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UFC/MMA Juggernaut Slowing Down? Part 2

Adam Swift's full article on the downgrade of Zuffa's credit rating from BB to BB- is now up on Sherdog. The gist is that the rate of expansion for the UFC appears to be slowing, or at least that's what Standard's & Poor's is worried about. Notable quote:

"Given Zuffa's reliance on the UFC brand and lower growth prospects internationally, the company's ability to grow its core UFC operations is integral to maintaining the current rating," the report said. Moving forward, revenue and cash flow generation are expected to remain weak through the fourth quarter of 2007 based on Zuffa's revised guidance.

The new rating represents the company's "revenue and cash flow volatility given its primarily event-driven business model, vulnerability to changing consumer tastes, and relatively short operating history," the report stated. "These risks partly are offset by the company's well-recognized UFC brand, healthy free cash flow conversion, and modest expected debt leverage."

It should be noted that Zuffa remains profitable. The cut is the result of a failure to meet high expectations set for the company by S&P and apparently by the company itself. Zuffa continued its rapid expansion this year in anticipation of growth similar to last year. Instead, business has been flat to slightly down, forcing the company to tighten its belt.

The size or popularity of the business doesn't really matter. The idea here is that in addition to the rate of growth slowing, the UFC's projected returns were lower due to expensive expansion efforts. That means there is less money to promote other events, which could ultimately be the UFC spreading itself too thin. White and the Fertitta brothers are banking on eventual returns from their UK expansion efforts, thereby complimenting the profitable shows put on in North America.

MMA and the UFC is still a high-growth area of the market. Once football is over, young men will likely not be looking to basketball to get their fix. Moreover, with the UFC planning some stellar match-ups post Superbowl, the UFC could regain momentum again.

Lastly, this is what the ebb and flow of expansion looks like. There is technically no ceiling limiting how far a company or brand can grow, but you have to think the more the UFC brand grows, the more it has to compete with established mainstream competitors. That's going to make it difficult for Zuffa to maintain that high growth rate we saw in late 2006, early 2007. MMA might be slowing down some, but the train is still firmly on the tracks.