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On Tuesday morning, Endeavor‘s UFC business merged with the WWE to create a new sports firm, TKO Group Holdings.
But while the new company creates a combat sports and entertainment powerhouse (controlled by Endeavor and led by its leadership team), it also created a new, slimmed down Endeavor, a company with its WME agency business front and center.
Mark Shapiro, the president and COO of both Endeavor and TKO, says that was no mistake.
“Endeavor is sitting in a very pristine position,” Shapiro tells The Hollywood Reporter in an interview. “I mean, we’re at the epicenter of a large, mobile, fast-growing market. You know, the TAM [total addressable market] for sports, entertainment, music, live events and premium experiences is over $500 billion. And we’re walking into that world with a very strong balance sheet, lightly levered, healthy free cash flow, several capital return initiatives already in place vis-à-vis our recently announced dividend and share buyback, and we’ve got a management team that has great experience and a great track record of outperforming expectations. So we’re pretty confident in our position.”
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As Shapiro notes, a side effect of the TKO spinout is a delevering event for the core Endeavor business, a move that will make it easier to deliver on the dividend promise. But it also opens the door to more M&A. Shapiro notes that with Endeavor controlling TKO, the cash from the sports company “has an opportunity to flow up to the mothership that is Endeavor, which will be used for investment, more resources, and potential tuck-in acquisitions, long term.”
When pressed on what the deal means for M&A, Shapiro says that, “TKO will always play in the sports space, and Endeavor will continue to play in the overall cultural space.”
Endeavor’s management team is also betting that shifting the UFC to TKO will help with the valuation of Endeavor. Executives at the company have made no secret of their thinking that the markets were undervaluing the company, including its talent agency WME, which is the biggest driver of cash at Endeavor.
Shapiro noted the recent sales of IMG Academy (for $1.25 billion to a private equity firm) and Endeavor Content ($775 million for an 80 percent stake) which sold for multiples that should have given clarity to Endeavor’s “intrinsic value.”
More recently, the sale of WME’s main competitor CAA to French billionaire François-Henri Pinault for a reported $7 billion provided another opportunity to set a value for the agency business.
“When you look at the Endeavor portfolio, [the CAA sale] reflects favorably on WME’s own valuation, which is just a part of our integrated portfolio,” Shapiro says, adding that the company holds “a number of best-in-class businesses.”
“I think this will clear up some of the dislocation in the stock price, which is the fact that there’s obviously a dislocation between the public market value and the intrinsic value of our assets,” he adds.
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