WSJ article notes UFC sale as example of questionable buyout-loan strategy

October 17, 2016

The Wall Street Journal reports on the UFC sale and how the structure of the deal is being seen as too liberal with adjustments to earnings which enables more borrowing for transactions.

The Federal Reserve had warned Goldman Sachs (Deutsche Bank AG is also a lender) the entity that marketed the debt to investors, of the abuse in inflating the 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.

According to the article, $48 million in expected “future step up payments to television contracts and other licensing agreements,” helped bring the EBITDA up to $300 million.

Payout Perspective:

The UFC deal is an example brought to light by the WSJ article.  The story also writes about the acquisition of event-management software firm Cvent and IT firm SolarWinds as other examples in which EBITDA climbed.  The issue that banks and regulators are concerned with is that the forecasted EBITDA may not be a realistic estimate.  Nevertheless, debt investors were bullish with the UFC debt despite the caution.

Report: Fed cautioned Goldman Sachs about UFC deal

October 7, 2016 reports that the Federal Reserve bank cautioned Goldman Sachs Group, Inc. over debt risks in a deal it arranged to fund the $4 billion purchase of the UFC.

Goldman Sachs was hired to market the debt to purchase the UFC this past July.  Regulators have criticized deals that push a company’s debt load to more than six times its earnings.

“Add-backs,” which estimate a company’s future profitability after an acquisition or buyout were used to double projected cash flow for the UFC.  The concern is that the projections may be too optimistic for the companies that are purchased.  This could lead to a default which is the reason why the Federal Reserve cautions deals where the debt load looks to be more than the projected earnings.

According to the Bloomberg story, prospective investors were shown estimates that EBITDA would more than double from $142M to $298M.  Per the article, the adjustments had the effect of lowering UFC’s leverage to 6 times EBITDA.

The UFC raised a total of $1.8 billion of debt which included $1.4 billion in first lien loans and another $425 million in second lien loans.  Based on the current EBITDA of $142M this would have the company leveraged at approximately 12x EBITDA.

Payout Perspective:

Notably, the Bloomberg report states that the UFC’s EBITDA as of June 30th was $142 million.  A previous SBJ report had the EBITDA at $180 million although that did not have “as of” date.  The obvious goal of the Fed is to reduce the risk of default in acquisitions.  While the deal may never reach critical mass in terms of a default on the debt, the deal is considered high risk.

Alliance MMA goes live on the NASDAQ

October 6, 2016

CNN Money reports that Alliance MMA, a self-described “premier developmental league for aspiring mixed martial arts fighters” is now a publicly traded company on the NASDAQ.  It went live on the NASDAQ on Thursday.

The company’s investor page is sparse with financials but it indicates that it wants to develop the next generation of UFC fighters other premier MMA promotion champions.

In an interview with CNN Money, its CEO Paul Danner outlined a plan in which it would sponsor fights across the country through regional promotions.  Its revenues will be drawn from the attendance, live fight access and attraction of national sponsorships.

More information on the stock can be found on  Its stock symbol is (AMMA).

According to its company financials, its net income is -$223,941 and its total assets is $56,766.  Its total liabilities are $661,874.

Its initial share price is $4.50 per share.

Payout Perspective:

Will this stock take off?  One has to think that this IPO is capitalizing off of the UFC’s monstrous sale of $4 billion this past summer.  But will investors think that regional/developmental MMA is a good investment.  Certainly, the niche audience for sports has a certain attraction (e.g. FloSports) and can generate revenue.  We shall see if investors believe in this business model.

McGregor makes Forbes’ annual “World’s Highest-Paid Athletes”

June 12, 2016

Forbes released its annual report on the World’s Highest-Paid Athletes from June 2015 to June 2016.  Conor McGregor is the first UFC fighter to make the top 100 list.

McGregor landed at number 85 on the list earning a total of $22 million.  His salary is reported at $q8 million while he made another $4 million in endorsements.

Soccer player Cristiano Ronaldo topped the list with total pay of $88 million.  There was $56 million in salary and $32 million in endorsements.

