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

2.  PFA and MMAAA seek to organize UFC fighters

3.  MMA finally legal in New York

4.  Legislation to expand Ali Act introduced

5.  UFC 200

6.  The year of Conor McGregor

7.  Bellator signings

8.  UFC pulls credentials for Helwani after breaking news

9.  Legal troubles for Jon Jones continues

10.  WSOF legal woes continues

11.  Ronda Rousey returns

12.  Alliance MMA goes public

13.  GSP declares himself a free agent

14.  Bellator 149

15.  CM Punk debuts

16.  Former Bellator employee sues company, organization sues back

MMA Payout Exclusive: Interview with Burt Watson

December 9, 2016

MMA Payout had the opportunity to speak with former UFC event coordinator and current Alliance MMA Director of Fighter Relations Burt Watson.  We talked about what he did after leaving the UFC, his new job and what he thinks about the UFC sale.

MPO:  What have you been doing since you left the UFC?

Watson:  When I left the UFC, I was home for 35-40 days.  It’s the longest I’ve been home in 10 years.  I was due some down time, private time and family time.  So, when I left [the UFC], I kinda just shut down and regrouped a little bit until the smoked cleared.

Watson said that he received an email from Rob Haydak when he was operating Cage Fury Fighting Championships [CFFC].  He met Haydak a couple weeks later.  Although Watson received a couple inquiries from other organizations, he decided to work with Haydak since it was close to home.   He came on as Fighter Relations for CFFC.

Watson noted that he wanted to slow down a bit after working with the UFC.  “Last year with the UFC, I did a total of 40 shows.  That’s a ton, baby.”

At the time, Haydak was putting together the Alliance MMA deal.  Once the deal was put together, he became part of Alliance MMA.  In addition to the announcement that Watson would be a Director of Fighter Relations, he was appointed to the Board of Directors.

MPO: What will your new role be about?

Watson: Same capacity with CFFC now on a larger scale.  Working with regional promotions.  Alliance MMA has about 5-6 promotions.  My role is fighter relations which entails continuity and consistency across the board.

There is no need to reinvent the wheel, just put some more air in it.  We’re going to see where we can share information and come up with a template with working consistently.

When I was in the UFC, I got the fighters at their highest level.  Common sense told me that there was a feeder system.  Now I get to see it.  I’m proud and excited about that and the good thing is that I’m still learning.

MPO:  What advice do you give young fighters?

Watson:  I start by giving my presence.  Some of them are aware of my past and past history.  Sometimes when the lights go on, there lights go out.  I try to prepare them and give them a feel for what its like and what they can expect in that you have to be ‘camera ready. ‘

I try to show them that they are not in the cage just to get their butt whooped.  The promoter cares that they are getting the right fights to move them along.

In addition, Watson will provide detailed prep procedures for Alliance MMA promotions.

Watson:  First thing I do is check their weight.  Making weight is part of your job.  Then, I’ll check their weight again.  Its part of the process, I make sure the official scale is available to get on [before official weigh-ins] to show ‘how much hustle they have.’

I do gloves.  I hand roll gloves.  I make sure that the fighters have a mouthpiece, cup and know who is wrapping hands and braiding hair.

Fighters are a strange breed.  You gotta understand them.  You gotta get to know that, or ask.

MPO: What is the state of MMA?  Do you see it expanding?

Watson:  When I initially started in MMA in 2001, I had no idea what MMA was.  I knew about karate, I knew about Bruce Lee and Bruce LeRoy…To see the sport go where it is now and to see the advancement of the technical skill background is great.

I come from a boxing background, through the sport of boxing, as a coordinator, I couldn’t get near a boxer of the caliber of a Mike Tyson or Oscar de la Hoya.  The sport of MMA is fan friendly. It did not pull the athlete, it made the athlete accessible to the fan.  When you have fan popularity, there’s room to grow, there’s a whole way of doing it.

