What investors are being told about UFC earnings
Written by John S. Nash
For an in-depth look at the UFC's revenue and debt see our previous articles: "What investors are being told about UFC revenues" and "What investors are being told about UFC debt."
What do we know about the financial health of the UFC? We know the company has seen its revenues rise steadily over the years, from $4.6 million in 2001, the first year under Zuffa, LLC's management, to $522 million last year. At the same time, we have seen the company's long-term debts also rise, from zero bank debt in those early years to its current $535 million debt load. Neither debt nor revenue tells us much though about its current financial condition. Are they profitable, and if so how profitable? Are they solvent and able to meet their obligations? Without more data, revenue and debt do little to answer these questions.
Since the UFC's operational expenses are not available (and thus we can only guess at what they spend on event production, marketing, administration, travel, labor, lobbying, or executive benefits) we will have to look at other metrics if we want to try and determine its current status.
One tool often used to gauge the financial health of a company is the Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) which is often used to represent a company's operating profitability and is calculated by using a company's net earning before interest, taxes, depreciation, and amortization are subtracted. We only have the EBITDA, or the means to calculate it, for the years 2004-2014 and will have to unfortunately skip the first few years under Zuffa's managements. (Zuffa though has repeatedly stated that they lost as much as $44 million in those early years, before the Ultimate Fighter turned the company's fortunes around. This would most likely have to been through capital injections since no long-term debt was reported before 2006[i] )
Using data from the 2007 Deutsche Bank memorandum, we can determine the EBITDA for 2004-2006. It was reported to potential credit facility lenders that the UFC had a net income of -$653,000 (a loss) for 2004, $6.3 million for 2005, and $75.3 million for 2006.[ii] It was also reported that their amortization and depreciation was approximately $609,000 for 2004, $383,000 for 2005, and $621,000 for 2006. For later years (2007-2014), we can make a reasonable estimate using the reported EBITDA margins and the UFC's reported revenue from part 1 or the reported debt-to-EBITDA leverage ratios along with the debt estimates from part 2. (The debt-to-EBITDA leverage ratio represent the number of times the EBITDA divides into the debt. Thus the EBITDA for a given year can be obtained by dividing the current debt with the ratio.)
According to sources, Zuffa's debt-to-EBITDA leverage ratio for 2007 was over 5.0x,[iii] 2.6x for 2010,[iv] 3.3x for 2011,[v] 4.6x for 2012,[vi] 4.2x for the Last Twelve Month (LTM) period ending 9/30/2013[vii] and 4.5x for the LTM period ending 9/30/2014.[viii] It was also reported that they had EBITDA margins of 39% in 2010 [ix] and 19% for the LTM periodending 9/30/2014[x] .
For the years in which we do not have exact debt-to-EBITDA leverage ratios (2007-2009), we can use the reported annualized EBITDA growth for those same years to make a ballpark estimate. According to reports, Zuffa saw strong 46% annualized EBITDA growth from 2007-2010 which was then followed by steep declines of 18% and 25% in 2011 and 2012 respectively.[xi] (Our estimates showed a decline of 16% in 2011 and 27% in 2012. We expect that our other estimates are within a similar margin of error.) Since we have an estimate for 2010, we can use this annualized growth rate to work backwards to fill in the EBITDA for those other years.
* for Last Twelve Months ending 9/30/2013
** for Last Twelve Months ending 9/30/2014. Debt-to-EBITDA ratio is estimated to have risen to 5.8x by 12/31/2014
It should be noted that the UFC's debt-to-EBITDA ratio was projected by Moody's to rise to 5.8x by the end of 2014.[xii] If we instead used December 31 and not September 30 as the last day for our 2014 estimates, EBITDA drops to under $80 million.
While EBITDA is one tool used to diagnosis a company, an even better one is cash flow earning. Cash flow earning can be estimated by deducting cash expenses (interest and taxes) from the EBITDA. Interest expenses were estimated in part 2 on debt, while as an LLC (Limited Liability Company) responsibility for paying Zuffa's taxes is allocated to its members. As one of our go-to economic experts, former Federal Trade Commission antitrust Attorney David Dudley, explained for us: "An llc is what's called a pass-through entity. This means that it doesn't directly pay any taxes, but its owners pay taxes as if they had personally earned the income."
