MMA Investors Searching for Viable Competitor, Is It Worth the Risk?

March 16, 2011

This weekend’s Zuffa-Strikeforce purchase announcement shook up the MMA landscape in such a way, that many fans, fighters, and sponsors were left in limbo as to what the future will hold for the sport and business of MMA.  The announcement also created a huge void for a number 2 promotion in the market, an opportunity which some MMA investors are already analyzing and moving some money around.

 

Why would investors be interested in MMA at this point after Strikeforce was just purchased by Zuffa? Well, lets take a look at the events that lead to Strikeforce’s sale to understand why.

Showtime, which was a part owner of ProElite, spent a good amount of resources and budget to build up and kick-off MMA on the network. They were fairly successful in making stars within the promotion, such as Kimbo Slice, Gina Carano, Robbie Lawler and Nick Diaz, though they spent way too much money and accumulated debt of around $55 million, which lead the company to to almost file for bankruptcy, but instead chose to sell off it’s assets to recuperate some of the losses for Showtime.

Strikeforce and CEO Scott Coker were in the kickboxing promotion business all the way up to 2006, when they promoted their first MMA event in California, which was hugely successful and still holds the U.S. paid attendance record for MMA.  Before their first MMA event, they had a strong regional fanbase and following in San Jose.  SVSE along with Scott Coker struck a deal and created a partnership which slowly built up the company to the point where they were well positioned enough that when the Showtime was looking for a new MMA promoter, they were able to strike a deal with Showtime and Pro Elite to acquire their assets. Sherdog had the details back in February 12, 2009.

Strikeforce parent company Explosion Entertainment LLC purchased selected assets of Pro Elite Inc. for $3 million, according to a United States Securities and Exchange Commission report released Wednesday.

As part of the multi-million dollar purchase announced last week, Strikeforce acquired valuable fighter contracts, media assets that include the ProElite fight library and inventories that include all EliteXC-related DVDs. Various promotional and marketing materials were also part of the deal.

The asset purchase also lead Strikeforce to signing a TV deal with Showtime/CBS, a deal which was estimated to pay Strikeforce $25 million dollars in license fees over the course of the three-year deal.

In October of 2009, the Stratus Media Group acquired a 95% stake in ProElite for $2 million after the companyalmost filed for bankruptcy earlier in the year.  Although they sold most of their valuable assets to Strikeforce, they still maintained rights to the brand name ProElite (ProElite.com), Cage Rage, Spirit MC, and most importantly the EliteXC brand. The ProElite group, who put a bid for Strikeforce back in December of 2010, was composed of some original ProElite members such as Doug De Luca, William Kelly, Glenn Golenberg, along witch newly appointed Chairman of the board Paul Feller from the Stratus Media group.  It was said they raised enough capital to place a bid for $40 million dollars, though it wasn’t enough and was eventually outbid by Zuffa.

The other bidder for Strikeforce was from a group headed by Shelly Finkel, who is Mike Tyson’s manager and has been one of the most powerful managers in boxing for the past 30-plus years.  Finkel officially announced that he was leaving the sport of boxing back in June of 2010, citing politics of the sport as the reason he was driven away to where he got his start, music promotion under Empire Sports and Entertainment.  Although Finkel left boxing, he continued to act as an advisor to heavyweight champions Wladimir Klitschko and Vitali Klitschko, with whom he has worked for several years.  Empire Sports and Entertainment’s mission was said to become a leading media and entertainment company known for promoting the best events in concerts, music festivals, pay-per-view specials and sporting events around the world.

If we look back at some of those figures, it took an investment of $3 million dollars from SVSE and Explosion entertainment back in February of 2009 to cash out on March of 2011, span of 2 years, to be bought by Zuffa for above $40 million dollars. Being the #2 promotion or the “next competitor to the UFC” paid off for Strikeforce, and I think many other promotion are looking at their model to try and accomplish the same.