The NFL has been around for over 50 years and it is still growing.  I think MMA has still got a way to grow.

MPO:  What are your thoughts on the UFC sale?

Watson: It’s a testament to the growth of the sport.  It’s pretty well documented.  I know where they were and how much red there was 5 years into it.  Not in my wildest dreams did I see $4.2 billion.

Fed gives second reprimand to Goldman over UFC deal

December 2, 2016

Bloomberg reports that Goldman Sachs Group Inc. (Goldman Sachs) has been reprimanded by Federal Reserve regulators for the second time due to its debt deal to purchase the UFC for $4 billion.  Regulators consider the loans as “substandard.”

In addition to Goldman Sachs, Deutsche Bank AG, which was the lead underwriter for the junior portion of the deal also has been notified by regulators.

Goldman Sachs had appealed an earlier warning about its deal structure which included add-backs to increase the earnings before interest, taxes, depreciation and amortization (EBITDA).  The EBITDA for the UFC was placed at $170 million but then rose to an estimated $300 million when presented to debt investors to finance the sale.  The higher EBITDA allowed for WME-IMG to borrow $1.8 billion for the deal.  According to a Wall Street Journal article, future “step up payments” for future television contracts and other licensing agreements were factored into bringing the EBITDA up to $300 million.  Notably, the UFC has made it public that they will be seeking a $450 million per year television contract once its current agreement with FOX ends in 2018.

With yields for the UFC loans at 8.5%, investors were eager to purchase the debt.  The demand was so high, that the UFC lowered the interest rate on the junior debt twice the week the loans went to market.

Payout Perspective:

The concern with the sale is the “add-backs” which were factored into the profitability of the company.  If the balance sheet provides too much of a flowery outlook, investors might be led astray.  A company inflating their cash flow projections would appear to be able to take on more debt due to its liquidity.  But, if the projections are not realistic, there is the concern for a default.  Investors are looking for high yields to make money and this deal, with its yield on loans, is enticing despite the fed warnings.  We shall see with a new administration coming in January, if these type of deal structures will continue to be pursued.

UFC to implement corporate discipline in cutting costs

October 28, 2016

MMA Junkie reports on a document the site obtained regarding the acquisition of the UFC by WME-IMG.  The information reveals cost-cutting on the part of the new owners.

According to the document, the purchase price for the UFC was $3,775,000,000 with $200 million going to banker fees and other expenses.

As outlined by a Moody’s report in July, there are “earn-outs” if performance goals are met over the next two year.  The new owners could make an additional $250 million if it meets EBITDA goals.  According to the Moody’s report, it will receive a $175 payment upon the achievement of $275 million in EBITDA (but not earlier than June 30, 2017) and $75 million payable upon achieving $350 million of EBITDA (but not earlier than December 31, 2018).

With the employee layoffs, the previous payroll of $55.4 million will be cut by $27 million.  The new owners did not acquire the corporate airplane used by Dana White, et al.  It also indicated that it would “increase standardization and more rigorous corporate discipline, namely in “compensation practices, (travel and expense) policies…”  It will also cut the budget for “The Ultimate Fighter.”  The show’s production budget will be cut from $27.6 million to $10 million per the document obtained by Junkie.

Payout Perspective:

It was expected that there would be cost-cutting upon the new owners taking over.  With the news that the owners would receive a bonus upon meeting EBITDA expectations over the next two years, the cuts are more glaring than one might expect.  The news likely means that any chances of significant raises for fighters will likely not happen.  Moreover, with more “corporate discipline” it’s unlikely that the company will take on significant extravagances.  The news of cuts with “The Ultimate Fighter” likely means the show will not have international TUF’s although I would expect the show to continue since it does provide content for FS1.

Show Money Episode 13 talks GSP contract, Zuffa purchase and WSOF woes

October 27, 2016

It’s another episode of Show Money with Bloody Elbow’s Paul Gift and John Nash.  In this episode, we talk GSP’s contract dispute, the WME purchase and WSOF’s troubles.