Floyd Mayweather, Jr. lost his top spot from the past couple years as with just one fight during the timeframe he earned $44 million for one night’s work this past September against Andre Berto.  Still, he was number 16 on the list.  Manny Pacquiao was number 63 as he earned $24 million for his May fight against Timothy Bradley, Jr.  Canelo Alvarez was 92nd with $21.5 million.  Canelo had 2 fights within the one year from June to June.

Payout Perspective:

McGregor had 3 fights from June 2015-June 2016 (Mendes, Aldo and Diaz).  This would average $6 million per fight.  The endorsement deals are interesting considering the UFC Outfitting Policy does not allow outside sponsors during fight week or event night.  McGregor has an individual Reebok deal and has worn a Monster patch during his fights.

WWE shows increase in revenues in Q1 of 2016

May 16, 2016

Last week the WWE announced its financial results for the first quarter of 2016.  The company increased its revenue by 13% on a pro-forma basis to $171.1 from $151.3 million in the prior year quarter.

The WWE Network averaged 1.29 million paid subscribers over the first quarter 2016 which is a 39% increase from the first quarter in 2015.  Per the WWE press release, it reached 1.47 million total subscribers at the end of the quarter.  It also states that the Network reached a record 1.82 million total subscribers immediately following Wrestlemania.

For the first time since the inception of the network, the WWE allowed consumers to potentially watch Wrestlemania (the company’s biggest event of the year) for free if they utilized the network’s #FreeWrestlemania promotion.  According to PW Torch, there were 112,000 trial subscriptions pre-Wrestlemania and 370,000 post-Wrestlemania.  There were 355,000 total additions over the weekend of Wrestlemania (March 31-April 4).

The total paid subscribers were 1.357 million with 1.027 domestic and 330,000 international.  The company projects approximately 1.5 million paid subscribers in the second quarter of 2016.

Net income rose to $13.9 million from $9.8 million a year ago.

Notably, the revenue for live events decreased 36% to $25.3 million although this number excludes the timing of Wrestlemania which occurred in the second quarter.

Payout Perspective:

From just an outsider viewpoint, it appears that the WWE stock is moving along well and its Network, which is the most interesting thing, is still showing signs of growth.  There might be a concern regarding the pro-forma reporting (excluding items such as restructuring charges or executive-based compensation) as it sometimes distracts investors from GAAP reporting as told by the Wall Street Journal.  While the concern of churn is always on everyone’s mind, the incremental growth should appease investors.

Stations Casino IPO put on hold

January 28, 2016

The Fertitta Brothers will have to wait on an IPO that will provide them with a financial windfall.  Due to stock market conditions, the Red Rock Resorts (RRR) IPO will hold off going public for now.

According to the New York Post, Deutsche Bank delayed the IPO from going public on Thursday.  Deutsche Bank holds a 25 percent stake in the offering.

The newly formed Red Rock Resorts IPO will buyout Fertitta Entertainment, the management company which runs Station Casinos.  The Fertittas own 57 percent of Stations Casino.  The IPO will net $460 million for the management company.

Last week, the Nevada Gaming Control Board signed off on the deal which would allow Stations Casinos to become a public company traded on the NASDAQ under the name Red Rock Resorts with RRR as its symbol.  I’m sure it was not done for “Rowdy” Ronda Rousey.

With the stock market in flux, the decision to go public was held off.

Payout Perspective:

Despite a slight turn for the better recently which included Facebook (another company trading on the NASDAQ) recording solid profits, the decision to forego an IPO this week was a prudent decision.  One would expect that they revisit launching its IPO once the markets stabilize. One would think that the IPO happens before the summer.

S&P upgrades business outlook for Zuffa

November 19, 2015

MMA Junkie reports that Zuffa’s Standard and Poor’s business outlook has been elevated from “negative” to “stable” based on its success in its Pay Per View business in 2015.  The company’s corporate credit rating remains the same at BB negative which is below investment grade.

Standard & Poor’s Financial Services publishes financial research and analysis on stocks and bonds as well as being one of the Big Three credit-rating agencies.  It issues credit ratings for the debt of public and private companies.  S&P serves as a resource to investors for a key measure of its success.

In October 2014, S&P downgraded Zuffa, LLC from BB to BB-as a result of “greater EBITDA volatility.”  It had maintained a “BB rating” since December 2010.  It was previously downgraded in November 2007 from BB to BB-.  A couple weeks later, it downgraded the business outlook from “stable” to “negative.”

