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Report: Zuffa’s credit rating goes down

By Zach Arnold | November 28, 2007

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Adam Swift of MMA Payout fame has a new report on Sherdog talking about Standard & Poor’s cutting Zuffa LLC’s 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 Radio.

Here’s an interesting paragraph from Adam’s story on Sherdog:

S&P expects most of that surplus will be used to pay down debt. The report also noted that dividend payments to the owners — Station Casino magnates Frank and Lorenzo Fertitta own 90 percent of Zuffa, and UFC president Dana White owns 10 percent — will be increasingly limited due to the company’s disappointing returns.

Topics: Media, MMA, UFC, Zach Arnold | 14 Comments » | Permalink | Trackback |

14 Responses to “Report: Zuffa’s credit rating goes down”

  1. Probably not surprising, mainly because we had the warning earlier this year. Underlying industry conditions are not good at the moment. You have the previously discussed anti-MMA activity coming out of the UK and Australia, you have Vancouver banning MMA (in certain respects), and you have the poor financial results of publicly held companies that are in the industry. You have increasing industry consolidation, and Zuffa’s own failure to get enough traction in Japan to revive Pride (probably because the employees that were on their payroll were acting independently to resurrect Pride for themselves as soon as they could get Zuffa to cut them loose, it’s kind of hard to get the job done when the guys you hire are acting on their own to compete against you) are additional factors.

    Add to that the Couture thing, and so many of UFC’s titles being frozen at the moment, and you have some issues that need to be addressed before you can bring that rating back up. It’s kind of surprising in a way how many unforeseeable challenges have come up for UFC in the last six months.

    It’s an interesting time to be an MMA fan as much because of the chaos right now as in spite of it.

  2. The Gaijin says:

    As suspected, marketing merely off the “UFC” brand alone and putting on crappy cards is starting to negatively effect the bottom line.

  3. KennyP says:

    Gaijin,

    It’s not that Zuffa is doing THAT poorly on an operating basis, it’s that Wall Street expected UFC to have greater upward growth potential than has been displayed of late. Venture Capitalists and investors are looking for the next NASCAR (v.1994), NBA (v.1983), or NFL (v.1955). And they will pay a premium to get in the game before the real business boom comes. Many investors in MMA (or pro soccer or auto racing or whatever is the ‘next big thing’) are looking to increase attendance and revenue significantly above recent levels. Sometimes that is possible (NASCAR), sometimes that isn’t (MLS). And when you own a profitable niche it isn’t going to be valued as much as a competitor that might own the mainstream.

    (In other words, it might be good business to own a team in the NHL or NBA, but the best business to be an owner in is the NFL. Wall Street is figuring out that UFC can fill 18,000 seat arenas, sell 500K ppv buys, and draw good cable ratings, but it might not be able to fill stadiums, sell 750k ppv buys, and draw #1 cable ratings on a regular basis. Stakeholders can make a lot of money selling 500K ppvs and 18,000 tickets, but some advertisers and investors will look for something else that might deliver those larger ‘mainstream’ numbers.)

    While a debt downgrade is a bad thing, it primarily affects the cost (and value) of issuing new debt. Since Zuffa seems already to have issued the maximum sustainable debt level in proportion to the enterprise value of the UFC, I don’t know that a short-term downgrade affects Zuffa’s business too much. (Of course it does adversely affect the current owners of the Zuffa bonds. And a long-term downgrade will be a problem as Zuffa needs to gain access to a neww revolving line of credit.)

  4. The Gaijin says:

    So….as I said, their failure to capitalize on being “the next big thing” AND having the deepest roster they’ve ever had by arrogantly thinking they can sell based on name alone….is hurting business. I realize they’re still turning profits (I shouldn’t have used the phrase “negatively effecting the bottom line”, i was just generalizing), but they’re beginning to lose some of the momentum they were carrying in early ’07 and we all know how short the attention span of the “masses” is these days.

    This is two straight quarters with disappointing results and I hope it serves as a wake-up call. Thankfully we’re getting UFC 79 which has some “dream matches” and hopefully they’ll turn that corner going into ’08, b/c their last few ppv offerings (main cash cow) are starting to leave A LOT to be desired.

  5. 45 Huddle says:

    Due to many factors, they haven’t had many “blockbuster” fights in 2007. Those things are always cyclical. Hardly a huge worry.

  6. I’ve got a comment in that apparently was caught by the moderation script, so I won’t repeat that here.

    MLS is a funny scenario. There was a solid business plan developed in 1994-1995 that they failed to follow up until recently. They had a much bigger first season than they expected, and mistakenly presumed that this boom would be followed up by consistent growth in future periods (they had forecasted low initial attendance followed by slow growth in their original business plan). The fast start convinced the original investors and some new ones that they would be able to grow revenues fast enough that they could avoid implementing some of the capital intensive portions of the business plan that were intended to provide better operating revenues and more control over operating costs (including building stadiums).