 

UFC one of the best brands in 2016

October 26, 2016

Forbes.com reports on 2016’s 40 best business brands.  The UFC ranks 6th as one of the best brands for 2016.

Nike topped the list with a current brand value of $27 billion which is up 3.8% from last year.  ESPN came in second with a brand value of $16.5 billion despite being down almost 3% from 2015.  Adidas, Under Armour and Sky Sports round out the top 5.

The UFC placed seventh with a brand value of $2 billion and a remarkable one year change of 335%.  Reebok, the UFC’s official clothing sponsor, ranked 9th with a current brand value of $800 million, down 3.6% from last year.

Forbes.com explains the brand value for a sports business, which differs from sports teams, athlete and sport event brands, in the article:

the brand value is the difference between the estimated enterprise value of the business brand and what the enterprise value of a similar business is worth.

Forbes.com specifically addressed the UFC sale as well as a word of caution:

By my count the price allocation of the deal valued the UFC’s brand at $2 billion–more than three times its value a year ago–based on the enterprise value premium paid for the mixed martial arts promotion. The UFC posted the biggest year–over-year increase among business brands. But if the UFC does not become bigger and more profitable–thereby justifying its $4 billion price tag–its brand could fall sharply in value.

Payout Perspective:

Undoubtedly the UFC’s sale to WME-IMG impacted the brand value.  Is it possible that the UFC brand is overvalued?  One of the reasons for the high price tag for the company was the strength in the brand.  It is MMA to the casual fan.  Of course, the buyout loan strategy implemented in the sale has been questioned by federal regulators due to the increase in the possibility of a default.

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.

UFC sale made official

August 22, 2016

The UFC has officially sold as first reported by Darren Rovell. Forbes.com received confirmation from a WME spokesperson Monday afternoon.

The sale for $4 billion means that the Fertitta brothers will cash out nearly $870 million in post-tax cash according to Forbes.com. The Fertitta brothers will not be involved in the day to day operations of the new UFC but will retain a “passive minority interest in the organization.” As previously reported, Dana White has a 5 year deal and will receive 9% of the company’s annual net profits.

Payout Perspective:

We saw glimpses of the new regime this past Saturday as the PPV lacked the “Face the Pain,” theme song at the beginning. Also, no post-fight press conference. The deal gives the Fertitta brothers a hefty return on what was once a speculative investment.

Moody’s details UFC Holdings, LLC acquisition

July 26, 2016

In a press release sent out last week, Standard & Poor’s Global assigned a rating for the debt involved in the acquisition of the UFC by a group led by WME-IMG.  Moody’s Investor Service has sent out its own press release with more details related to the leveraged debt in the acquisition.

Per the July 22, 2016 release, Moody’s assigned VGD Merger Sub, LLC (aka UFC Holdings, LLC) a B2 corporate family rating and the proposed $150 million revolver and $1,300 million first lien term loan a B1 rating.  The rating is assigned to those investments with a high credit risk and are based on speculation.  The outlook, per Moody’s is seen as stable.

While Moody’s has a pretty optimistic outlook on the future of the company, it will not adjust the rating any time soon until the debt leverage is reduced.

UFC Holdings, LLC will be the rated entity after the transaction is complete.  The Moody’s release broke down the money covered in this transaction:

  • $1,420 million in new equity
  • $325 million in rollover equity from management and existing investors
  • $400 million of preferred equity
  • $1,300 million in new first lien term loans
  • $500 million second lien term loans or unsecured debt.

When the company determines if the $500 million will be in the form of a second lien term loan or an unsecured note, Moody’s will assign a rating to the debt offering.

Moody’s expects that the UFC will maintain a “good liquidity profile over the next twelve months with an expected cash balance of about $30 million following the close of the transaction and an undrawn $150 million revolving credit facility due 2021.”

