The players might've slightly changed along the way but it turns out that reports of a UFC sale at a roughly $4 billion valuation were dead-on accurate. On Sunday night the world learned that WME-IMG led the purchase which was also backed by private equity firms Silver Lake and KKR along with MSD Capital, Michael Dell's investment company.
Is the UFC really worth a whopping $4 billion? The easy answer is if someone's willing to pay it, that's its worth. But where did that valuation come from and what thoughts were shuttling through the investors' heads as they analyzed and prepared their offer?
We can't really know for sure since we aren't them and at least one of them politely turned down a request to be interviewed. But that just means we get to have some fun and speculate.
Valuations are essentially investor beliefs about a company's likely future, along with adjustments for perceived risk. Common metrics to help guide valuations involve revenue/earnings multiples, growth rates, free cash flows, and what stage a company is in regarding growth and its "path to profitability."
Silver Lake is known as a tech private equity firm - described as "The Global Leader In Technology Investing" on its website. So would they value the UFC like a money-losing, start-up tech company? Probably not. But the multiple commonly used in that case is forward-looking revenue.
Thanks to the work of John Nash, it appears the UFC has been highly profitable from 2006 on, which means a more appropriate multiple tends to be EV/EBITDA (EV is enterprise value; EBITDA is earnings before interest, taxes, depreciation, and amortization). It can be calculated for present day or forward looking, and while potential investors would probably use a forward-looking multiple, it's easier to find current values in this particular case. So for fun, let's examine both forward-looking revenue and current EV/EBITDA multiples and see how the UFC valuation stacks up.
Forward revenue would be for 2017. The most recent UFC revenue report we have is from MMA Fighting's Dave Meltzer who cites $608 million in 2015 revenues. Based on that number and the fact that 2016 is already off to an excellent start, let's guesstimate 2016 revenues of $675 million and 2017 revenues of $750 million. These are pure guesstimates that assume PPV continues to do well, television payouts escalate up, global television deals continue to be signed, and any Ariel/Casey/Esther effect on Fight Pass cancellations will be temporary. We're not trying to be rigorously precise here, just looking for a rough idea.
A $4 billion valuation puts the UFC's implied forward-revenue multiple at 5.3. If using enterprise value and adjusting for Zuffa's reported $467 million in debt and $19 million in cash, the multiple could get has high as 5.9.
For comparison purposes and sticking to the tech space that's Silver Lake's domain, LinkedIn recently sold to Microsoft at a 2017 revenue multiple of around 5.9. A more recent tech IPO was Twilio which priced at $15 on 2017 forward revenues likely in the range of $350-400 million for a multiple of 3 - 3.5. Since then and as of this writing, shares have surged to over $42 and a forward-revenue multiple of 8.7 - 9.9.
While it may not be fully appropriate to compare the UFC to tech companies, make no mistake, an overwhelming part of its value derives from the ability to produce content and its vast collection of digital media - with Fight Pass sometimes described as the Netflix of combat. Think about the ways Fight Pass might be used in 10-15 years and comparisons with tech companies don't seem so farfetched.
Perhaps a better business model comparison is the WWE - other than being athletic entertainment instead of competitive entertainment - which sits at a multiple of 2.0. Since WWE shares probably benefited from the news of a UFC sale, we can run the stock back to two days before news of a possible sale began heating up and get a multiple of 1.7.
Should a comparison to another sports franchise be more appropriate, Manchester United's forward revenue multiple is 4.8.
In this particular sample of forward-revenue multiples, the UFC looks a little more like a tech company relative to the WWE and Manchester United. But things change when profitability ratios are examined.
The UFC presently has an approximate enterprise value of $4.45 billion ($4 billion valuation + $467 million in debt - $19 million in cash) and reported EBITDA of $250 million, which implies an EV/EBITDA multiple of 17.8.
WWE (before UFC sale reports): 16.2
Manchester United: 13.7
Entertainment sector: 10.4
When we look at these multiples, Twilio's off behaving like a high-growth, money-losing tech company. LinkedIn's doing god knows what.
If we focus on the UFC and possible WWE and Manchester United comps, it looks like while the WME group paid a premium, but not an enormous premium, to add another significant asset to what WME-IMG co-CEOs Ari Emanuel and Patrick Whitesell call their "platform."
Aswath Damodaran, a corporate finance and valuation professor at the Stern School of Business at New York University, lists the current EV/EBITDA multiple in the entertainment sector at 10.4, which is the best fitting sector I found for the UFC. By these numbers, the UFC, WWE, and Manchester United would all currently be valued at a premium relative to the entertainment sector in general. High multiples tend to signal high expectations, and the UFC's expectations seem to be the largest of the three.
This is consistent with indications that Emanuel and Whitesell - along with Silver Lake managing director, Egon Durban - believe there are still substantial opportunities for UFC growth and intra-platform collaboration with other WME-IMG businesses.
In March, when asked about WME's 2014 acquisition of IMG and the possibility of having overpaid by $300 million, Whitesell told The Hollywood Reporter's Matthew Belloni, "They said that [to Disney's Bob Iger] about [‘overpaying' for] Marvel, they said that about Pixar, right? And Lucasfilm, too. What do you do with the asset once you have it? Our longer-term horizon is, what is it going to be in the next five, 10 years and what can it grow to do? We were really comfortable with the price. But at the end of the day, time will prove whether or not we were right."