The member's tax burden would be based on their percentage of ownership in Zuffa, LLC.
Originally Zuffa, LLC was owned by Frank and Lorenzo Fertitta and Dana White, with the Fertittas reportedly owning 45% each and White 10%. In 2009 they sold 10% of the company to Flash Entertainment of Abu Dhabi, United Arab Emirates for an estimated $200 million. [xiii]
Currently the ownership makeup of the company consists of: [xiv]
Fertitta Business Management, LLC, owns an approximate 72% interest in Zuffa, LLC. Fertitta Business Management, LLC is wholly owned by Fertitta family trusts.
A Frank J. Fertitta III family trust owns an approximate 4.5% interest in Zuffa, LLC.
A Lorenzo J. Fertitta family trust owns an approximate 4.5% interest in Zuffa, LLC.
Dana White's family trusts own an approximate 9% interest in Zuffa, LLC.
January Capital owns an approximate 10% interest in Zuffa, LLC. January Capital is owned by Flash Entertainment, FZ-LLC, which is in turn owned by the Executive Affairs Authority of Abu Dhabi.
Zuffa Pipco 1, LLC, an entity established for an employee Participation Interest Plan, owns an approximate 0.08% interest in Zuffa, LLC.
The retained cash flow earnings could be used for either distribution to the owners (with no additional taxes since it had already been paid) or capital expenditures in order acquire or improve long term assets.
Consolidated statements and federal tax rates can be used to calculate the UFC's cash flow for 2004-2006. [xv] Free cash flows (after distributions to owners for tax payments) were also reported for the years 2011 ($82 million) [xvi] and 2014 ($45-50 million). [xvii] In addition, it was reported that for 2014 the UFC had a retained cash flow/net debt of 9.5%; [xviii] which comes out to a retained cash flow of a little more than $45 million. For the other years, estimates were made using EBITDA, debt expenses and the current tax rate.
Distributions are limited only by a negative pledge protection that limits investments, additional indebtedness and restricts payments (excluding payments to cover taxes) whencovenant debt-to-EBITDA is over 5.0x (or 5.5x before March 31, 2015), regardless of whether or not there is an outstanding revolver balance. Its ability to do restricted payments is limited to $75 million plus a percentage (100% if leverage is under 4.0x) of its excess cash flow or consolidated net income.[ixx]
While the retained cash can be used for capital expenditures or distribution to the members, it is expected that the UFC will "pay out a majority of cash flows as distributions to members"[xx] as they have had a "relatively aggressive posture towards dividends" "illustrated by the high level distributions" of the "maximum allowable amount."[xxi] Since the members had already paid their share of the LLC's tax they wouldn't have to pay additional taxes on any distributions.
In comparison to distributions, capital expenditures seem rather limited. It was projected in 2007 that their capex would be less than $2 million for the year, [xxii] while Standard & Poor's had given similar estimates for their minimum maintenance capital expenditures in their loan recovery analysis.[xxiii]
As stated earlier, any and all distributions and tax responsibilities would correspond to the member's share of Zuffa, LLC.
Summary:
It should come as little surprise that there is a great deal of interest in the UFC's finances. As the biggest and most important promotion in the sport of mixed martial arts, how the UFC goes is usually indicative of how the sport as a whole is doing. But with its finances kept from the public eye, those interested in the business are left guessing at its current financial status. Is it a money making machine or a troubled company buried in debt? Is it expending their resources to expand the sport around the globe or is it instead making huge profits on low expenses?
Suggestions that the UFC is still struggling should be put to rest. The primary take away from all of this is that for the last decade and a half the UFC has proven to be a very successful and profitable venture. From revenues of $4.6 million in 2001 to $522 million in 2014, the promotion has experienced a 11,348% growth. While it is thought to have experienced losses during the early years of Zuffa's stewardship over the UFC, it now regularly see cash flows in the scores of millions each year.
