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A Look Behind the Curtain: Zuffa’s Finances Come Into Focus

By Adam Swift | September 30, 2007

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By Adam Swift - Author, PAYOUT:  The Business of MMA 

As a privately held company, Zuffa is under no public reporting obligations. As a result very little financial information is made public. The numbers that do see the light of day are carefully screened and released only when convenient to tout the growth and success of the UFC brand. As result the company’s financial status and business model are largely left to speculation. But a recent series of reports by Standard & Poor’s, one of the leading financial services companies in the world, have provided a new insight into the finances of the undisputed leader of the MMA world.

The headline was a cut in the company’s credit rating outlook, from stable to negative, but the rest of the report revealed a still growing business. While profit margins are down substantially due to European expansion efforts, pay-per-view, the company’s key revenue source, is actually up 35 percent through the first quarter of the year. Furthermore, despite more than doubling operating costs from a year ago, the company remains profitable.

S&P initiated coverage on May 21 assigning Zuffa a credit rating of BB. A BB rating reflects a company that is less vulnerable in the near term than other lower-rated obligors. However, it indicates that Zuffa faces ongoing uncertainties and exposure to adverse business, financial, or economic conditions which could lead to its inadequate capacity to meet its financial commitments. Bonds rated BB and below are considered junk bonds due the risk of failure associated with the companies that issue them. At the time S&P issued the following outlook:

The stable outlook reflects our belief that Zuffa’s ability to successfully market UFC events will continue to drive strong revenue and cash flow growth through the next few years. We also believe UFC has gained a solid niche following, which will add stability to the company’s financial profile over the intermediate term. A shift in consumer interest away from MMA or a shift to a more aggressive financial policy could lead to downside rating pressure. Conversely, if the company continues to drive increased interest in the sport over the intermediate term while maintaining currently healthy EBITDA margins and free cash flow generation, the outlook could be revised to positive.

According to S&P, roughly 75 percent of the company’s revenues are generated through the production of live events. Pay-per-view buys account for the lion’s share of live event revenue with the gate playing a much smaller role. By way of example, while the average show might generate $2 million at the gate (ticket sales), it generates at minimum roughly $4.8 million in pay-per-view revenue (assuming 300,000 buys and a 60/40 split between Zuffa and the PPV distributor). The company’s contract with Spike TV and assorted sponsorship revenues account for the remaining 25 percent of revenues.

Last year Zuffa experienced what can only be described as explosive growth. In 2006, S&P reports that the average buy rate per event nearly tripled compared with the previous year. As a result the company’s EBITDA margin (EBITDA represents earnings before interest, taxes, depreciation and amortization, an EBITDA margin is akin to a profit margin) more than doubled from the mid-teens in 2005 to more than 40 percent of gross revenues in 2006. It is believed that Zuffa grossed $190 million last year and posted a before tax profit of $76 million.

Entering 2007 Zuffa was expected to post an EBITDA margin of more than 50 percent. Instead, while pay-per-view buys for domestic events have increased 35 percent over the first half of last year, and total revenue growth is up 30 percent, there has still been a more than 50 percent decline in the company’s EBITDA margin due to dramatically increased operating costs. Operating costs have more than doubled thanks to production costs associated with the two events held in the U.K and an aggressive marketing campaign to establish the brand in the U.K., the scale of which was criticized by the company’s financial officers according to Dave Meltzer. As result the company’s EBITDA as a percentage of gross revenues has fallen to roughly 20 percent for the year thus far.

S&P “expect[s] the company to reduce the scale of its international UFC bouts going forward, with the intent to limit potential losses generated by these events and return consolidated cash flow to a level more consistent with 2006 results.” It will be interesting to see if the company can meet this expectation given White’s stated commitment to the European market place and aggressive expansion plans. However, despite this anticipated cost reduction, the company is not expected to return to its previous EBITDA margin of 40 percent because of “increasing fighter costs and production expenses for domestic content.” S&P’s most recent report from September 14, concludes that the UFC’s credit outlook is negative:

Failure to improve the company’s currently depressed margins through more stringent cost controls and continued top line growth or a shift to a more aggressive financial policy over the intermediate term could lead to a downgrade. Conversely, if the company can restore its previously strong credit metrics through cash flow growth and debt repayment, the outlook could be revised to stable.

Credit rating outlook aside, the numbers behind the headline reflect a healthy growing business. While profit margins are down substantially due to European expansion efforts, pay-per-view, the company’s key revenue source, is actually up 35 percent through the half of the year. However, it is important to note that the first half of last year was significantly weaker than the second half of the year, while this year’s first half may end up being the strongest.

