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Why You’re Smart to Buy WWE

Daniel B. Kline, The Motley Fool

Consumers still watch sports live or nearly live. If they don't, it's too easy for their viewing to be ruined by a friend, a family member, coworkers, or even someone on social media tipping them to the results.

That makes sports programming especially valuable, which has been a boon for leagues big and small. Yes, the big four leagues, led by the NFL and the NBA, get the most money, but secondary leagues and sports like mixed martial arts have seen big increases in rights fees.

The biggest winner with these increases has been World Wrestling Entertainment (NYSE: WWE). The company, which offers scripted entertainment presented as sports, had both its major rights deals in the United States come up at the same time. That led to it being able to negotiate huge increases --from $235 million this year to $462 million in 2021 -- with Raw staying on Comcast (NASDAQ: CMCSA) while Smackdown Live moves from USA to FOX (NASDAQ: FOX).

A wrestler holds up a championship belt on the entrance ramp.

WWE's biggest show of the year is Wrestlemania. Image source: WWE.

How big are these deals?

WWE's full-year revenue came in at $930.2 million for 2018, a 16% increase. Global Media (which includes rights fees, the company's streaming network, and advertising) accounted for over two-thirds of the total coming in, at $683 million.

About $200 million of that came from WWE Network subscribers. That number should grow slowly over time, and the increased exposure of Smackdown airing on network TV may help that. The biggest part of the company's global media segment -- $269.8 million -- comes from "core content rights fees," which are driven by Raw and Smackdown.

As of October, those fees will nearly double, and that reflects only the U.S. market. Essentially, USA is paying for Raw what it paid to get Raw and Smackdown. FOX will be paying roughly $1 billion over five years for Smackdown and airing it on a network (albeit on Fridays, which is arguably a worse night for viewership than Tuesday).

Most of the increases in rights fees moves directly to the profit line. The company may pay performers a little bit more (partially driven by a growing number of secondary wrestling companies competing for talent) but the other costs of the shows won't increase in any meaningful way.

That means that for five years, WWE has roughly $230 million a year in extra revenue that comes at no extra cost. That number does not reflect expected increases in deals around the world, nor does it account for the fact that the FOX deal -- which is expected to include other already-produced WWE shows airing on FS1 -- will drive an increase in customers (who might go to live shows, subscribe to the network, or buy merchandise).

But that's not the best part

Networks/media companies including FOX and Comcast have come to understand that owning media companies takes increasing rights fees off the table. That's why Sinclair Broadcast Group bought Ring of Honor, a lower-tier, growing WWE rival. It's also why Viacom bought Bellator, the No. 2 MMA company in the U.S.

It's very likely that in five years, the cable/television landscape will look different. More homes will have left traditional cable, and it's possible that WWE won't be able to match the money it's making from its current television package.

Live sports (even scripted ones) will likely still be very valuable -- maybe even more valuable -- when it comes to attracting eyeballs. That could mean WWE entertains offers from pure digital services or -- and this may be the most likely scenario -- FOX buys the wrestling/entertainment company.

That makes sense because, in five years, WWE CEO Vince McMahon will be 78 years old. He has Paul "Triple H" Levesque positioned to run the creative side of the business, and FOX could take over the business side, potentially lowering some costs by absorbing some back-office functions.

A FOX-owned WWE would eat up hours of programming across FOX's various channels, bring an audience to other shows, and allow the media company to use WWE Network as part of a bundle. It's a marriage that makes sense -- and one the two companies might be testing out a bit through their upcoming partnership.

Of course, FOX isn't and won't be the only company that could benefit from owning WWE. Comcast would almost certainly be interested, and it's possible other players would enter the fray.

WWE has a rock-solid business for the next five years -- with revenue available to grow the company's nonwrestling pursuits (like its reality shows). After that five years, McMahon -- who also plans to relaunch the XFL football league with his own money -- may finally be ready to step away, and that could be the catalyst for his selling the company at a significant premium.

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Daniel B. Kline owns shares of World Wrestling Entertainment. The Motley Fool recommends Comcast. The Motley Fool has a disclosure policy.