Similar to the Standard & Poor’s projections, Moody’s cites the upcoming rights fee agreement as a positive for the company when considering its prospective business outlook.  Despite the high debt, analysts believe that this shall contribute to an ascending EBITDA.

Also to note from Moody’s:

WME Parent is subject to a $175 million contingent acquisition payment upon the 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 31st 2018).

The stable outlook reflects Moody’s expectation that UFC’s EBITDA will continue to improve following a strong year in 2015 driven by PPV revenues, increased digital revenues, and contractual domestic and international television rights fees. While leverage is very high, we expect it to decline below 7x by the end of 2018.

The report warns of a possible downgrade if leverage is not below 7x by the end of 2018.  It also states that there would be negative rating pressure if fee cash flow is used for returns to equity holders instead of debt repayment.

Payout Perspective:

The report notes that the legalization of MMA in New York and the success of UFC Fight Pass improved the outlook for the company.  The fact that the UFC is the largest MMA organization in the sport is a positive for analysts that see “high barriers to entry” to competition.  It also cites a strong brand and “its large contractually bound pool of fighters with superior opportunities for exposure and profit.”  The report also notes that the UFC has mitigated its concern over injured fighters which caused a downturn in PPV revenues in 2014.  Overall, despite the amount of debt used to purchase the UFC, it is seen as a good prospective purchase with the belief that the company will continue with its improving revenues.

UFC Holdings, LLC issues credit facility, given ‘B’ rating, outlook ‘negative’ per S&P Global

July 23, 2016

Per a Standard & Poor’s Global press release Friday UFC Holdings, LLC will issue a $1.45 billion first lien credit facility.  The company was assigned a ‘B’ rating on the WME-IMG acquisition.  The outlook is projected as negative per the Standard & Poor’s Global Ratings report.

The financing for the deal to acquire the UFC will consist of the $1.45 billion credit facility which will consist of a $150 million revolver due 2021 and a $1.3 billion term loan B due 2023.

S&P Global Ratings assigned its ‘B’ corporate credit rating to UFC Holdings, LLC.  It issued a ‘B+’ issue-level rating to the company’s $1.45 billion credit facility.

The negative outlook reflects significant leverage with the UFC which is based on EBITDA growth to reduce leverage over the next few years (i.e., revenue is predicted to grow to offset the debt load currently taken on).

Recognizing that the revenue from its events fluctuate throughout the yar, the rating is given to ensure the “UFC can reduce total lease and preferred stock-adjusted debt to EBITDA to below 8x” before revising the outlook to stable.

Per S&P Global Ratings credit analyst Emile Courtney, “The ‘B’ corporate credit rating reflects very high anticipated adjusted leverage to complete the acquisition, partly offset by good EBITDA coverage of cash interest expense and an adequate liquidity profile.”

Analysts believe that the company’s EBITDA has a “plausible and robust growth path.”  Similar to the SBJ article, the belief is that future media rights revenue will increase with the next television deal.

Notably, the opinion of analysts is that “the risk of marquee fighter injuries, which caused a significant more than 40% decline in EBITDA in 2014, will likely be partially mitigated in future periods due to “a strategy of marketing multiple fights at events and planning back-up matches and fighters in the event of injuries…”  The report also states that “remedial training and safety actions” have taken place so that less injuries occur.

Payout Perspective:

The report essentially rates UFC Holdings, LLC the way it does because the acquisition by WME-IMG is predicated on loans and the speculation that the UFC revenue (which remains volatile, yet optimistic) will increase.  What is interesting is that the report is bullish on UFC events.  While the volatility of the events (i.e., injuries causing cards to change or fights cancelled) have been a concern with its credit rating in the past, this report implies that the UFC has changed its strategy by promoting multiple fights on a card as well as promoting more safety precautions in training.  The UFC has invested in helping fighters train smarter.  Despite the need to shift fights due to injuries (and now USADA flagging fighters), the report seems to believe that it has improved upon making changes last minute.  The underlying notion here is that the UFC brand is much stronger than the individual fighters.

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