Is The WWE Rousing Itself Off The Mat?

Vince McMahon's wrestling empire is getting a second wind -- but the Street isn't sold yet

Maybe Vince McMahon is beaming because he's about to become a grandpa. No one is suggesting that the buff, 58-year-old chairman of World Wrestling Entertainment Inc. (WWE ) is a softie, but he does keep a book called Great Dads by his computer. Or he could be basking in the afterglow of taking his show to the troops in Iraq over the holidays and watching tickets sell out almost instantly for WrestleMania XX, scheduled for Madison Square Garden on Mar. 14. More likely, his signature snarl has morphed into a smile because of the sound once again swirling around this master of organized mayhem -- buzz.

After three gut-slamming years of dwindling live audiences, declining TV ratings, and a struggling crop of wannabe stars, WWE may be on its way back. The company's narrowly traded stock has risen 84% over the past year, to almost 14. Ratings have steadied and remain strong. Advertising is up. Thanks partly to an extra pay-per-view event, pretax profits were $27.2 million in the last quarter vs. $500,000 a year earlier, and revenues increased 4.5%, to $94.4 million. Even the controversial split of the WWE's Raw and SmackDown! shows, which divided what used to be one continuous storyline and talent pool into two separate entities, is starting to pay off. Because stars now appear on only one show, it has freed them up to do more international live events. And wrestlers such as rapper John Cena and Randy Orton are starting to elicit the kind of passion from fans that fuels stars like The Rock.

No wonder McMahon and his wife, Linda, the WWE's president and CEO, are feeling like comeback kids. Their slogan for WrestleMania is "Where It All Begins...Again." Forget rumors about the company going private. Heck, the chairman would be "delighted" to expand the public float beyond 20% at some point, not because the McMahons need the cash but to spread the joy of wrestling to the investing masses. "This is literally a slice of Americana," he says. "The more individuals who have a piece of it, the better."

Still, winning fans on Wall Street has proved tough. Even now, WWE stock is well off the 34 peak it hit during its October, 1999, debut on NASDAQ. While profits are expected to rise 30% in fiscal 2004, ending Apr. 30, revenues will be down. Linda says WWE "has turned a corner." But even Mario Cibelli, whose Marathon Partners LP owns more than 650,000 shares, concedes that "people called me up to say `Are you crazy?' when we bought the stock. There's a natural aversion to taking this company seriously."

LET'S GO TO THE TAPES. It probably doesn't help that the McMahon family regularly appears in the ring -- the storyline includes Vince's on-air mistresses and fistfights with daughter Stephanie. The company has also grunted under the weight of several well-publicized body blows, such as the death of its XFL Football League, a joint venture with NBC that folded after one season. Both Vince and Linda insist it could have paid off if given time. Says Vince: "I think our pals at the NFL went way out of their way to make sure this was not a successful venture."

Add to that the collapse of their Times Square restaurant, competition from reality TV shows like Fear Factor, and the devastating ruling by a British court that their original WWF (World Wrestling Federation) acronym belonged to the World Wildlife Fund. That decision has cost tens of millions in direct costs and lost business. Then key stars like Stone Cold Steve Austin and Dwayne Johnson, a.k.a. The Rock, either were out with injuries or spending more time in Hollywood. The March, 2002, split of Raw and SmackDown!, which air on Spike TV and UPN, respectively, sharply hurt ratings as fans had to adjust to not seeing their favorite wrestlers on both shows.

But there have been victories, too. One was acquiring the library, brand, and major talent of former archrival World Championship Wrestling from AOL Time Warner Inc. in 2001. Dennis B. McAlpine of McAlpine Associates -- the lone analyst still covering WWE -- argues that "the [McMahons] have very quietly been gathering up every tape ever made on wrestling." While that's a stretch, they have built an exhaustive video library that could lend itself to a cable channel and other forms of revenue. McAlpine recently raised his rating from sell to hold, in part because of signals like growing pay-per-view buys.

FLICKS AND TOONS. While its fortunes depend on creating new stars, at least some of WWE's improved results come from fresh talent behind the scenes. "We have a lot of people now who are a helluva lot smarter than me," brags Vince. One new hire is Phil Livingston, a former Oakland Raider who came on board as chief financial officer a year ago. He has moved to cut costs and display statistics on the company Web site. "We have to be our own analyst for a while," explains Livingston.

The challenge now: Pump up sales again. Among the initiatives is WWE Films, which is doing everything from an action-adventure with Stone Cold to a horror flick with 7-foot villain Kane. A cartoon series for the 2-to-11 crowd is also in the works and could air next year. And Vince is interested in a late-night franchise that he describes as "a little racier and a little more wild West" than the current two brands.

With increased global pay-per-views and live events, WWE expects international sales to grow from 14% of revenues in 2003 to roughly 18% this year. Moreover, unlike some media companies, WWE has virtually no debt and $270 million in cash. "We make money when we're not hot," says Vince. "When we are hot, it's off the charts."

Never was the McMahon empire hotter than in the last Presidential election year: The Rock appeared at the Republican National Convention, the hype about the soon-to-debut XFL was infectious, and Vince and Linda were everywhere. Those heady days may not be back, but a WWE that knows its limitations may be a healthier company.

By Diane Brady in Stamford, Conn.

Before it's here, it's on the Bloomberg Terminal.