On Monday, just a couple of days after the Zuffa-Strikeforce purchase was announced, ProElite stock (one of the bidders for Strikeforce) opened at less than $0.01/share and closed at a 52 week high of $0.06 /share with a volume of just under 1 million. The average volume over the past 3 months had been around 14,000.  On Tuesday (the following day March 15, 2011), ProElite stock closed at $0.19 /share and had a day high of $0.24 /share.  What the numbers are saying is that investors and MMA fans have already started looking for a viable competitor for the UFC in the MMA market, and as Strikeforce proved in the span of 2 years, money can still be made in the market without being the #1 promotion as long as you have a platform for your product (Showtime) and a unique selling point you offer to fans.

If Zuffa ends up deciding that they do not want female MMA in the UFC, another promotion could build a solid stable of female fighters and scoop whatever talent is left out there not under the UFC umbrella (see Bellator) to start the process all over again.  FX, Fuel TV, G4, FSN, and other networks have shown recent interest in MMA programming, and all it takes is the right deal to present itself to a promotion for a shot at the #2 spot.  With that being said, the risk in the market has grown exponentially high this time around, as UFC has taken a dominant share of the market and has the majority of the top fighters in MMA.

Strikeforce is said to have roughly 140 fighters under contract in addition to UFC’s current 260 fighters, which is a whopping 400 fighters under the Zuffa banner at the moment.  It is expected that a good portion of those fighters will be cut and out of the UFC by 2012, since Zuffa has said before that they feel comfortable with a roster of around 200-220 fighters.  The UFC will also have to sign many foreign fighters as they keep reaching new international markets (trying to find the GSP of each country they visit), which only guarantees that many domestic fighters will be getting cut in the next 12 months.  This bodes well for the promotions such as Bellator, MFC, Shark Fights, Titan FC, & Tachi Palace Fights in the States,  BAMMA, Cage Wars, & Cage Warriors in the UK, and KSW in Poland to name a few. It also bodes well for a station like HDNet who has TV contracts with MFC, Shark Fights, and Titan FC. These promotions have shown a great deal of potential in the last couple of years and the talent pool quality of MMA fighters should be increasing in the next year.  One of those could make the next step up or it could be an investment group, like the ones behind ProElite to assume the #2 spot in the market. It will definitely be a risk for any investor to jump into the current state of the market, but fans and investors seem eager to give it another go.

22 Responses to “MMA Investors Searching for Viable Competitor, Is It Worth the Risk?”

  1. Bill Jennings on March 16th, 2011 5:48 AM

    The assumption that Zuffa paid over 40m is ridiculous. Pro-elite was reported to have offered 20m to purchase and then 20m to invest into strikeforce. That’s not a 40m dollar purchase price. It’s a 20m dollar purchase price.

    Secondly, the 20m dollar offer included stock options which is worthless. You are confusing everything which makes your conclusions invalid.

    You cant just look at SF investing 3m and then selling for this fantasy number of 40m. As I explained above 40m wasnt even the number. You also have to account for the 55m dollars that was lost in order to create assets that SF purchased for 3m dollars. And then on top of that you also have to account for all the money showtime invested in the venture.

    So no, it’s not as simple as investing 3m to make 40m. That is the silliest assumption I have ever read and being on a blog supposedly about the business of MMA this is beyond amateur.

  2. Tom on March 16th, 2011 6:24 AM

    Your article is in error. Pro Elite never filed for bankruptcy.

  3. Jose Mendoza on March 16th, 2011 8:28 AM

    Tom: You are correct, fixed. Meant to say were going to file for bankruptcy but sold off its assets and re-structured instead.

  4. Jose Mendoza on March 16th, 2011 8:41 AM

    Bill:

    Is your assumption that ProElite was the second highest bidder, because there were 3 other bidders.

    Josh Gross reported: “ould buy out Coker’s Silicon Valley partners for $20 million and another $20 million investment in capital”

    Dave Meltzer reported: “ProElite raised new capital and had reportedly made a $40 million offer.”

    Loretta Hunt says: “According to a strong source, UFC purchased Strikeforce for about $40 million, which included some debt repaymen”

    That’s pretty much all we know about bids and what Zuffa may have paid.

