This Thursday should have been a day for quiet celebration in WWE. Not only was their programming staying on NBCUniversal's top rated stations, the place they wanted to be, but they had also negotiated a healthy increase in their television rights fees of between $35-50 million from the 2013 high of $106 million for the year. That's a respectable number considering the TV revenue in 2013 was inflated by four months of rights fees for Saturday Morning Slam on CW and a whole year of Main Event on Ion Television, which weren't part of the NBCU deal.
The only time in the company's history WWE saw similar growth in TV money was in the autumn of 2000 when NBCU and Viacom got in a bidding war for WWE programming, at a time when WWE's popularity was at its peak. To do equally as well when WWE's ratings have stayed flat for years is fairly impressive.
True, WWE viewers are still horrendously undervalued by networks and advertisers alike compared with other live sports programming, but the perception that pro wrestling is a low rent soap opera for jocks and rednecks wasn't going to change overnight, no matter how much you stress its similarities with legitimate athletic events and downplay the obvious differences.
However, WWE turned their small victory into a nightmarishly whopping defeat by setting the expectations of their investors sky high. So assured was Vince McMahon that domestic rights fees would be at least doubled, he joked on a conference call last year that analyst Brad Safalow could place a hammerlock on him if he didn't achieve that goal. With such brash statements, anything less than that would be a major letdown.
Instead of diffusing the situation with a press release pushing that the company still has confidence that it will double or triple its 2012 OIBDA (operating income before depreciation and amortization) in 2015, they poured gasoline on the smouldering investor discontent by projecting that they would lose $45-52 million this year even if they hit their target of one million WWE Network subscribers by the end of the year, and that they would now need 1.3-1.4 million subscribers on a global basis at steady state to just match their 2012 financial results in 2015.
Moving the goalposts backwards like that at the exact moment they had disappointed their stockholders with the results of their U.S. TV negotiations was a PR blunder. Certainly big losses in the first two financial quarters were expected this year due to the start up costs of the Network, but the general belief by stock analysts was that WWE would start turning a profit by that point and end up with only $12 million in losses for the year as a whole. WWE would have been better served keeping the bad news that their short-term business outlook was much worse than expected quiet until their investors frustration over the new television contracts had dissipated. Instead, WWE laid bare a double whammy of business miscalculations when one was bad enough.
The end result was WWE stock taking a right hammering on Wall Street on Friday morning with company shares losing 43.45% of their value in just one day from Thursday's closing price of $19.93 to just $11.27 when the market closed for the weekend. As Forbes noted, this meant that Vince McMahon lost his billionaire status overnight after his net worth declined $350 million from the drop in value of his own personal WWE shareholdings. Now, his fortune is only estimated to be a paltry $750 million.
If this wasn't bad enough, Lemelson Capital Management (LCM), who two months ago advocated short selling WWE stock, announced that they had taken advantage of the price crash to re-invest in WWE and immediately called on the company's Board of Directors to replace their executive management team or explore the option of selling the business, because of the recent period of consistent losses, execution issues and material misstatements. In quite the vote of no confidence for Vince McMahon, they believe that such changes are a necessary component of any successful strategy going forward.
Emmanuel Lemelson, LCM's Chief Investment Officer, also told investment site Seeking Alpha that:
"WWE has affirmed that even with one million subscribers for its WWE network, the company stands to lose between $45 million and $52 million in FY 2014, which validates [our] original short thesis. This follows what we believe to be material misrepresentations by the company about both the performance and operating profit model of its WWE network, which the company has wrongly labeled 'a homerun'.
For example, promoting the WWE direct network's value to shareholders without a fair and accurate discussion of the implications to a traditional network revenue circumvented management's fiduciary responsibility as stewards of investor's capital, and is part of what has emerged as a pattern over recent years. Further, there are no pending operational developments in the pipeline to offset these significant losses."
LCM aren't the only people out for Vince McMahon's head on a spike. It's being reported on the financial newswires that another investigation has already been started to see if WWE's executives broke the law with their failed promise of at least doubling domestic television rights fees in 2014:
"Former Attorney General of Louisiana, Charles C. Foti, Jr., Esq., a partner at the law firm of Kahn Swick & Foti, LLC ("KSF"), announces that KSF has commenced an investigation into World Wrestling Entertainment Inc. (WWE).
On May 16, 2014, WWE disclosed that it had reached a multiyear deal with US broadcaster NBCUniversal for its long-running Raw and SmackDown programs, stating that the annual value of its television distribution agreements would reach $200 million, well below what investors were expecting. Daniel Moore, an analyst with CJS Securities, said in a research note that, "Given management’s more optimistic tone and the fact that other major sports franchises have garnered much higher increases, this outcome is likely to be viewed as disappointing by many investors."
On this news, the value of WWE’s stock plummeted by over 43%.
KSF’s investigation is focusing on whether WWE and/or its officers and directors violated state or federal securities laws."
Although WWE executives were definitely guilty of extreme overconfidence that led to a few majorly dumb statements with the benefit of hindsight, I don't think they were ever being intentionally deceptive and that they so overstepped the mark with their hype that it was illegal in some way.
The reason why Vince McMahon is getting so much flack rather than WWE's Chief Strategy & Financial Officer George Barrios and their Chief Revenue & Marketing Officer Michelle Wilson, who were believed to have done the bulk of the TV rights fees negotiations, is that the media is placing the blame at the top. The Wall Street Journal claimed that this latest failure highlighted a shortcoming of Mr. McMahon's. Although they credited him with being an unbeatable promoter and a creative genius, he still struggles to master corporate negotiations and dealings with Wall Street. Meanwhile, Seeking Alpha questioned McMahon's interventions in the talks with NBCU:
"McMahon took the TV negotiations personally: He played hardball in talks with NBCUniversal, demanding to more than double the value of their previous ~$100M deal, but he wound up renewing the deal with an increase analysts estimate at 50% - nice, but well short of what Wall Street had come to expect, and what McMahon may have bragged he would get."
It's no wonder then that Vince is in panic mode over the reaction of Wall Street to their new TV distribution agreements!
The WWE fight back is set to start on Monday morning, as Friday afternoon they announced an emergency business outlook conference call to clear the air with the investors who are baying for blood:
"WWE (NYSE:WWE) announced that it will host a conference call on Monday, May 19, 2014 to discuss the Company’s 2014 and 2015 Business Outlook. The Company’s Chairman & CEO, Vincent K. McMahon, and the Company’s Chief Strategy & Financial Officer, George Barrios, will host the conference call beginning at 11:00 a.m. ET. "
Hopefully, they'll be more forthcoming with explanations and information than Barrios was to Forbes, who was still keeping his cards very close to the chest:
"We never commented publicly on the expectation. We said we were undervalued by the math that we had done....
I don't want to talk about the specifics of how the contracts are structured. I think it's pretty typical that there is some escalation in them, but we haven't gone into detail on any of that."
I think at this stage it's imperative for WWE to be as honest and open as possible. The underperformance at the negotiating table with NBCU means the performance of the WWE Network becomes more important to their future business success. They need to convincingly articulate how they are going to guarantee to hit early subscriber targets and the timescale for doing so. They should avoid talking too much about rosetinted long term projections like 2.5-3.8 million global subscribers, as investors would now question any predictions that aren't backed up by hard facts. You can worry about getting your second million when you've locked in your first million, Vince.