WWE upgraded at Morgan Stanley as investors can gain exposure to attractive risk/reward of TKO

By Sam Boughedda

Morgan Stanley analysts upgraded World Wrestling Entertainment (NYSE:) shares to Overweight in a note Thursday, telling investors they can gain exposure to the attractive risk/reward of TKO.

Endeavor Group Holdings Inc (NYSE:), the company that runs Ultimate Fighting Championship, has agreed to combine with WWE to form a new, publicly listed firm valued at about $21 billion.

The analysts said Morgan Stanley sees TKO as “offering an attractive risk/reward given the secular tailwinds behind sports and entertainment media rights revenues, live content, and the defensive characteristics of largely contracted revenue growth.”

They believe the pending deal creates value by creating a pure-play sports and entertainment equity. “The UFC is a rapidly growing global sport and perhaps the most profitable major sport in the world. The value of this asset, in our view, was and is not being captured in EDR shares,” the analysts wrote.

“WWE is coming into TKO debt-free. TKO’s estimated ~60-70% FCF conversion (’24E pro forma) will allow it to rapidly de-lever its own balance sheet, we estimate. When the deal closes, we expect TKO’s net debt leverage to be 2-2.2x and by YE24, down to 1x,” they added. “There are clear cost synergies while the revenue opportunities are also potentially meaningful — including sponsorship, live events, and over the long term, potentially higher media rights fees. These synergies are now being captured in a higher multiple asset, creating more meaningful equity value.”