Zuffa Maintains “BB” Credit Rating, “Stable” is Key

November 3, 2011

Standard and Poor’s has maintained Zuffa’s credit rating at “BB” based on the belief that the company’s strong EBITDA margin and healthy cash flow are sustainable over the “near-to-intermediate term” as Zuffa continues to grow and benefit from it’s well-recognized (UFC) brand and dominant market position.

On the other hand, the following S&P concerns kept Zuffa’s credit rating from being upgraded:

– Risk of revenue and EBITDA volatility given the company’s primarily event-driven business model

– Vulnerability to changing consumer preferences and susceptibility to variability in discretionary spending

– Management’s aggressive financial policy

– Although the UFC has a strong fan-base, in order to maintain their advantage, they need to continue to develop fighters that appeal to the 18-34 demographic.

– Preserve current regulatory acceptance of the sport. Fatal injury or change to the rules and regulations governing the sport and legal status could have meaningful impact to the company’s business model and long-term viability.

 

Report Summary

  • UFC’s seven year TV deal with Fox Sports Media Group, replacing Zuffa’s current deals with Spike TV and Versus, offers more stable and favorable economics over the term of the TV deal in hope of potentially reducing Zuffa’s dependency on the more-volatile event based revenue.
  • Zuffa should be able to deliver more content and potentially expand it’s audience through the vast distribution FOX provides, thus exposing content to a higher potential viewership base.
  • During the first half of 2011, revenue and EBITDA were down against the comparable period in 2010. Reasons given: One less PPV event, as well as significant fighter injuries which contributed to lower PPV buys.
  • Despite a weak first half of 2011, the report expects Zuffa’s total debt to EBITDA and coverage measures to remain in line with the rating over the term.
  • It is expected that Zuffa owners will continue to pursue moderate distributions over time as the company continues to grow, which will likely preclude any meaningful sustained improvement to Zuffa’s financial risk profile.
  • Nearly 75% of Zuffa’s total revenue is event based. The majority is composed of PPV buys and ticket sales. Remaining 25% revenue is composed of live and taped television broadcasts, sponsorship, merchandising, licensing, and content distribution deals.
  • Due to the FOX television deal, it is anticipated that TV broadcasting may become a larger source of revenue, as they see this revenue stream as less volatile than event based revenue.
  • Zuffa has been successful in expanding sponsorships and merchandising, which improves stability and strengthens their business model.
  • Zuffa’s expansion plans are seen as a positive due to the potential of growing revenue from a more diversified fan base and broadening the acceptance of MMA.
  • UFC expansion into the UK  several years ago was extremely volatile, and they have since taken a more cautious and measured approach in international expansion.
  • Interestingly enough, the report points out that Zuffa could face increased labor costs in the future if fighters organize (union) and seek a higher share of revenue, which is the case for most major sports in the U.S.
  • The acquisition of Strikeforce (along with the WEC) is believed to have strengthened the UFCs already dominant market position, as it continues to increase the number of fighters and title fights under the promotion.
  • Liquidity: Zuffa has adequate sources to cover its needs over the next 12 to 18 months. Sources include cash flow generated from strong operations and it’s revolving credit.
  • Uses of liquidity include minimal capital spending needs, modest amortization, acquisitions, and distributions.
  • Debt: Zuffa had only $1 million of availability under its $50 million revolving credit facility as of June 30, 2011, which expires in 2012. $425 million term loan due in 2015.
  • Payments for taxes are primarily distributed directly to the owners and additional dividend payments are limited by a restricted payment basket under the credit facilities.
  • The expectation is that owners will likely continue to pursue max allowable distributions under the credit agreement.

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
August 2011 – Zuffa Maintains “BB” Credit Rating

 

Payout Perspective

Typically, a rating of “BB” implies that Zuffa is less vulnerable in the near term, although it faces major ongoing uncertainties and exposure to adverse business, financial, or economic conditions, which can result in failure to meet its financial commitments. On the other hand, it’s a credit rating of “stable”, which is not a bad place to be for a company who’s core business model is so volatile and can be affected by many market variables.

The international expansion efforts and the seven-year $100 million FOX TV deal help tremendously in bringing more stability into the UFC’s business model, but with that said, it still only accounts for 25% of their total revenue. In this regard, not much has changed since 2010 when Zuffa was able to match the event based revenue growth with the non-event based revenue growth, so we still have a 75-25 split in overall revenue. The hope here is that through the new TV deal, more mainstream exposure can come to the brand by creating more PPV draws, and opening the door for more stable revenue opportunities which can help offset the volatile nature of PPV based core business model.