    Then because they held off, they ran into problems because some teams that were league operated that they expected to sell to additional investors became unsaleable due to the downturn in attendance. These markets then suffered due to lack of league attention. It was a downward spiral.

    Things have leveled out pretty well in most of the league at this point though, and they’re no longer counting on expansion fees to balance the books, and most of the teams have either gotten out of their high rent stadium deals into their own digs or are soon to do so.

    With the exception of my local team which is hideously mismanaged, of course.

    ===

    UFC: My expectation is that this promotion in the worst case scenario would float 49% of their shares in a public offering to pay off their debt, and they could easily bring in 350 mil that way unless things went seriously south. That based on brand name alone. 3.5 million shares, 10 dollars a share. It’s easily within reason given what lesser promotions have been doing just on the idea of promoting MMA rather than any sort of track record.

  7. Zack says:

    45…what blockbuster fights do you think 2008 has to offer? We’ll consider blockbuster fights being anything that is expected to do more than 500k PPVs.

  8. Adam says:

    Keep in mind that some of the major capital expenditures that Zuffa incurred this year won’t be around in the future. The financial fallout from acquiring Pride is involved in this credit downgrade, and once the debt is cleared from that mess, the rating should rebound (eventually). It’s extremely uncommon for a sport to expand rapidly (as UFC has) and ALSO maintain a steady income-to-expenditure ratio. In the next financial year, if UFC were to take in as much as they did this year, but without some of those expenditures, their ratio will look much better, and this would likely be reflected in the credit rating.

  9. Zack,

    If Rampage is indeed going to be coaching on the next TUF, then I would expect that his title defense following that series would be a Very Big card. If that card is separate from the first Montreal card, then I would expect that the first UFC event in Canada would also be huge, particularly if you can headline that card with GSP either defending the interim title or going for an undisputed title. You have to figure that that card might sell a couple hundred thousand buys in Canada alone.

    If there is a Randy Couture kiss and make up card, then you can count on that being huge.

    In the next 12 months we could see Forrest go on a massive tear, and he’s very nearly money in the bank at this point. He WILL be headlining cards in the coming year unless something terrible happens.

    Obviously, it’s hard to forecast now what’s going to happen in UFC in four months let alone over the next 13 months.

  10. Zack says:

    Forrest vs Rampage could be big number wise for sure. I really hope they learned their lesson on icing a division from this year’s 170lb debacle. If Rampage/Forrest coach on the next season of TUF, we won’t see Rampage fighting again until the summer.

  11. David says:

    “Wall Street expected UFC” – Standards and Poor is not Wall Street… but I see where you’re going.

  12. IceMuncher says:

    Don’t forget Lesnar. He’ll be able to pull in a ton of viewers on any card he’s in as long as he beats Mir. Also GSP/Hughes vs Serra will be a fairly large draw as well.

  13. Forrest is injured ATM though, which is why coaching him on TUF would be a good idea. His recovery period is going to coincide with that season, unless something goes badly. Rampage is also injured, I guess his coach is saying he’s good to go in February though.

    Previously, TUFs have aired in the early April through late June timeframe, so you could give Rampage a fight in February or March (aren’t there noises that there might be another LHW coming in to UFC soon?), fight Forrest in April in a gimme fight (he suggested in his audio interview posted in yesterday’s news thread that he expects to get another fight before a title shot because of his injury), and then give him his shot against Rampage in July.

    That’s all assuming that things don’t go to hell of course, but we’re learning that you can have things go awry even when you try to protect your fighters before an event, so it’s probably smokin’ ’em if you’ve got ’em.

  14. IceMuncher says:

    Ok, so I read the Sherdog article. This really doesn’t seem like anything to worry about.

    The S&P was upset about the 2nd quarter because Zuffa had extra expenses (Pride and UK) and therefore didn’t make as much profit as they projected. Now the S&P is upset because Zuffa’s 3rd quarter revenues were down “at a low-single-digit rate”. I’m assuming this means something like a 5% decrease in total revenue as compared to last year at this time.

    An individual sport like the UFC is bound to have ups and downs based on public interest. I’m not especially worried that the UFC didn’t make as much profit as they were expected to, given the circumstances. Fights with huge draws are determined by circumstance more than anything else. Of course, you could do what Pride did and build up specific fighters with fights against undeserving cans, thus guaranteeing interest in the fighter. I’m not sure that’d go over too well over here though, after seeing all the backlash for Liddell/Jardine and Forrest/Shogun.

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