ANALYSIS: Wanda Sports Group Slims Down to Outlast Downturn

Wanda Sports Group is selling a significant business unit as it gathers cash to outlast the Covid19 pandemic downturn.

Donovan Jones
    May 30, 2020 11:00 AM  PT
ANALYSIS: Wanda Sports Group Slims Down to Outlast Downturn
author: Donovan Jones   

Short Take

Wanda Sports Group (Nasdaq: WSG) went public in July 2019, pricing its shares at $8 in a U.S. IPO

The firm provides a range of sports events and related marketing services worldwide.

WSG is selling a major unit to pay down debt and has significant cash to weather the Covid-19 pandemic's ill effects, but the event industry faces years of lower attendance ahead as the world slowly emerges from the pandemic.

Company

Beijing, China-based Wanda Sports was founded to unite people in sports and enable athletes and their fans to live their passions and dreams.

Management is headed by president, CEO, and director, Hengming Yang, who has been with the firm since 2016 and was previously president and the chairman of BP (China) Investment Holdings.

Wanda acquired Infront Sports & Media in 2015, a Zug, Switzerland-based sports marketing company and WEH (World Endurance Holdings), a Tampa, Florida-based triathlon and endurance event services company, and established WSC in Beijing, China to provide a sports events, media, and marketing platform in China.

According to management, as of Dec. 31, 2018, Wanda had worked with more than 160 rights owners, 120 media broadcasters, and over 750 brands.

Management claims that, according to a Frost & Sullivan report, Wanda Sports was the largest provider of events in triathlon, mountain biking and running globally, based on revenue and number of events organized in 2018, the number one full-service sports marketing company based on sports covered in 2018, and the number two full-service sports marketing company based on revenue in 2018.

Additionally, it claims to be the second global digital, production, and sports solutions company based on revenue in 2018, according to the Frost & Sullivan report.

Wanda Sports has built a global sports event portfolio of globally-recognized brands and related intellectual properties in mass-participation sports owned by WEH, such as triathlon, running and mountain biking, which the firm complements with personal and corporate fitness as well as other events, including obstacle course racing, owned by Infront.

The company's media services include media production and distribution of sports content in the form of live coverage, host broadcasting, programming, archive services, and digital solutions.

Wanda Sports' primary revenue source is from event entry fees and other event-related fees, such as host city fees. Otherwise, the firm monetizes its intellectual properties through sponsorship, event and product licensing, merchandising, and media distribution opportunities.

Wherever the firm doesn't own the intellectual property relating to sports events, it enters into rights-in and rights-out agreements to profit from media distribution, sponsorship, and marketing activities.

Market & Competition

According to a 2017 market research report by Tecnavio, the global sporting events market is projected to grow at a CAGR of 3.58% between 2017 and 2021.

The main factors driving market growth include the increasing passion of individuals for sports, which has resulted in the formation of teams representing various countries or regions, and the rise in disposable income, among other factors.

According to another 2019 market research report by The Business Research Company, the global sports market was valued at $488.5 billion in 2018, growing at a CAGR of 4.5% between 2014 and 2018.

Major competitors that provide or are developing sporting events include:

  • ESPN

  • Razorgator

  • Ticketmaster

  • 21st Century Fox

  • Ace Ticket Worldwide

  • Adidas

  • GoTickets.com

  • Nike

Recent Performance

WSG's topline revenue by quarter has been variable and lower in Q4 2019 versus the previous year's same period, as the chart shows below:

Gross profit by quarter has followed a similarly uneven trajectory:

Operating income by quarter has remained positive, but also has been highly variable over the past five quarters:

Earnings per share (diluted) have deteriorated sharply, with FY Q4 2019 seeing a severe drop in earnings due to booking a non cash impairment loss of goodwill on its Ironman Group unit:

Source for chart data: Seeking Alpha

Since its IPO, WSG's stock price has dropped 67.75% vs. the U.S. Entertainment index' rise of 11.4% and the overall U.S. market's growth of 3.6% over the past 12 months, as the chart below indicates:

Source: Simply Wall Street

Commentary

In its last earnings call, management highlighted its slight revenue growth in fiscal 2019 and its initiatives to retain marketing rights to various events despite the serious impact of Covid-19 on sporting events.

The firm sold its Ironman Group and wrote down the impairment of goodwill in Q4 2019 resulting in a large non cash loss.

Management said it would use the proceeds from the sale to pay down debt and intercompany accounts payable. 

Any remaining proceeds from the sale would be used to pay a dividend to shareholders, which has yet to be announced.

As a result of the sale, WSG will see a revenue and EBITDA drop of 20%, which is what the Ironman unit contributed to the firm's overall results.

The firm is typically operationally cash flow positive. It ended the most recent reporting period with $183 million in cash, so presumably, when combined with the Ironman unit sale, WSG will have enough cash to get it ‘across the chasm' of the Covid-19 initial effects.

The big question for me is what happens to public events after the pandemic crisis period has ended? How long will social distancing be continued, how hesitant will consumers be to attend public events and how will event producers adjust to accommodate perhaps fewer attendees for an extended period.

We don't know the answers to these questions, many of which may depend on how quickly the global population can be inoculated against the coronavirus.

In my estimation, it is likely to be at least two to three years before we see a return to some type of ‘new normal,' and that is the best case scenario.

(The analyst has no position in any stocks mentioned as of the article date, no plans to initiate any positions within the next 72 hours, and no business relationship with any company whose stock is mentioned in this article. Information provided is for educational purposes only, may be incomplete or out of date, and does not constitute financial, legal, or investment advice.)


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