    On your second question, I think you are missing the point. I list the initial investment capital in a couple of examples that it took for a promotion to go to the next level and become a #2 promotion. I listed numbers that we know were reported, so the point wasn’t to say it was a 3m investment and you got 40, it’s obviously a lot more complicated than that, not to mention whos perspective you are talking about. SVSE, Scott Coker, and Showtime all pumped money into Strikeforce, all had very different results after the deal was made.

    From the Sources I have spoken to, SVSE made money from the venture and that it was a very good deal for Scott as well, although he didn’t want to sell.

  5. Machiel Van on March 16th, 2011 8:49 AM

    Bill,

    I think that the implication is more that buying the assets from ProElite allowed them to get their TV contract with Showtime/CBS, which allowed them to place themselves as a potential competitor to the UFC, whereas before the purchase they did not have a strong TV platform on which to really expand the brand. I don’t think Jose is suggesting it is a $3 million investment = $40 million cashout, that would just be silly as you’ve explained. However, without the TV deal (and the fact that Showtime is also a PPV provider), there would not have been a significant incentive for the UFC to purchase Strikeforce.

    Now, I believe that all Jose is saying is that potential investors will see this situation as more of a “invest a few million, get tens of millions back” scenario, which could be true, since big-moneyed investors have shown time and time again to jump into the MMA industry expecting to make a profit without understanding the market. It is very possible that someone merely reading about the numbers might reach this conclusion without understanding the different facets of the actual deal.

  6. Machiel Van on March 16th, 2011 9:00 AM

    The problem is, if you understand the MMA market, this situation is pretty unlikely to be repeated anytime soon. Strikeforce had a lot of legitimate MMA stars, very few of which were organically grown. Nearly all of their biggest stars became notable before their time in the promotion, which is the reason Strikeforce bid for their services in the first place. Now, outside of the Zuffa umbrella, where are the Fedors?The Gina Caranos? The Robbie Lawlers? The Nick Diazs? etc. There aren’t any, save a precious few like Eddie Alvarez and Hector Lombard, and Bellator has those fighters, and let’s be extremely clear: Bellator FC, while a unique promotion, is not on the level of Strikeforce. It will be very tough to grow organic stars that people will believe could actually challenge fighters in the UFC, which is what will be needed to establish a number two promotion that could potentially seem attractive for a Zuffa purchase. A lot of the stars in Strikeforce were merely left over from the Pride fallout who chose not to sign with Zuffa, of fighters who had left the UFC for whatever reason. It will take years and an appropriate TV platform to cultivate fan interest in organically grown stars in a new and unfamiliar promotion in a sport that is now, in the eyes of the media and probably the majority of fans, synonymous with Zuffa, LLC (be it through the UFC, Strikeforce, or both). And of course if you do get a TV deal for your fledgling promotion, there’s always Zuffa counter-programming to deal with, in addition to other major sports (Zuffa can literally counter-program across three TV networks and two promotions now). Investors beware.

  7. Matt C. on March 16th, 2011 10:26 AM

    I feel like I’ve been wrong every time I say this because the truth is the UFC has been paring down it’s roster. But when the UFC folded in the WEC they said it was because they needed more fighters. They are saying the same thing with this deal because they need more fighters. I’m beginning to feel like an idiot for believe them on that matter but they keep talking about running more shows.

    In the phone conference the other day about the Strikeforce buyout Lorenzo again said they see the demand for more shows. They want to be running around 8 shows in Australia. They think Canada and England also has a demand for around 8 shows a year. That isn’t PPVs a year just shows. Again I’m beginning to feel like an idiot for buying this we need more fighters talk only to see them pare the roster down but something tells me they aren’t just completely fibbing about needing more fighters. To me it seems like their plans keep getting pushed back on how quickly they can make those extra shows happen and instead of keeping a big roster they have to cut fighters until they can get those deals done. But now with this deal with Strikeforce they got a place to keep fighters busy and maybe won’t have to pare down the roster drastically. Especially if they start using the whole Strikeforce card for contract fighters rather than farming out the undercard like Strikeforce was previously.

  8. Machiel Van on March 16th, 2011 10:44 AM

    Matt C.,

    It’s not that they need more fighters per se, it’s that they need more marketable stars to bolster PPVs, so that talk is a little misleading. Just like when Dana said “we need more fights,” what he meant was that they need more big blockbuster fights.