Check PAYOUT tomorrow for a UFC Pay-per-view forecast for the rest of the year.

Topics: Adam Swift, MMA, UFC | 20 Comments » | Permalink | Trackback |

20 Responses to “A Look Behind the Curtain: Zuffa’s Finances Come Into Focus”

  1. Zurich says:

    As a privately owned company, Zuffa isn’t bound to maximize its shareholders interests – Zuffa can do whatever it wants. If Dana and the Fertitta’s are intent on growing the sport as much as they can and can still turn a profit at the end of the day, then analyst’s “expectations” really don’t hold much water. Hasn’t the UFC always been a bit of a “hobby” of the Fertitta’s anyways?

  2. fightopinionReader says:

    This does put a dent to the notion that Zuffa is making money hand over fist while screwing over the fighters.

  3. white ninja says:

    zuffa’s ability to survive and continue to grow depends on 2 factors

    1. keeping interest in mma alve in the US – a lot will depend on how the doping issues are handled… failure to handle this will could get ufc grouped wth wwe in the mainstream and endanger the future
    2.controlling costs – how well can they control fighter payments, production costs and marketing expenses

  4. fightopinionReader says:

    “Zuffa can do whatever it wants. If Dana and the Fertitta’s are intent on growing the sport as much as they can and can still turn a profit at the end of the day, then analyst’s “expectations” really don’t hold much water”

    Yea, but Zuffa would pay a higher interest on their debt if their actions result in a lower credit rating.

    (I presume they have debt cause why would S&P have coverage on them otherwise)

  5. sebastian says:

    Comparing the Fertitta’s casino business with their UFC business, how do they stack up next to eachother size-wise?

  6. Grape Knee High says:

    “This does put a dent to the notion that Zuffa is making money hand over fist while screwing over the fighters.”

    Fightlinker, the notion that Zuffa is morally bound to proportionally share any increase in profits with their employers (in this case, the fighters) outside of what is minimally necessary to keep retention levels high is pure socialism.

    Zuffa can and should pay the minimum amount necessary to keep their business going, not to keep their fighters awash in cash. As it is, I think Zuffa is paying quite a high amount of economic rent for their fighters.

  7. Hey bud, I agree with everything you said except the part where you think ‘fightopinionreader’ is me.

  8. Jeremy (not that Jeremy) says:

    I think that, generally, the guys these days who are more singled out for “getting screwed” by UFC are the TUF guys who are on the equivalent of multi-year fighter development deals.

    I haven’t heard any significant complaints about the undercard guys who aren’t on the PPVs getting shafted even though they typically make a lot less than main card fighters.

    It’s easy to look at the purses for Griffin vs Rua and say that Forrest is getting screwed. However, he also benefited mightily from the exposure that TUF gave to him. He hasn’t spent any time on the undercard doing dark fights. He’s able to capitalize on that mindshare through the larger amounts that his sponsors are willing to pay to be positioned on his shorts or his shirt, or to be the water that he sips between rounds.

    Plus, when his deal comes up, he’s going to be in a very strong position when negotiating a new deal precisely because he’s had so much exposure.

    This is more than a buy in for Griffin. He’s not just biding his time, he’s building a brand, and UFC is helping him do that.

    ===

    I’m looking forward to the rest Adam, it’s great so far :D

  9. Zurich says:

    Zuffa was reported to be $40 mil in the hole before the “Big MMA Boom” of ‘05/’06, but is it confirmed that they still have outstanding debt/loans? I’d think after $76 mil in profit they’d be operating in the black…

  10. Jeremy (not that Jeremy) says:

    They definitely still have outstanding debt.

    Based on information from May (prior to their debt restructure package), they were going to take out $275 mil to pay off their prior debt package among other things. I don’t know whether that debt dated from the Zuffa purchase (i.e. whether that was how Zuffa financed the purchase) or whether it was directly acquired debt from SEG. Between May and September, Zuffa arranged for an increase in that pending debt package to $350 mil consisting of a 325 mil term b and a 25 mil revolver. The increase was for cash to purchase Pride and to finance overseas expansion primarily.

    From the outside perspective, the company seems to have a lot of liquidity right now, they’re turning quite a bit of cash, and reportedly they aren’t using the revolver. Their margin is down because they’ve been offering these free overseas shows to their biggest PPV audience (US), and also there’s a lot of cost just involved in doing business over there as opposed to here, in addition to the added cost of doing larger scale US shows (speculation: renting arenas instead of working casinos is a major change).

    It would be hard to imagine Zuffa having more than 350 mil in assets, so they must still have negative retained earnings, but the prognosis going forward is good as long as something nasty doesn’t happen. Zuffa has been paying dividends to the shareholders (the brothers and Dana, maybe some other minors).

