TKO Group Holdings, the newly-formed company resulting from the merger of UFC and WWE, made its highly anticipated debut on the public market this week. However, despite the initial excitement, there looms a substantial debt that must be refinanced by 2026.
The beginning for TKO Group Holdings hasn’t been particularly remarkable, with the share price slipping by $1, settling at $101 since its initial public offering.
The primary cause for concern revolves around TKO’s significant leverage, with a towering debt of $3.2 billion, underpinned by approximately $1.2 billion in EBITDA for the year 2023. The situation is further compounded by the ticking time bomb of $2.7 billion in UFC debt set to mature in 2026.
This may seem like an overreaction. True, refinancing the debt is likely to be more costly, especially considering the variable interest rates associated with UFC Credit Facilities. The recent moves by the Federal Reserve to combat inflation have led to concerns about higher interest expenses. For instance, UFC’s interest expense in 2022 increased by $37.3 million, or 36.5%, compared to the previous year, primarily due to higher interest rates on UFC’s variable rate debt. A hypothetical 100-basis-point increase in interest rates would result in an approximate $28 million annual interest expense hike, given UFC’s outstanding indebtedness as of December 31, 2022.
However, these challenges shouldn’t deter potential TKO shareholders. Moody’s Investors Service is even contemplating upgrading UFC’s B2 Corporate Family Rating. The agency cites reasons such as enhanced scale from the merger, increased operating leverage, and greater business diversity. The combination of WWE and UFC is expected to create an entity with a larger and more devoted fan base across various regions, enabling the new company to maximize the value of its media rights and sponsorships. With imminent contracts set to expire with major media companies like Fox, NBCUniversal, and the Walt Disney Company, the merger provides additional leverage and positions the company better to monetize its content across multiple platforms.
Mark Shapiro, TKO’s President and Chief Operating Officer, has expressed the company’s intent to pursue acquisitions and expand beyond combat sports. This aligns with the evolving landscape where the lines between sports, entertainment, and lifestyle brands continue to blur. In this environment, sports conglomerates that can create platforms with significant scale have the upper hand in the entertainment industry.
A recent report by Seaport Research Partners reinforces this perspective. It suggests that key synergies will arise from Endeavor’s expertise in global rights pricing, thanks to executives and agents experienced in negotiations from both sides of the table. Furthermore, easier access to a wide array of media distribution and sponsorship partners is anticipated. For WWE, negotiations related to contracts with Comcast (USA Network and Peacock) and Fox, set to expire in September 2024 and estimated at a combined annual average value of about $520 million, may already be underway. The report speculates that if the developmental wrestler’s program NXT is excluded and integrated into a separate Peacock/WWE Network deal expiring in 1Q26, there could be a 40% increase in the average annual value or a 15% step-up in Year 1 compared to Year 5 of the old deal, equating to $190 million annually on average.
Regarding UFC, Seaport Research Partners believes that the MMA promotion has the potential to significantly boost revenue per event, which could alleviate some of the concerns surrounding its debt.
