16 for 16: No. 1 WME-IMG purchase the UFC
December 31, 2016
The UFC was sold for approximately $4.2 billion this summer changing the face of the largest, mixed martial arts company.
Despite internal and external denials, it was clear that Zuffa was set to sell the company. Perhaps we should have seen this coming the year prior. Subtle changes made to the brand logo and broadcasts, making Reebok the official clothier of the company and adding a drug testing component likely solidified the company as prime for purchasing. One of the things that appealed to the buyers was the strong brand and making investments in its brand pre-sale helped the eventual transaction.
WME-IMG made the purchase. The deal was backed by private equity firms Silver Lake, Kohlberg Kravis Roberts and the investment firm of Michael S. Dell. The price tag of $4 billion was surprising considering that the sport is still considered a niche.
Via our post this past July
The purchase price of $4 billion represents a 22 multiple of the UFC’s earnings before interest, taxes, depreciation and amortization. On $600 million in gross revenue from 2015, UFC’s EBITDA is $180 million. $180m x 22 =$3.96 billion. The hope is that with a new media rights deal, the multiple will lower to 13-14 range which would make it a much better purchase.
The Fertitta brothers, Dana White and Flash Entertainment cashed out on their ownership interests. White signed back on with the new owners for 5 years and 9% of the company’s net profits. Ari Emmanuel and Patrick Whitesell are the new faces of the UFC. They were No. 4 on a list of most influential in sports business for 2016.
The transaction was scrutinized by government regulators for its questionable buyout-loan strategy. The Fed warned Goldman Sachs and Deutsche Bank AG, the entities that marketed the debt to investors, of abuse in inflating earnings before interest, taxes, depreciation and amortization. The EBITDA for the UFC was pegged at $170 million but then was estimated up to $300 million when presented to debt investors helping finance the sale. The higher EBITDA allowed WME borrow $1.8 billion for the deal without running afoul of the guidelines which prevent borrowing for more than 6x a company’s EBITDA. A WSJ article stated $48 million in expected “future step up payments to television contracts and other licensing agreements,” helped bring the EBITDA up to $300 million. Under the new owners, it is looking for $450 million per year for 10 years in next media rights deal. This would have bolstered the anticipated EBITDA of the company. Whether or not the UFC could garner $450 million is yet to be seen. We’ll see if there are buyers on the market this time next year.
Regulators made a second reprimand to Goldman Sachs earlier this month.
The sale included incentives for WME-IMG which included a $175 million contingent payment upon achievement of $275 million in EBITDA (but not earlier than June 30, 2017 and $75 million payable upon achieving $350 million of LTM EBITDA (but not earlier than December 31, 2018).
A Sports Business Journal poll of its readers found 66% of the responses thought that WME-IMG overpaid for the UFC while only 3% of the responses found it underpaid. Another 30% thought it paid the right amount. 26% of SBJ readers polled thought the UFC to be the hottest sports property of 2016. The NBA, NFL and NCAA were ahead of the UFC (in that order).
As far as changes, the new regime is looking to institute corporate discipline in cutting costs. The new owners trimmed staff which included consolidating overseas operations in what seems to be a focus on domestic events. Matt Hughes and Chuck Liddell were let go by the UFC. Perhaps indirectly, long-time PR exec Dave Sholler found a job with the Philadelphia 76ers and Joe Silva announced he was leaving the company at the end of 2016. Also, Mike Goldberg called his final UFC fight at UFC 207. In its new media rights deal, it indicated that its partner would be in charge of production of events whereas the UFC had been in charge of it in the past.
The sale also sparked more fighters to express their discontent with the organization over pay. With the news of the purchase price, fighters wondered their worth to the company. The interest in organizing an association or union for the UFC came to the forefront this year as we saw a willingness by fighters to publicly state their views. But, with an incentive to increase revenues to hit their EBITDA goals by the end of June 2017 and December 2018, the UFC will seek to cut more costs which does not bode well for fighter benefits.
2017 will be an interesting year to see how the new owners will manage the company and deal with the evolving issues that will come up.
16 for 16
5. UFC 200
14. Bellator 149
15. CM Punk debuts