    On the international note, I think that you should trust what Zuffa says, because I believe they really do have big international aspirations for the company, it’s just a matter of expanding the company’s infrastructure and getting the right partners in those countries (see: Flash Entertainment). Just be patient, Zuffa needs to grow much more to make all these international shows and “The Ultimate Fighter” seasons become a reality overseas, which will take time, as well as trial and error. You certainly shouldn’t feel like an idiot, a lot of these are just future products that are merely in the conceptual stages.

    The problem is that Dana and Lorenzo can’t keep their mouths shut about these sorts of things. I think part of that is because there is in fact a demand for those products, which is why Zuffa intends to actually go to those countries and do those shows. Fans are constantly hollering for the UFC to come to their area, and Dana and Lorenzo hear them. Again, I don’t think they’re pulling the wool over your eyes so to speak, I just think they’re commenting on future projects a little too early. They could just say “don’t worry, we’ve got plans for your country, things are in the mix,” (like how I used Dana’s statement?) but let’s face it, fans demand more promises and information than that.

  9. Seth on March 16th, 2011 12:07 PM

    The battle for the #2 spot in MMA will belong to the long tail of promotions and the consolidation of them.

  10. Miesha Tate Wants To Be Gina Carano’s Comeback Opponent on March 16th, 2011 12:19 PM

    [...] good news for the Miesha Tate’s of the world, but I suppose there’s always Bellator or some other enterprising group to pick up where Strikeforce will eventually leave [...]

  11. Bill Jennings on March 16th, 2011 2:04 PM

    Machiel Van,

    Exactly. It took a purchase of an asset which cost 55million to create and then it took a network like showtime to invest millions of dollars to back the venture.

    Where on earth can someone with a few million or even 20 million replicate that scenario? Showtime will likely never again invest in something only for the owners to sell it and there are no assets and rosters available for sale comparable to what SF purchased from pro-elite.

    Once Warner Bro’s gave up on the WCW it was over. All the big money went away.

    Nobody is dumb enough to risk 10′s of millions of dollars with now the most optimistic projection being Zuffa purchasing the assets because at some point you realize the risk isnt worth it anymore.

    Before you had UFC’s business to look at for optimistic projections. That’s how many millions were being generated. Now you look at SF who barely got out with it’s skin intact as the upside. Nobody is securing any significant capital based on this.

  12. Jose Mendoza on March 16th, 2011 3:39 PM

    Just a couple of updates, I hear Strikeforce will not have any amateur fights on the undercard and that Strikeforce will be kept around as long as the TV deals with Showtime are good, which could extend until 2014.

    Just curious, no one has commented on the fact that ProElite’s stock has jumped from less than a penny to 19 cents/share since the UFC bought Strikeforce. MMA investors are aware that PE was ready to invest about 20 million into MMA. ProElite still has a pretty big MMA library that they own, Strikeforce only took over EliteXC’s library, not the other promotions PE owns, which is another incentive for them to get going again. If that happened, UFC would virtually own every single piece of MMA history footage, which would be something they would want for the UFC channel they keep talking about.

    Update on the PE stock, it closed at .09 cents today, it closed at .19 cents yesterday :)

  13. Would you invest money into MMA in this business climate? (Audio show included) | FightOpinion.com – Your Global Connection to the Fight Industry. on March 16th, 2011 6:48 PM

    [...] Jose Mendoza: Searching for a viable competitor, is it worth the risk? [...]

  14. Steve on March 16th, 2011 8:23 PM

    Stock prices are meaningless in publicly traded MMA companies. Investors are completely clueless about the sport and are just wildly speculating.

    The IFL had a $100+ million book value at one point after they were featured on ’60 Minutes’ yet they were out of business a year or two later.

  15. Machiel Van on March 17th, 2011 7:18 AM

    Hopefully if DREAM and WVR (Sengoku) go under in Japan Zuffa can purchase their fight library as well. I can’t see those companies making good use of that footage in the event of a collapse/sale. Does anyone know if HdNet has any rights to the footage of shows that have been broadcast on their network? Seems unlikely…

  16. Sergio on March 17th, 2011 12:56 PM

    Jose:
    Any word on who the mystery 3rd buyer is? I know you gotta have at least some speculation n im curious to know who that might be.The only ppl that come to
    mind are..

