Friday, June 15, 2007

World Wrestling Entertainment: Goodbye, Vince -- The Show Must Go On.

On June 12, 2007, World Wresting Entertainment (WWE-$17.04) announced that its Chairman Vincent K. McMahon entered his limousine when it suddenly exploded. Although full details were not disclosed, initial reports indicated that Mr. McMahon was presumed dead.

Upon hearing the news, investors sold stock, sending the price down a modest 30 cents per share, or 1.8% in value.

Yawn! Serious investors—and the Company—know that Mr. McMahon “will survive the fiery explosion.” And the only ones guilty of committing such a heinous act are the writers who came up with this melodramatic and predictable storyline.

However, for funs sake, let’s play along:

"The investigation into Mr. McMahon's limo explosion is currently underway, with no one being ruled out as a suspect."

Will we learn new information regarding the startling demise of the Chairman?

Will we ever learn exactly what happened after Raw that caused the fiery explosion? [Sounds like an old Batman cliff-hanger ending: "Same bat-time, same bat-channel!"]

Stay tuned!

To be continued on SmackDown Friday night.

If WWE lets this story roll on into next week, however, management will be in violation of SEC regulatory disclosures, for public companies must file with the SEC to announce any material events that affect shareholders—within four business days of the occurrence of the event.

The death of Mr. McMahon, who beneficially owns approximately 66 percent of the Company’s outstanding equity, and controls about 94 percent of the voting stock, would trigger a Form 8-K filing.

Maybe we watch too many cop shows, but if someone did blowup Mr. McMahon, our primary suspect(s) would be his wife and WWE co-founder and CEO, Linda E. McMahon, or children.

Shane McMahon is the son, and Stephanie Levesque and Paul Levesque are the daughter and son-in-law, of Vincent and Linda McMahon. Shane and Stephanie both work for the Company, and in 2006, earned only $471,000 and $353,000, respectively.

According to the Company’s annual proxy, son-in-law, Paul Levesque, is a key performer for, and independent contractor of, the Company. Paul receives talent pay and royalties, subject to a guaranteed minimum. The regulatory filing, however, did not disclose details of his 2006 compensation.

Upon his death, McMahon’s heirs would receive an estate valued at about $800 million (most of it in WWE stock). In addition, WWE is obligated to pay, upon his death, a lump sum in cash—within 90 days—of $4.34 million to his trust.

What serious investors really want to know, however, is (i) was the limousine insured for an explosion? (ii) Who is responsible for paying for the cleanup of the destruction and mess caused by the explosion?

McMahon’s contract states that he is “eligible to receive reimbursement in an amount up to $50,000 in any calendar year for his expenses for cleaning services.”

The explosion will likely be properly accounted for as a “reasonable business expense incurred by him [McMahon] in the course of the performance of his duties.” Ergo, WWE will pick up the blown-up limo expenses (and Mr. McMahon can save the $50,000 for dry-cleaning bills and landscaping and house-cleaning services from "undocumented Americans.")

On the surface, there is no apparent reason for WWE to “kill-off” Vince McMahon. Back on May 3, the Company reported first-quarter earnings of $15.1 million, or 21 cents per share, a 59 percent increase over the prior year. The Company attributed the gain to positive operating metrics, such as increased event attendance, and a dip in state and local taxes.

Profit contributions increased 13 percent to $49.3 million, led by net income gains of $7.1 million, $10.3 million, $6.4 million, and $15.1 million from Live-events/venue merchandise, pay-per view, television, and licensing.

Average Event Attendance in North America rose 15% to 6,900 per event. However, Average Event Attendance in international markets fell 23% to 9,300 per event. There were 63 live events [up from 61] in North America and 8 live events (down from 11) in the international market. A key driver of profit was an 8 percent ticket price hike and fixed, guaranteed sales contracts in emerging markets, such as Guatemala and Mexico.

Of concern, pay-per view income fell 4 percent year-over-year, due to a 24 percent decline in pay-per view buys for the comparable three-month period ended March 31, 2007. Offsetting the $1.3 million, or 8 percent, sales decline was a $5 domestic price hike to $39.95 per event.

Television net-income fell 16 percent year-over year. Of its two key drivers, viewer attendance remains flat: RAW drew an average of 4.1 million viewers (down 2%) and the audience for SmackDown was flat at 2.9 weekly viewers.

Without promotion something terrible happens... Nothing! American circus entertainer P.T. Barnum (1810 – 1891)

Perhaps the decline in viewers inspired Stephanie McMahon Levesque—who is responsible for overseeing the creative writing process for all television and pay-per-view programming—to instruct the writing staff to script the McMahon “who done it’ event?

Sorry, Stephanie-- cliffhangers have been done too death. Sometimes they work--think the season two ending episode "Who shot J.R.?" on Dallas or to be continued endings on Heroes; but sometimes they don't: the "Who Won?" episode on Benson, or the "Conclave" epsisode on Blade: The Series; and, sometimes, a show is gone even before it completes its first-season story arc--think the day-repeating themed show, Day Break, cancelled by ABC in December 2006, after airing only six six episodes of a 13-episode plot.


The effective tax rate also plunged for the quarter to 35 percent from 45 percent in the first quarter of 2006. We estimate that the Company saved about 3 cents in reported income due to greater tax-exemptions.

The Company also needs to divert investor attention because its feature film strategy has been a bust. Two feature films which were released in fiscal 2006, See No Evil and The Marine, achieved about $15 million and $18.8 million in gross domestic box office receipts, respectively. Both films have already been released on video, yet the Company still hasn't recovered any revenues sufficient to recover unamortized assets. Why then the delay in writing down these two impaired assets? [Ed. note. It is because such a write-down will adversely impact earnings.]

The show must go on
The show must go on
I'll face it with a grin
I'm never giving in
On - with the show -

WWE says McMahon’s supposed demise “has the sports-entertainment world reeling.” The foregoing stats, however, have us somewhat more lightheaded about WWE’s future earnings.

I'll top the bill,
I'll overkill
I have to find the will to carry on
On with the -
On with the show
– Queen (Album Innuendo, Track #12. The Show Must Go On) [video]

Editor David J. Phillips does not hold a financial interest in World Wrestling Entertainment. The 10Q Detective has a Full Disclosure Policy.


Anonymous said...

I believe the problem with the WWE is they used to do a heck of a job promoting in my neck of the woods-LongIsland for their live events back in late 90s and early 2000, and then it came to an end--not seeing much visibility. In my wrestling buddies' neck of the woods--NJ--same thing--they did a lot of promotions, you saw wwe all over the place and on radio. Their promo guru must have left, and with him went the visibility all over NY/NJ. They are too silent in their getting the word out there. That's my opinion.

David J. Phillips said...

On June 19, 2007, management of World Wrestling Entertainment, Inc. concluded and reported to the Board of Directors that it had determined, based on its analysis of the revised performance estimate of its third film, "The Condemned," that an impairment charge in the amount of $15.7 million should be taken against the capitalized costs of this film.

The 10Q Detective is still waiting for them to take an impairment charge in their first two films [see original posting]