Envelope Math: Is Zuffa Worth $1 Billion?
November 12, 2008
The conventional wisdom in MMA is that Zuffa is a billion dollar company. That is the company line and has been whole heartedly accepted by the media, most notably by the influential Forbes magazine. Information about the private company is hard to come by, making informed fact checking on the subject a difficult task. However, last week Zuffa disclosed to the Sports Business Journal that it is generating $300 million in annual revenue. That number makes it possible to do a little envelope math to arrive at a potential valuation of the company.
Based on S&P reports, Zuffa’s highest EBITDA margin is believed to have been 40% in 2006, falling as low as roughly 20% in 2007. Therefore, the company’s EBITDA on $300 million in revenue would likely be between $60 and $120 million.
The closest comparable company is World Wrestling Entertainment. WWE is a publicly traded company with a market cap of $931,740,000, $5.35 million in debt, and $184.39 million in cash. Those numbers produce an enterprise value of roughly $738.24 million. Comparing the company’s EBITDA of $104.69 million to its enterprise value, produces a ratio of 7.05. Applying that multiple to Zuffa’s estimated EBITDA produces a ballpark enterprise valuation between $423 and $846 million.
One major caveat to the comparison is the vastly different capital structures of the two companies. Zuffa is highly leveraged with $300 million in debt while WWE is virtually debt free. Zuffa could also command a healthy growth premium that wouldn’t be adequately captured by the WWE comparison.
Another important caveat is the dramatic change in market conditions since earlier this year at the time of the Forbes article in particular. In April WWE was trading at roughly $19 per share as compared to its current level of $13 per share. That multiple applied to Zuffa would yield an enterprise valuation of somewhere between $630 million and $1.2 billion.
The stated $300 million in revenue is a roughly 58% increase from Zuffa’s reported 2006 revenue of $190 million. The number seems high to me based on what we know about Zuffa’s revenue streams. Live event revenue accounts for 75% of total revenue, with the vast majority dependent on pay-per-view. That means that the company would have generated roughly $225 million on its 11-12 pay-per-view events per year.
It’s hard to imagine a scenerio in which the company could generate an average of $18.75 million in revenue per event, unless the company is including total pay-per-view revenue (i.e. $45 per event, as opposed to the roughly 50% the company actually sees).