The report points out that revenue and EBITDA for the first half of 2011 is down compared to the same period in 2010, though one less PPV was accounted for this year. The main reason given for the decline was injuries to UFC stars.  The problem with solely blaming injuries and correlating it to revenue is that you hope next year won’t be as bad but as we are starting to see on a year-to-year basis, injuries are part of the sport.  Fights and training camps take a toll on the fighters, so having a PPV star such as a GSP or Brock Lesnar can really only give you about 2 fights per year taking all the variables into account.  Injuries is an unknown that cannot be controlled or correctly estimated beforehand, so it will be interesting to see how if injuries becomes a hot topic again in 2012, as it has been for the past 2 years.

If injuries is the main component of declining PPV buys, then that brings up another issue.  It means that fans are only willing to pay to see fighters that they deem worthy of their hard-earned money. It also shifts the drawing power to the fighters instead of the UFC brand and product they offer.  It means MMA may not be enough anymore to get anyone outside of the MMA hardcore fanbase to tune in, and I’m sure that’s something the UFC hopes to address with the exposure the FOX TV deal brings along with its vast distribution platforms.

There has also been a lot of talk this year about the UFC or MMA peaking or plateauing, and pointing out declining PPV buys and TV ratings as a quick and easy measuring stick.  Oddly enough during a year when we’ve seen TV ratings decline or hit low points for the UFC and Bellator, both were able to sign TV deals with major media groups.  UFC signs a huge TV deal with FOX that not only gets their full support and puts them on FOX, FX, and Fuel TV, but it can now be linked to FOX and become synonymous to other mainstream sports they televise. FOX has been heavily promoting the first UFC on FOX event on all their high viewership sport programming including MLB’s World Series and Sunday NFL games. Bellator was just purchased by Viacom and looks to be moving on to Spike in 2013 after only getting roughly 150-180K viewers on average per event on MTV2. Again, Spike re-iterates that they will be sticking with them even through hard times as they have done with other programming.  They find themselves in a similar situation when the WWE left Spike and TNA was picked up as their replacement.  After a few up and down years, TNA has been getting great ratings for Spike as of late, a formula they hope to reproduce with Bellator after the UFC leaves at the end of this year.

What we are seeing here is that these media groups believe MMA has a ton of potential left, but at this point, it makes more sense for these media groups to either own or sign a very intimate contract with a promotion rather than having a licensing fee agreement for MMA programming such as Showtime, Spike, Versus, and CBS have done in the past.  Is more mainstream MMA content what we need for ratings and PPV buys to kick back up again or will it just add to the ever-growing free MMA content anyone can get from various TV and media channels?  Will an adverse effect shift UFC’s business core to be more TV dependent in the next few years? Can you really sustain a PPV core model in the long run? I have a feeling these questions will be answered in the next 5 years, as the FOX and Spike TV deals run their course.

It’s not realistic to expect that the UFC will outdo itself year-after-year, but it will be interesting to see how it can push itself off a potential stagnant stage and onto that next level as they have shown in the past with the Spike TV deal (TUF), the acquisition of PRIDE/WFA/WEC, and now signing the major FOX TV deal.

MMAPAYOUT QUICK THOUGHTS:

– Zuffa has significantly drained their revolver, which makes you wonder what kind of burn rate/overhead they have.

-The other interesting tidbit is Zuffa’s dividend distribution policy. On one hand, some people think its smart/prudent to protect your gains/investment. On the other hand, some people say if you really believe in this company long term and its a business your going to keep, why would you cash out all the money instead of putting it back into the company.

24 Responses to “Zuffa Maintains “BB” Credit Rating, “Stable” is Key”

  1. Diego on November 3rd, 2011 5:20 AM

    Jose,

    I’ve always been curious about the UFC’s margins. Are revenue and EBIDTA numbers available?

  2. boomchoom on November 3rd, 2011 6:17 AM

    Great article. Pieces like this are why I love this site so much.

    Agree with Diego – do you have any estimates on revenue and EBITDA?

  3. Jason_MMA on November 3rd, 2011 8:30 AM

    What is the WWE’s credit rating?

  4. Jose Mendoza on November 3rd, 2011 9:06 AM

    Diego, Boomchoom:

    I will try and see if I can come-up with a ballpark figure, but there was no specifics mentioned.

  5. Justin Klein on November 3rd, 2011 9:16 AM

    Great stuff Jose.