    There’s a good bit of stuff that we just found out this past week in the wake of the podcast (which was recorded about ten days ago). Some interesting details. I don’t want to steal Adam’s thunder though, because he’s doing a good job laying it out.

  11. Grape Knee High says:

    “Hey bud, I agree with everything you said except the part where you think ‘fightopinionreader’ is me.”

    Sorry, man. My mistake.

  12. KennyP says:

    “Comparing the Fertitta’s casino business with their UFC business, how do they stack up next to each other size-wise?”

    Not even close. While the UFC sure helps the positive cash-flow (the casinos are debt-leveraged after the buyout), they are not nearly as important as the Station casinos.

    The casino business is a multi-billion dollar enterprise. (It doesn’t get as much publicity as the other casino operators because the Station properties are off-strip and geared toward locals. So the casinos are basically invisible to tourists. Exceptions for the recent OJ Simpson robbery.)

    Also, a key part of the Fertitta strategy has been to purchase and control large tracts of real estate. Property values keep going up in Vegas (long-term). And major projects (casinos, shopping centers, residential developments) need large plots of land. The Fertittas control several very important tracts.

    As big as the UFC has gotten, there is a long way to go before it even approaches parity with the Fertittas’ “day job”. (Much like Mark Cuban’s Mavericks sideline is far smaller than his other businesses).

  13. AB says:

    Thanks for a very interesting report. Nonetheless, some of the analysis (from the document, not your post) seemed pretty simplistic and common sensical. Take this, for example: “Conversely, if the company continues to drive increased interest in the sport over the intermediate term while maintaining currently healthy EBITDA margins and free cash flow generation, the outlook could be revised to positive.” It’s basically saying that if people remain interested in MMA, Zuffa wil do well. If it doesn’t work out, then it won’t. I sometimes wonder how much do these financial analysts know about what’s essentially a new product (at least to them) which they can’t really compare more than superficially to other forms of entertainment.

  14. David says:

    I love a bunch of fans on here criticizing and giving their opinions on a business that many people don’t know ANYTHING about.

  15. AS says:

    Zurich makes a very good point, other than the cost of credit, as a private company the Feritittas and Dana can do whatever they want. And they have already proven that they are risk takers of the highest order.

    Jeremy – you are the man. I’m hoping to get to work on the article on the details of the financial instruments later tonight.

    AB makes a valid point as well. It would be interesting to hear from someone familar with the credit industry (Jeremy…) whether this simple analysis is the rule or not. I imagine that to a degree there is a great incentive to be conservative/bland in the outlook analysis.

  16. Jeremy (not that Jeremy) says:

    Yeah, it’s pretty typical to say “if this, then this, otherwise this.”

    Sometimes pointing out the obvious is what’s required. It’s the other information that’s of value, because Zuffa isn’t posting their financials on the UFC website.

  17. cyphron says:

    I’m reposting this since the filter may have caught my previous (duplicate) post.

    The conundrum of business has always been:

    1) grow slow and experience less default risk, but risk competitors overtaking you
    or
    2) grow fast by going into debt but experience much higher risk of default and higher borrowing interests.

    Obviously, the UFC feels that MMA is here to stay and is adopting option #2 and cornering the European market before other players (Bodog, Strikeforce) even gets chance to compete properly in the US.

    S&P ratings only care about default risk and measuring the risk that creditors would face. They don’t care what the UFC is using its credit for. As far as the S&P is concerned, more debt and higher spending means the UFC’s credit worthiness goes negative.

    I don’t think the UFC’s credit rating means anything about its outlook as a business. The fact that the Fertitas want to keep the business private speaks volume of its outlook. They obviously don’t want to share the wealth.

  18. Sonny M says:

    Something to be noted.

    On the American Forbes 400 list, both Ferritas brothers are listed.

    They are both individually listed as being worth 1.3 billion dollars each (or 2.6 billion combined for anyone to dumb to do basic math).

    This does NOT mean this is what they make, it is what they are worth. The UFC is almost definatly carrying some debt, or likely to in he future, if they are reporting to S&B for credit rating purporses. It is well known they spent a massive fortune early on the UFC and took a bath, it is only now that it has become profitable.

  19. [...] you’d never be able to find anywhere else. One of those awesome articles this week is on the financial status of the UFC as determined by Standard & Poors, a premiere financial company charged with assessing lending risk. One interesting tidbit of info: [...]

  20. [...] credit rating from BB to BB-. We’ve discussed Zuffa’s credit rating recently on the web site and with Adam Swift on past editions of Fight Opinion [...]

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