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Grey Owl Capital - Hidden Value in WWE's Under Market
Posted by: Canadian Value (IP Logged)
Date: January 19, 2014 09:27PM
At this week’s Consumer Electronics Show, World Wrestling Entertainment (WWE) announced the launch of WWE Network. Covering the event, The Wall Street Journal wrote, “World Wrestling Entertainment Inc. is sidestepping the cable world that long has been its bread and butter to launch the WWE Network, a subscription-only, online video channel that will air round-the-clock programming.”
While a terrific opportunity for significant value creation, it is unlikely this is a complete “sidestep” of cable. Rather, WWE is flexing its collective muscle as it continues to renegotiate its two largest broadcast rights agreements with NBC Universal. The contracts for “Raw” and “Smackdown” expire this year and NBC Universal’s exclusive negotiation period concludes at the end of this month. The timing of the network announcement seems aimed at pushing NBC Universal toward action. It was as if they said, in the words of the late Randy “Macho Man” Savage, “Hey NBC, snap into a Slim Jim!”
We typically invest in high-return businesses, with strong competitive advantages, and executives with a record of excellent capital allocation and balance sheet management. We aim to hold these types of investments for at least 3-5 years and in the best case, forever. We discussed our five largest positions, all of which meet these criteria, in our third quarter 2013 letter.
WWE does not exactly fit these parameters. Yet, we are owners of WWE equity. It is our belief that the current “Raw” and “Smackdown” distribution agreements are so far below market that there is a high probability they will renew at 2, 3, or even 4x the current rate. The majority of this new revenue should flow to the bottom line. Thus, we were willing to overlook their shareholder-unfriendly dual share class structure, an operating history that includes questionable capital allocation decisions, and a dividend that is not covered by current cash flow. The immediacy and magnitude of the event present an incredible risk reward dynamic.
We have followed the evolution of the media business for some time, compelled by the increasing value of content in general and “DVR-proof” content (typically live sports) specifically. Additionally, we find the ongoing shift in media consumption patterns brought on by the proliferation of broadband Internet access intriguing. We watched from the sidelines for several years. Then, we came across a Forbes video and story highlighting the pending WWE broadcasting deal negotiations. We immediately recognized the investment opportunity.
The analysis is relatively straightforward:
Oh, by the way, the WWE Network could have some value too.
Stocks Discussed: WWE,
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