  6. 5 Oz. MMA Link Club : Five Ounces of Pain on November 3rd, 2011 10:16 AM

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  7. michael on November 3rd, 2011 10:17 AM

    hi! Like boomchoom already said: it’s articles like this one, that make this site special and valuable. Keep up the good work!

  8. Mossman on November 3rd, 2011 10:40 AM

    Nice Jose. Solid thoughts… and we even got you thinking like a marketer. :)

    Heck even S&P understands the necessity for “building the brand”!

    Diego – Its a good Q… but there is no way in hell they would have put those numbers out there. Zuffa has like 50 lawyers and I don’t think they are dumb enough to expose any numbers, this had to of all been done with “estimates” and comp #’s from like-programming, deals, etc.

  9. Jason Cruz on November 3rd, 2011 11:23 AM

    Great job, Jose!

  10. Former business owner on November 3rd, 2011 11:52 AM

    How does that $425mm term loan that is due in 2015 affect the UFC’s financial outlook? That’s a huge nut to cover in 3 years.

    Should we read the $1mm left on a $50mm revolving credit line as the Fertittas and White using the line for day to day operating expenses while they take as much revenue as possible out for themselves? I owned a business for years and the credit line was used to purchase inventory or to cover operating expenses while waiting for our accounts receivable. We’d never let the line go below a certain percentage unless it was an absolute emergency, and we always replenished the line as soon as possible.

    Obviously the UFC is a different business model then one that sells an actual physical product, but its still strange to see that.

  11. John S. on November 3rd, 2011 12:06 PM

    Kick ass, Mr. Mendoza. Will have to pilfer some of this,

  12. EK Poll on November 3rd, 2011 12:12 PM

    Great article!

    In regards to the questions: Will an adverse effect shift UFC’s business core to be more TV dependent in the next few years? Can you really sustain a PPV core model in the long run?

    I heard the other day that the WWE (who’s always had PPVs as a large part of their business model) is planning to launch their own ‘network’ next year and that they’re cutting back from 13 yearly PPVs to 4. This is an interesting shift in their business strategy.

    I’m intrigued to see if the FOX exposure helps UFC PPV buys… 2012 should be a very telling year….

  13. Jose Mendoza on November 3rd, 2011 12:33 PM

    Justin:
    Thanks, would love to hear your thoughts.

    John:
    Not a problem, just send me the link. I’m sure will add some great insight.

    Mossman, michael, Jason:
    Thanks for reading! Appreciate any feedback you guys may have.

    EK:
    Great input. Since the UFC has modeled their business similar to the WWE’s, it would be interesting to see if they follow in their footsteps in that regard.

  14. Jose Mendoza on November 3rd, 2011 12:42 PM

    Former business owner:

    I have some of the same concerns you have.

    “How does that $425mm term loan that is due in 2015 affect the UFC’s financial outlook? That’s a huge nut to cover in 3 years”

    S&P did not lower their outlook because it believes it has enough cash flow to be able to pay off the debt, but as always, it assumes that market variables will stay constant for the near term or else they would be downgraded is what I’m thinking.

    “Should we read the $1mm left on a $50mm revolving credit line as the Fertittas and White using the line for day to day operating expenses while they take as much revenue as possible out for themselves?”

    I think given their revolving credit spending and dividend policy, it seems to hint in that direction, although tough to say for certain with the information given.

  15. CodeMaster on November 3rd, 2011 3:03 PM

    This article sounds like a good business article, however, it is hamstrung by some very key points:

    1. The UFC is a private company, and we don’t know what kind of money or what financial situation they are in except by vague second-hand reports from Standard and Poor’s.

    2. Does Standard and Poor’s really know how to evaluate a company like the UFC? I suspect they are using traditional methods of evaluation as used for conventional businesses, therefore, I suspect they err on the conservative side.

    3. We don’t know how much profits are being moved out of Zuffa by the Feritta’s and others, so a true picture of the company is again, impossible.

    4. The future financial health of the UFC is dependent upon the popularity of the sport. Measuring the popularity of the sport solely by PPV revenues is flawed. It is my guess that for every single PPV, there are many fans watching that event—legally and illegally. In other words, the fanbase could be growing, but the PPV’s are not. If the fanbase is growing, then advertising revenues will eventually increase, once a better handle on the total true viewership is accurately measured.

    5. The best guage of the potential of the UFC is via the market itself, not Standard & Poor’s. When Fox offered the UFC a 7 year deal, this was a key indicator by well-informed market particpants that the UFC has a promising future.

    6. Inroads into new markets do not have an immediate payoff, however, given time, revenues will be harvested in growing quantities. A case in point is Brazil, a country of 200 + million people. If successes to date continue, this market alone could provide lucrative revenues down the road in the not-to-distant future.

