Zuffa Credit Rating Upgraded to BB
December 22, 2010
Standard and Poor’s have upgraded Zuffa’s credit rating from “BB-” to “BB” on the strength of the UFC’s strong operating trends, improved profitability internationally, and good credit measures.
- Zuffa has increased profitability in large part due to holding its events in more profitable domestic venues or international markets that facilitate live PPV broadcasting to the domestic market.
- Specific mention is made of the UFC-WEC merger as potential source of incremental ticket and ppv sales growth.
- The volatility of consumer tastes and preferences continues to be a slight concern as these may impact PPV revenues, but the report also cites the development of new fighter talent and regulatory acceptance as additional risk factors.
- However, the company’s strong EBITDA margin and healthy cash flow conversion rate are reportedly sustainable over the near to intermediate term and partially off-set concern over volatility in PPV earnings and risk factors mentioned above.
- The report reinforces that 75% revenues are event-related; PPV buys account for nearly 60% of all PPV event revenue while gate and sponsorships account for the rest.
- The remaining 25% of revenue comes from live and taped broadcasts on SpikeTV, merchandise, and digital media revenue; much of that is broadcast revenue, but an emerging portion is merchandise and digital media.
- EBITDA margins are expected to track within a consistent range in the future, even with expansion into new markets like Brazil.
- Liquidity remains strong due largely to limited capital spending requirements.
- Debt: $50 million credit facility expiring in 2012; $425 million term loan due in 2015.
Zuffa Credit History
November 2007 – S&P Cuts Zuffa Rating, BB to BB-
July 2008 – Zuffa Rating Goes Negative to Stable
July 2009 – Cuban Now a Zuffa Bond Holder
October 2009 – S&P Re-Affirm BB-, Slide Recovery Rating Down
December 2010 – S&P Raises Zuffa Rating, BB- to BB
Zuffa has invested a great deal of time, effort, and money to diversify its revenue sources over the last few years. I expected this focus on merchandising and digital media revenue generation to increase non-event-related revenues as a percentage of overall revenues, but Zuffa has matched this revenue growth with substantial growth in the PPV domain. Thus, there remains a 75-25 split between event and non-event related revenues.
Overall, the raised rating is not surprising. Zuffa has had another excellent year, breaking its PPV and live gate marks for the third consecutive time. I suspect it may break the record again in 2011 with the addition of the WEC roster that now gives them two more titles to use in its event scheduling rotation.
There’s been a lot of talk lately about the UFC peaking, but I don’t think this is the absolute top of the mountain. Sure, the company is going to have its ups and downs – we can’t expect straight line 20% growth in perpetuity – but I do think there remains a host of growth potential both on the event-related side and the ancillary side. Its best chance for growth is to gain exposure domestically with a new television deal (somebody other than Spike). However, it may also achieve growth in other ways:
- The UFC Gyms model
- The continued development of its merchandising business
- An aggressive digital media expansion to reach new audiences
- Investing in a strong integrated marketing campaign (something they’ve yet to really do) to work on converting awareness to interest and beyond
UFC Gyms are perhaps the most exciting opportunity that has yet to be fully explored. I’m not sure they’ll provide material revenues (either in operation or through licensing fee), but the potential is there to leverage these gyms as first a means to greater exposure and then as a teaching tool. This seems to be even more crucial in MMA than other sports; it’s something that people don’t think much about trying, but upon doing so often realize the many health and fitness benefits to the training. These workouts often provide enough new perspective and appreciation for the sport that a new fan is born.
There are many things the people of this industry have yet to discover (myself included, certainly). However, one I feel quite strongly about is the notion that a.) while everyone may “get” MMA, not everyone is going to like it, and b.) not all those that like it, come to like it in the same way or for the same reasons. MMA has to learn to be flexible and accommodating to all sorts of people that like the sport for various reasons or get into the sport in various ways. The UFC Gym idea is something that helps in this regard.