While some have focused on their debts as a sign of financial distress, that may not an accurate portrayal. Dudley explained to us why a successful company would carry such a debt load:
“Firms typically take out a lot of debt to invest in building up a company, like an internet start-up using debt to hire programmers and advertise its products. When a firm takes out a lot of debt and then pays out large dividends, it raises the prospect that the company is stripping the equity out of the firm.
The general rule in the US is that a corporation’s owners aren’t personally liable for the corporation’s debt. This is how, for example, Donald Trump’s companies can go bankrupt without directly affecting his personal finances. By simultaneously taking out corporate debt, and paying out dividends, Zuffa’s ownership were extracting value from the company in a way that, they hope, would protect that value from potential future lawsuits or other claims.”
One only has to look at their current EBTIDA to see how affordable their current debt load is. Instead of burying them under payments the opposite has been true; since 2006 they've consistently seen earnings in the tens of millions, if not more. The end result is a company that sits at the top of the world of mixed martial arts while looking to expand even further.
Special thanks to Jacob Miller for all graphs and charts used in this article.
[i] May 2007 Deutsche Bank Confidential Information Memorandum
[ii] ibid.
[iii] "Credit Opinion: Zuffa, LLC" Moody's Investor Service, 2/03/2014
[iv] Ibid.
[v] "Moody's assigns Ba3 rating to Zuffa's 9Ba3 CFR) new bank debt; rating outlook changed to stable." Moody's Investor Service, 7/07/2013
[vi] Ibid.
[vii] "Credit Opinion: Zuffa, LLC" Moody's Investor Service, 2/03/2014
[xi] "Credit Opinion: Zuffa, LLC" Moody's Investor Service, 2/19/2015
[ix] Moody's Investor Service, "Credit Opinion: Zuffa, LLC," 12/02/2011
[x] "Credit Opinion: Zuffa, LLC" Moody's Investor Service, 2/19/2015
[xi] "Credit Opinion: Zuffa, LLC" Moody's Investor Service, 2/03/2014
[xii] "Credit Opinion: Zuffa, LLC" Moody's Investor Service, 2/19/2015
[xiii] Miller,Matthew G."Fertittas Made Billionaires by Head Blows With Chokeholds,"
Bloomberg, 7/31/2012
[xiv] Zuffa LLC's Certificate of Interested Persons and Entities, filed 2/13/15. Cung Le et al
vs. Zuffa LLC, 2:15-cv-01045-RFB-PAL (District of Nevada (Las Vegas)
[xv] 2007 May Deutsche Bank Confidential Information Memorandum
[xvi] "Credit Opinion: Zuffa, LLC" Moody's Investor Service, 2/03/2014
[xvii] "Credit Opinion: Zuffa, LLC" Moody's Investor Service, 2/19/2015
[xviii] Ibid.
[ixx] Ibid.
[xx] Pagano, Stephen "Zuffa's $510M Sr. Secured Credit Facility Rating Raised To 'BB+' From 'BB' (Recovery Rating: 2); CCR Affirmed At 'BB'," Standard & Poor's 3/4/2014 and "Research Update: Zuffa LLC Downgraded To 'BB-' On Greater EBITDA Volatility; Outlook Stable," Standard & Poor's 10/6/2014
[xxi] Halchak, Michael "Zuffa LLC 'BB' Senior Unsecured Term Loan Rating Unchanged After $50M Add-On," Standard & Poor's 6/4/2012, "Summary: Zuffa, LLC," Standard & Poor's 8/22/2012, and "Zuffa LLC's $510 Million Senior Secured Facility Rated 'BB' (Recovery Rating: 4"," Standard & Poor's 2/7/2013; Pagano, Stephen "Zuffa's $510M Sr. Secured Credit Facility Rating Raised To 'BB+' From 'BB' (Recovery Rating: 2); CCR Affirmed At 'BB'," Standard & Poor's 3/4/2014
[xxii] 2007 May Deutsche Bank Confidential Information Memorandum
[xxiii] "Recovery Report: Zuffa LLC's Recovery Rating Profile," Standard & Poor's 7/18/2008 and "Recovery Report: Zuffa LLC's Recovery Rating Profile," 2/12/2013
*This article originally appeared on Bloody Elbow. It was written by John Nash on Nov. 19, 2015