    7. The UFC, and MMA in general will become more mainstream with the recent Fox television deals and will expose many viewers to a sport they never before even noticed. It is highly probable the the fanbase and the consequent advertising revenues will dramatically increase–and this is before the globalization efforts pay off.

    8. The track record for the growth of the UFC has been nothing short of astounding over the past 10 years–which supports the case for continued growth since market saturation has not nearly been reached.

    The bottom line is that evaluation methods as used for a typical business is flawed in many respects, and without knowing the details of the business finances, it becomes impossible to evaluate the company accurately.

  16. mmaguru on November 3rd, 2011 6:10 PM

    The quick thoughts section covers my concerns.

    With only 1 million left on the revolving credit, I expect another sale of shares of the company in the short term next year. Funding has to come from somewhere if they are intent on international expansion.

    I find it amazing they have a 425 million term loan due, it makes you wonder if there are any other long term debts or liabilities not presented in the credit rating review.

    Second, I am not overly shocked that management could be potentially “cashing out” the cash flows. This business is more like boxing then any other sport and whether we like to think of Zuffa as a typical business, at the end of the day these guys are promoters first.

  17. EK Poll on November 3rd, 2011 7:25 PM

    Zuffa CEO Lorenzo Fertitta did an interview recently with Sergio Non from USA Today. Always good insight from the boss:

    – “We’re going to pull back a little bit on the schedule next year. We have 14 pay-per-views”.

    – “The way I look at the Viacom thing, it’s massive competition for us. We’re in a situation now where it’s literally David vs. Goliath. We’re David and Viacom is Goliath.”

    – “I’m thinking in the next five years, we’ll probably be in a position where North America will represent 50% of our business and the rest of the world will probably represent 50% of our business. Right now, we’re probably 85-90% North America. ”

    http://www.usatoday.com/sports/mma/post/2011-11-03/ufc-co-owner-fertitta-fox-deal-a-huge-commercial/561253/1

  18. Jose Mendoza on November 3rd, 2011 9:39 PM

    EK:

    Good stuff EK, thanks for the links!

    CodeMaster:

    All valid concerns, but S&P has key points as well regarding the overall volatility that a PPV core based business faces. Like you said, I don’t it should be the only measuring stick, but I believe it is a legit and important issue. Just my opinion.

  19. The Fight Nerd | Friday Link Party – November 3, 2011 on November 4th, 2011 6:01 AM

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  20. Jose Mendoza on November 4th, 2011 3:53 PM

    Diego, Boomchoom::

    Some quick envelope math:

    In 2010, the UFC grossed around $411M in PPV revenue. That number would then need to be added to the total event gate revenue, which we can say is bout $56M.

    That then gives us $467M in event based revenue. We know that number is 75% of total revenue, so $116.75M in non live event base revenue.

    Total revenue for 2010 = $583M. Profit can then be loosely estimated at $200M for 2010.

    Hopefully that makes sense
    :)

  21. John S. on November 4th, 2011 8:55 PM

    Jose, are you sure your math correct? I believe the total gross for 2010, ppv and gate was $411 million total. 9 million ppv x $26 each = $234 million. Now add $57 million and another $20 million for other ppv sources (bars + foreign ppv etc) and you over $300 million or 75% of $411 million. SO at 30% EBITD it would be $120 million or so for 2010.

  22. Jose Mendoza on November 5th, 2011 3:40 PM

    John:

    I actually needed to double check it, did it on the fly.

    I got that figure from Meltzer:

    “Zuffa is estimated by industry sources as doing 9,145,000 buys and generating $411 million in gross pay-per-view revenue on 16 events in 2010, including five that topped 750,000 buys. Those would consist of 15 events under the UFC banner and the lone World Extreme Cagefighting pay-per-view in April.”

    ***

    Which means they did 9.145M (PPV Buys) * $44.95 (PPV Price) = $411M.

    I used that number just to ease the math a bit, but I guess it all depends what the $411M number means. I took it as only PPV buys gross, not including gate.

  23. Jimbo on November 15th, 2011 6:14 AM

    The Fertitta’s Station Casino recently emerged from bankrupty. Could they be taking dividends to cover their casino concerns? Is this a case of taking form Peter to pay Paul?

  24. Cory on November 30th, 2011 11:03 AM

    Who in their right mind would buy Zuffa bonds? Seeing the crap they pulled in the Xyience bankruptcy, I would assume they wouldn’t give a second thought to screwing the bond holders.

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