    -Mark Cuban/HD Net

    -Maybe Gary Shaw

    -Maybe M-1 Global

    -Maybe MC Hammer Sports Management Team

    Also you got to wonder that if both Shelly Finkel n Pro Elite n this mystery 3rd buyer were gonna invest in SF/MMA…Since they weren’t able to buy SF,Then they could actually be looking at a smaller org to invest in and the fact that this smaller org is not as established as SF was,gives this investor the opertunity to pay less,leverage better into the deal with minimal risk.If these investors are serious about getting involved in MMA,then this could be their potential Plan B..Who knows?

  17. Jose Mendoza on March 17th, 2011 1:35 PM

    Machiel Van:
    HDNet does have rights to all the footage they have shot, for the most part.

    Sergio:
    Nope, very hush hush. Only a few people know and they won’t say who.

  18. Jose Mendoza on March 17th, 2011 5:59 PM

    Latest on Purchasing price:

    Meltzer: “The purchase price has been reported at $40 million, although neither side publicly talked details. According to information from a source familiar with negotiations from the start, it may have been slightly higher, but it was in that range”

  19. Machiel Van on March 18th, 2011 7:38 AM

    Thanks Jose. Has HdNet released any information of what they will do with the footage? It would be nice if they licensed it out for other orgs to use (i.e. highlight reels). Otherwise I don’t know how much value it will give them broadcasting replays of events.

  20. mmaguru on March 18th, 2011 9:05 AM

    Jose, nice read.

    My opinion, I’m not so certain that the TV deal is what UFC was after. The video library as well as potential opportunity costs associated with not purchasing SF when they heard it was up for sale might have been the drivers as well as the SF goal to be on PPV.

    Now on to Showtime. They may decide at any time to, from what I’ve read, forgo the contract with SF in an effort to sign a partner that will be in it for the long haul. Perhaps that’s why the M1 deal made sense in the first place, a bit of an insurance policy. There is no doubt that Showtime are going to be interested in MMA content for some time to come and could be the driver to raise a #2 competitor from the ashes as they did with SF. I believe this is what will determine the future potential #2 in the business. For all we know, maybe they are already talking to Pro Elite again.

  21. juan on March 18th, 2011 12:50 PM

    After 2012 UFC will start cutting fighters. Whoever is #2 can make a play for them. And Strikeforce showed what people want … the big guys, the heavyweights. Strikeforce got tons of press for that heavyweight tournament even though most of the big guys were way past their prime. Put together a promotion in 2013 that has some ex-heavyweight UFC champs and a fledgling #2 can make a big splash. Maybe spend the money in 2013 to get Brock Lesnar out of retirement. People will pay money to watch big-name heavyweights fight — even after they get old and slow.

  22. Bill Hardiek on March 18th, 2011 1:14 PM

    Michael Van, I believe you hit the nail right on the head. I believe that Zuffa are looking to expand the size of the venues in the near future. Let’s not kid ourselves here. Zuffa have an ideal business model, the PPV buyrates are increasing every year and the growth of UFC has continued even during a global recession. Now, in order to make the PPV cards stronger and the live gates larger what needed too happen? Well, combat sports 101 says he who has the HW’s has the fans. Much like the Mike Tysons’ and Evander Holyfields of old the UFC will have a whole stable of HW fighters that they can sell to the global MMA consumer. It has been the 1 missing ingredient this whole time. The Rogers Centre turnout in Ontario is just the begging of things too come. Dana and Company have openly talked about doing a fight card in Texas Stadium. Look for that too happen sooner rather then later. UFC will be able to do the 1 thing that has held boxing back for the last decade plus. They will be able to put on all the fights that the fans want. And if the fans want a fight, UFC/Zuffa will be able to make money off of it. The high profile fights can become a platform to push UFC/MMA into a new stratosphere. Let’s face it, unless you are a diehard fan, you only catch a UFC here or a Strikeforce there. With a consolidated UFC, the fans will be able to find UFC much easier then in the past.

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