In October 2014, it identified Zuffa as having $535 million in credit with $60 million in “senior secured revolving credit facility due in 2018 and a $475 million senior secured term loan due 2020” per that S&P report.

Payout Perspective:

Monday’s news is a good sign that the company is recovering from its dip in 2014.  While a lot of the numbers are kept under wraps and we’re forced to cobble together how much the company makes, the PPV buys have rebounded from the past couple years on the strength of the first three PPVs of 2015 as well as July’s UFC 189 and Ronda Rousey’s fights at UFC 190 and 193.  Also, the international expansion and the assumed proliferation of UFC Fight Pass have provided additional revenue streams for the company.  Obviously, you have to offset these gains with its expenses which include the new anti-doping policy implemented with the help of USADA and three big legal battles it is currently involved in (the UFC antitrust lawsuit in Nevada, the appeal of the November 2011 lawsuit against New York and the new lawsuit against the state of New York filed this past September seeking a preliminary injunction to hold an event in New York in April).

Also, on the same day that this news came out, Bloody Elbow unveiled its third installment of its deep dive into UFC finances.

WWE reports Q3 results

October 29, 2015

The WWE announced its earnings for Q3 2015 on Thursday.  The company reported net income of $10.4 million ($0.14 per share) compared to a loss of $5.9 million ($0.08 loss per share) in Q3 last year.  The results bested most analyst expectations although the stock for the day dropped almost 13% as a result of profit taking.

Total revenue generated for the quarter ending September 30, 2015 were $492.6 million, up from $402.1 million the prior year period.  North America revenue were $373.6 million, up from $318.9 million from September 30, 2014.

The net revenues were $166.2 million at the end of the 3rd quarter as opposed to $120.2 million at the same time last year.

As for the WWE Network, it has about 1.3 million subscribers at the end of the quarter which is better than last year’s 515,000.  WWE CFO George Barrios indicated that the average for the WWE Network was 1,173,000.  At the end of Q3, the WWE Network had 1.233 million paid subscribers and 73,000 free subscribers as a result of the WWE’s rolling “free” months for new customers.  It’s up from the 1.15 million at the end of Q2 but down from 1.33 million at the end of Q1.  The Network revenues are up to $118.6 million.  Last year, at the end of Q3, they were $87.8 million.

The WWE plans to launch the network in Germany and Japan in January.  It also will be available on the Indian subcontinent on November 2.

According to the WWE press release, it has secured 37 new advertisers from the NBC Universal Upfront.

Vince McMahon touted the success of the reported earnings to the value from the WWE’s content.  He also emphasized the television rights deal and network revenue in attributing the international growth which was reported at 43% through the first 9 months of 2015.

Other notes from the earnings call:

Live events revenue increased 20% to $26.1 million from $21.8 million which related to 6 additional events and higher average ticket prices in North America.

Consumer products increased 21% to $22.4 million from $18.5 million in the prior year quarter.  WWE Shop showed an increase over last year’s third quarter as it was up to $6 million from $4.3 million in revenue.

Per Chris Harrington, the WWE barely touched on the ongoing concussion lawsuits only that there have been “increased legal expenses.”

The WWE introduced a 3 month subscription card at Walmart providing a “no credit card required” payment option.

There were 360,000 PPV buys equating to $4.5 million revenue for three events in Q3.  Thus, on average, despite the network about 120,000 households per event still purchase PPVs.

Payout Perspective:

The key takeaway might be that the WWE expects its WWE television rights fees and the growth of WWE Network subscribers will be the key drivers of WWE’s future revenue growth.  The WWE’s move to produce more live, original content for its Network is evidence that the company is investing heavy into its OTT platform as key for the future.  It’s interesting to note that the WWE did not address the reason for its “increased legal expenses.”  Then again, it’s likely that it did not want to make any comment on ongoing litigation.   Overall, the earnings report reflects a healthy company with earnings growth.

WWE Q1 2015 results

April 30, 2015

The WWE announced its results for the first quarter of 2015.  In a release from the company, it stated that revenues increased 40% to $176.2 million which is the highest quarterly revenue in WWE history.  The results exceeded analyst expectations for the company.

