Bloomberg’s Greg Miles reports on the potential investment opportunity in Ultimate Fighting Championship, a mixed-martial arts sports organization. UFC President Dana White says it is considering selling a stake in the league.

Possibly on rebalancing risk/reward, but again, if Zuffa is still viewed as high growth, why not use debt (to balance risk and retain ownership) to fund that growth, and thereby reap those returns?

Again — and I promise this is the last time I will repeat myself since this is getting tedious — you CANNOT gain any insight into the reasons why Zuffa did what they did.”

Agreed–that is the crux of my argument. Disagree that you can gain no insight–it is a metric closely followed by analysts for a reason. It is not meaningless and without insight.

Agree to disagree on that point.

We know for a fact that they are trying to expand in other countries and this takes cash flow.

We can say, if you’d like, that some of the cash from the previous revolver was used to fund operations as well as growth. If this new debt is being to to partially refinance that debt, it’s still ultimately going (at least partially) to fund growth.

What we’re talking about here is your feeling that the Fertittas’ think Zuffa is not a growth company.

This is the crux of your argument:

Possibly on rebalancing risk/reward, but again, if Zuffa is still viewed as high growth, why not use debt (to balance risk and retain ownership) to fund that growth, and thereby reap those returns?

Again — and I promise this is the last time I will repeat myself since this is getting tedious — you CANNOT gain any insight into the reasons why Zuffa did what they did.

People rebalance their portfolio for many reasons. Investors do NOT always seek the highest ROI from their investments. Seasoned investors balance risk/return characteristics across their entire portfolio when making their decisions.

What this means is that some people often give up potential expected returns for less risk. Some people also give up potential expected returns for cash. They balance risk/return, not necessarily just make heavy bets in the investments with the highest expected returns, as very often these are also the riskiest investments.

Given the extremely high risk and exposure of Station, it should be obvious that the Fertittas overall risk exposures are higher than they were even 2 years ago? How would they mitigate that if their risk tolerance stayed the same? **** They rebalance their portfolio to move some of their assets into less risky investments. ****

Here you are losing me. The new term loan, by my reading, is being used to (i) pay off the existing revolver, and (ii) fund dividends. It doesn’t appear that the debt is being used to fund growth, which is the point I have been trying to make.

Let’s say the Fertittas want $100 million in cash from Zuffa. And to continue to fund Zuffa’s growth would cost them another $100 million. Let’s Zuffa only has $100 million in cash and cash equivalents on hand. How could they achieve both goals without selling equity (and giving up future potential growth).

Answer: They issue debt.

I don’t say Zuffa isn’t going to grow. Of course it will. This move, while not conclusory by any means, suggests however that it is no longer a “growth” company with large rates of growth per investment dollar, and that growth will be more flat going forward.

“Issuing debt implies nothing about the Fertittas’ feelings about Zuffa’s future growth. Nothing.”

This I’m not sure I agree with. Take Oh Yeah’s example–for instance.

“If Zuffa earns $50m for the year with $100m in equity and $100m of debt @ 5%, it will earn $55m with $200m of equity and no debt. But then Dana and the Fertittas will need to take out personal loans to replace the $100m hole in their bank accounts, which will eat up the $5 million of Zuffa’s excess profits.

So it really matters little whether they take out their equity or not, because they have shown that they have the means to provide the capital they need through either equity or debt.

The only issue is whether they can earn greater than a 5% risk free return on their money since they’ve taken it out of Zuffa.”

If Dana et. al. viewed Zuffa as a growth enterprise subject to gains of 15% or more (or whatever growth rate you like), wouldn’t they have used debt (to balance risk) to fund the growth? Instead, they used debt to pay themselves. While not dispositive, this suggests two things:

(i) what Zach notes–cash was needed right now for other projects; or

(ii) while cash flows will remain strong, growth rates have tapered off, and the owners have concluded they have more enticing opportunities offering higher rates of return.

“Either case says more about Zuffa’s risk/reward profile, but nothing about the Fertittas’ actual feelings about Zuffa’s future growth. Seeing that you’re a lawyer with a good pedigree, I’m wondering at this point why you cannot see this very obvious distinction.”

Possibly on rebalancing risk/reward, but again, if Zuffa is still viewed as high growth, why not use debt (to balance risk and retain ownership) to fund that growth, and thereby reap those returns?

MichaelTheBox concluded the requisite ROI wasn’t sufficient enough to justify the expense required, and thus, growth will come more incrementally. That is a very plausible conclusion.

