TKO Group Holdings, Inc. current report, 12 September 2023

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Business Context and Reporting Period

TKO Group Holdings, Inc. filed this Form 8-K on September 12, 2023, reporting the closing of its combination with World Wrestling Entertainment, Inc. (WWE). The transaction created a sports and entertainment company combining WWE and Ultimate Fighting Championship (UFC), with TKO becoming an indirect majority-owned and consolidated subsidiary of Endeavor Group Holdings, Inc.

Transaction and Key Financial Matters

  • WWE merged with a subsidiary of TKO and became a direct wholly owned subsidiary before being converted into WWE LLC.
  • TKO contributed WWE LLC to TKO Operating Company, LLC in exchange for 49% of TKO OpCo’s fully diluted membership interests.
  • Endeavor and its subsidiaries received Class B common stock representing 51% of TKO’s fully diluted voting power and own 51% of TKO OpCo’s fully diluted economic interests.
  • Former WWE stockholders effectively own 49% of TKO OpCo’s fully diluted economic interests, 49% of TKO’s fully diluted voting power and 100% of TKO’s fully diluted economic ownership at the parent-company level, as described in the filing.
  • Each outstanding WWE common share, other than cancelled shares, was converted into one share of TKO Class A common stock.
  • TKO became the indirect parent of UFC Holdings, LLC and will consolidate UFC’s financial information.
  • The filing refers to UFC credit facilities and outstanding borrowings as of June 30, 2023, but does not provide the aggregate debt amount in the filing text; the underlying credit agreements and referenced prospectus should be reviewed.

Material Changes Versus the Prior Comparable Period

  • This filing reports a transformational change in corporate structure rather than quarterly operating results. TKO was formed as the combined parent of WWE and UFC on the September 12, 2023 closing date.
  • The company entered into a new TKO Operating Agreement, Governance Agreement, Services Agreement and Registration Rights Agreement.
  • TKO amended and restated its certificate of incorporation and bylaws and adopted a new code of conduct.
  • WWE financial statements, UFC-related financial statements and unaudited pro forma combined financial information are included or incorporated by reference as exhibits. The filing text itself does not state revenue, net income, cash flow, margins, cash balances or pro forma leverage amounts.

Management, Governance, Compensation and Outlook

  • A new 11-member board was appointed, with six directors designated by Endeavor and five designated by WWE under the Governance Agreement.
  • Ariel Emanuel became Chief Executive Officer, Mark Shapiro became President and Chief Operating Officer, Andrew Schleimer became Chief Financial Officer, Seth Krauss became Chief Legal Officer and Shane Kapral became Chief Accounting Officer.
  • Former incumbent directors Frank A. Riddick and Karen Mullane resigned effective at closing; Nick Khan continued as a director.
  • TKO adopted a director compensation policy that includes annual cash fees and equity awards. The filing states that non-employee directors received initial restricted stock unit awards with a grant-date value of $182,000.
  • Ariel Emanuel received a four-year vesting RSU award valued at $40 million based on the TKO closing price. Mark Shapiro received a one-year vesting RSU award valued at $6.25 million.
  • The company entered into employment agreements with Messrs. Emanuel and Shapiro and adopted the 2023 Incentive Award Plan.
  • The Registration Rights Agreement provides specified Endeavor affiliates and Vincent K. McMahon with demand registration rights for TKO Class A shares, including shares issuable upon certain TKO OpCo redemption rights.
  • No specific operating guidance, earnings outlook or management forecast is provided in the filing.

Risks, Contingencies and Unusual Items

  • Endeavor’s control of 51% of TKO’s voting power creates a controlling-stockholder structure and related governance considerations.
  • TKO’s consolidation of UFC and ownership of WWE will introduce new acquisition accounting, capital structure, debt and noncontrolling-interest considerations; the filing text does not quantify their effects.
  • Registration rights could result in future registration and potential resale of substantial amounts of TKO Class A common stock.
  • Related-party arrangements include the Governance Agreement, Services Agreement, Endeavor executive relationships and Vincent K. McMahon’s registration and transfer-related rights.
  • UFC’s existing credit facilities became obligations within the consolidated TKO structure. The filing does not summarize all covenants, maturities, interest rates or collateral terms in the provided text.
  • Executive and director equity awards create future share dilution and compensation expense, subject to the terms of the applicable awards.

Important Facts for Investors to Verify

  • Review the pro forma financial information to assess combined revenue, profitability, cash flow, leverage, liquidity and noncontrolling interests.
  • Verify the aggregate UFC debt outstanding as of June 30, 2023, including maturities, interest rates, covenants and refinancing terms.
  • Assess the economic and voting rights of Endeavor, former WWE stockholders and other TKO shareholders under the amended charter, bylaws, TKO Operating Agreement and Governance Agreement.
  • Review the Services Agreement and related-party arrangements for fees, duration, termination rights and potential conflicts of interest.
  • Evaluate the potential dilution and resale overhang from registration rights, redemption rights and executive and director equity awards.
  • Confirm the accounting treatment and purchase-price allocation for the WWE transaction in subsequent TKO financial statements.