After five consecutive quarters in the red, it’s the first quarter where the WWE has shown a positive operating income.  As for the WWE Network, it reached 1.3 million total subscribers, a benchmark it announced the day after Wrestlemania.  The WWE reports that its average of network subscribers is at 927,000 at the end of the first quarter.  Again, the network’s free promotion, which was February this quarter, contributed to the Network’s growth as 154,000 subscribers converted from free to paid subscribers.

For its quarter ending March 31, 2015, it reported net income of $9.8 million ($0.13 per share) as compared to a net loss of $8.0 million ($0.11 per share) in the first quarter last year.

According to Chief Strategy & Financial Officer George Barrios the positive financial results were “driven primarily by the escalation of our [WWE] television rights fees and the expansion of the WWE Network subscribers.”

The WWE indicated that it will implement a five-part strategy the rest of 2015 for the Network.  This includes 1) creating new content; 2) implementing high impact customer acquisition and retention programs; 3) introducing new features; 4) expanding distribution platforms, and 5) entering new geographies.

As for the rest of WWE business, each division, except WWE Studios ($1.5M vs. $4.3M) is up over this quarter last year.  The total net revenues for this quarter were $176.2 as compared to $125.6 at the end of the quarter for 2014.  The Network segment, which includes revenue generated from Network and PPV increased $19.2 million from the prior year quarter.  The Network alone generated $28.6 million in revenue based on an average of 927,000 paid subscribers.

At the time of this writing, WWE stock is down slightly at $14.16 per share.

Payout Perspective:

A good quarter for the WWE.  Beating the analyst expectations is a good achievement by the company.  Wrestlemania was the likely key driver here especially when you look at the number of converted free to paid subscribers going into March, which was Wrestlemania month.  Of course, we do not know how many dropped the network in April.  We will see if the WWE can continue its positive momentum and see if its strategy for the network continues to net subscribers.

14 for 14: No. 4 Zuffa downgraded by Standard and Poor’s

December 31, 2014

This fall Standard & Poor’s downgraded Zuffa’s credit rating and then its business outlook over a month later.

The downgrade in credit rating from “BB” to “BB–” was due to “greater EBITDA volatility.”

S&P issues credit ratings for the debt of public and private companies and is one of several credit agencies that is designated as a nationally recognized statistical rating organization by the Securities and Exchange Commission.

From our write-up in October:

In its overview, S&P concluded that Zuffa “will experience a 30% decline in EBITDA (Earnings Before Income Tax, Depreciation and Amortization) in 2014 and greater EBITDA volatility over time than we previously had anticipated.”  Despite the gloomy outlook, it stated that Zuffa’s outlook is stable and 2015 will be a recovery year for the company.  This is based on the belief that injured fighters return and PPV buys and ticket prices increase.

The report identifies Zuffa having $535 million in credit with $60 million in “senior secured revolving credit facility due 2018 and a $475 million senior secured term loan due 2020.”

Zuffa’s credit rating had maintained a “BB rating” since December 2010.  It was previously downgraded in November 2007 from BB to BB-.

Just over a month later, S&P revised its outlook on Zuffa from “stable” to “negative” with the forecast that Zuffa’s earnings would decline “approximately 40%”

Via S&P press release:

“The negative outlook revision reflects our updated forecast for 2014 EBITDA to decline approximately 40% (compared to a decline of 30% previously), primarily due to a change to a marquee fight card in the fourth quarter of 2014 as a result of another fighter injury causing anticipated pay per view (PPV)  buys and event ticket prices to decline further, as well as higher remarketing expenses for the event, and additional costs related to the company’s international expansion,” said Standard & Poor’s credit analyst Stephen Pagano.

Payout Perspective:

When we see the UFC using the hashtag #thetimeisnow, you can almost interpret it for the UFC business as well as the impending fights happening in the first quarter of 2015.  Since S&P’ handed down the news to Zuffa, we’ve seen an increase in business activity.  It has forged a deal with Reebok making it the exclusive clothier of the UFC, the signings of CM Punk and Rampage Jackson and the potential sponsor signing of Monster Energy Drink.  Add these business happenings with three big PPVs to start off the first quarter and the hope is that business is picking up.  If this were to happen, Zuffa may stave off another bad review by S&P in the first quarter of 2015.

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