“Have you not considered the likely scenario that Zuffa needs its cash and equivalents to fund its continuing growth? And that given that the Fertittas want to extract some cash, that the only for them to achieve this and continue to fund Zuffa’s growth would be to issue debt?”

Here you are losing me. The new term loan, by my reading, is being used to (i) pay off the existing revolver, and (ii) fund dividends. It doesn’t appear that the debt is being used to fund growth, which is the point I have been trying to make.

Again, maybe we came off the tracks due to semantics. Of course Zuffa is going to grow. Is it going to grow at rates of 5-10% per year, or 15% plus? A growth rate of 5% per year isn’t considered a “growth” company, in my opinion.

1) Dividend recaps, in particular, are used with companies with strong cash flows and it the owners have the advantage of not giving up future potential growth since they are still the owners. They have not given up any equity.

If the Fertittas really thought Zuffa’s valuation is right now at its highest level and would no longer grow, they sell would some or all of their equity, not issue debt.

Issuing debt implies nothing about the Fertittas’ feelings about Zuffa’s future growth. Nothing.

2) Again, by your “voting with their feet” comment, you betray your lack of basic portfolio theory. Risk/reward is what is considered, not just reward. Especially given the high risk level of their biggest investment vehicle (Station Casinos).

It seems to me (and everyone else here but you), that very likely, they wanted to pull some equity out of Zuffa to rebalance/diversify their existing investments (or maybe even for living expenses). They’re getting killed by their primary wealth vehicle in Station and making a killing with Zuffa; a pragmatic play here is to take some profits from Zuffa and sock it away in something safer. Or possibly even invest in another company; who knows?

Either case says more about Zuffa’s risk/reward profile, but nothing about the Fertittas’ actual feelings about Zuffa’s future growth. Seeing that you’re a lawyer with a good pedigree, I’m wondering at this point why you cannot see this very obvious distinction.

3) Let’s talk about Zuffa’s cash flow. You insist that Zuffa is no longer a growth vehicle because of their cash utilization. Have you not considered the likely scenario that Zuffa needs its cash and equivalents to fund its continuing growth? And that given that the Fertittas want to extract some cash, that the only for them to achieve this and continue to fund Zuffa’s growth would be to issue debt?

Considering the inroads Zuffa is trying to make in Europe, Asia, and South America, and knowing that the Fertittas are getting killed by Station, you really think the likeliest scenario is that the Ferttitas’ think Zuffa will no longer grow? Really?

even you have refrained from stating that owner/management usage of capital is irrelevant, though amusingly, you call only this conclusion “laughable.”

What I called laughable was your mindless speculation that the Fertittas think that Zuffa is no longer a growth company.

Please, given your apparent vast wealth of knowledge in the finance world, refute that point. In fact, numerous posters, apparently you as well, agree that Zuffa is a cash-cow. Several other posters above also conceded the point, such as the following post:

“In the case of the UFC, growth cannot be tied to the amount of money thrown at investing into the company. If marginal returns to reinvestment drop below a certain point, it may make sense for Zuffa to simply pay out large pieces of the profits as dividends. I actually expect that to be the case with Zuffa, as growth for Zuffa is largely tied to educating potential consumers, a process which can be done fairly cheaply up to a point, then becomes incredibly expensive if you want to exceed a certain basic rate and reach.”

That is your buddy–MichealTheBox. Isn’t that essentially the exact point I made throughout? That reinvestment has dropped below the required ROI, and that better options are available outside?

No where did I say this is the only explanation. It is most certainly a plausible explanation though, and even you have refrained from stating that owner/management usage of capital is irrelevant, though amusingly, you call only this conclusion “laughable.”

Again, given your vast finance experience and knowledge, please explain to us why analysts look to what owners are doing with capital? With their own equity? If it is “laughable” it should simply be ignored entirely, and yet it is not. In fact, S&P apparently revised their rating in large part on this very metric.

Could it be, that owners, on occasion, in essence “vote with their feet?” (Or in this case, their investment opportunities?)

From this quote: “If the UFC is seen as a “growth” engine, why would you take on large debt to fund dividends?””

I don’t see how anyone could possibly conclude anything other than that you think Zuffa is not a “growth engine”, given the context of your subsequent posts.

You are possibly more insane than 45. At least he understands finance. LOL is right.

This is post 4 in its entirety:

“October 1st, 2009 at 7:36 pm Rob Maysey Says:

If the UFC is seen as a “growth” engine, why would you take on large debt to fund dividends?”

Yes, apparently you are wasting your time, if the facts don’t support your argument, just make them up, apparently.