When asked later about WME-IMG's 2015 acquisition of Professional Bull Riders, Inc., Whitesell noted that he, Emanuel, and Durban make acquisition decisions together and with a focus on growth. "The three of us make a decision, yeah," Whitesell said. "Bull Riding fit the general thesis. We have a whole M&A team that does the exhaustive research, the analysis, and then we figure out, ‘OK, what do we think we can grow it to?' And then the three of us, if we agree, we go do it."
So what can they grow the UFC to? What is its longer-term 5-year, 10-year, 15-year horizon? What other areas of growth can help justify its revenue and EBITDA multiples?
In terms of number of shows, there isn't a ton of wiggle room to add more, nor would many of us want them to.
Remember when Donald Sterling, former owner of the Los Angeles Clippers, got an enormous $2 billion pay day after being forced to sell the team following racist rants? While L.A. sports teams are incredibly rare and come up for sale quite infrequently, part of the record-setting sale price was the knowledge that the NBA's television contract would kick up in value in a couple years. Something similar likely happened with the UFC as the Fertittas and Dana White reaped the rewards of the rumored growth of the next U.S. television contract from somewhere around $100 million per year to possibly in the $200-300 million range following the current deal's expiration in 2018. If similar thoughts were happening globally, that just kicks the value up another notch.
There's also the issue of revenue stability. All else the same, would you want a stable revenue stream or one that varies with the whims of the injury bug and how many hot fighters there are at the moment? We know what potential investors prefer since the credit rating agency Moody's screamed it at us in all caps in a Feb. 2014 credit opinion, "CREDIT METRICS VOLATILITY WILL EASE AS THE COMPANY TRANSFORMS ITS BUSINESS MODEL, SHIFTING TO MORE STABLE SOURCES OF REVENUE"
Stable revenue adds value to investors and, as a percentage of total revenue, it's been increasing and will continue to increase as television licensing rights fees explode and Fight Pass gains more subscribers.
And speaking of Fight Pass, if WME-IMG is truly thinking long term, fiber and faster Internet speeds will eventually permeate the country and along with them an improved ability to escape PPV splits and bypass TV networks, or at least threaten to. Another area for growth.
And then, of course, there's China. Upon originally hearing of a potential sale, my first guess was a partial sale to a Chinese partner who could help the Fertittas navigate the complex web of relationships and connections needed to successfully break into the elusive country of massive potential.
That they need a strategic partner is evidenced by the whopping zero UFC events staged in mainland China while three events have been held in Macau, a former Portuguese colony and now Special Administrative Region of China. Macau, the world's largest gambling center by revenue since 2006, has its own legal and monetary system and is a very different business animal than the mainland. Take a trip to the two areas and you'll feel it immediately.
In March, Japanese telecom and Internet company Softbank invested $250 million in WME-IMG at a $5.5 billion valuation. When asked "Why Softbank?" by The Hollywood Reporter, Whitesell replied, "We feel like their footprint in Asia - I can't go into a lot, but essentially what they want to do with content in that part of the world given their massive mobile footprint there — is really strategic." Later Emanuel would add in reference to China, "Going to the original [Endeavor] premise in '95, content is king...They've made huge investments in distribution, and they're going to need stuff to fill the pipes."
In June, WME-IMG, Sequoia Capital China, Tencent, and others unveiled a new China-based joint venture to further accelerate the agency's growth in the country. Sequoia Capital is one of the top venture capital firms in the world. In China, its portfolio includes Alibaba, Alibaba Pictures, and Wanda Group.
As Neil Shen, managing partner of Sequoia Capital China, described the deal, "WME-IMG has had a formidable foothold in China for a number of years. With the incredible growth they have been experiencing domestically, we saw this as a perfect opportunity to help them replicate that success in China within both sports and entertainment. This partnership is another example that Sequoia Capital China plays an instrumental role in helping leading Internet and media companies grow and expand in China."
This is no puny TV deal with Inner Mongolia Television. What's going on here is potentially huge. WME-IMG has built out the infrastructure, partnerships, business relationships - and therefore probably political connections - necessary to develop a massive presence in the country of 1.35 billion people. Not a bad untapped market.
Another less-scrutinized greenfield opportunity for growth in investors' minds seems to be the integrative and collaborative use of WME-IMG's different business units to help build value.
In this sense the question wouldn't be "How can we grow the UFC?" but rather "How can we use our entertainment, sports, and other properties to help the UFC grow?" and "How can we use the UFC to grow our other properties?"
As IMG's chief content officer Mark Shapiro told The Hollywood Reporter in March, "One of the smartest things Ari and Patrick did was to incentivize collaboration. You're incentivized to push business to other areas of the company."
"Part of the promise of the WME-IMG tieup is greater collaboration among the sports and entertainment sides of the agency," wrote Cynthia Littleton of Variety in 2014. "That process is slowly but surely happening as some of IMG's star football and tennis players have been making the rounds at WME's Beverly Hills offices to brainstorm showbiz opportunities."
WME-IMG may already have an incentive to promote the UFC athletes it represents, but think of how those incentives change when it doesn't just work with a few fighters but owns most of the top promotion in the sport. Unfortunately, the only way this will probably filter down to fighters like Andrew Sanchez - who bored the pants off many viewers last Friday - is if building up the entire sport eventually results in increased fighter pay. But for fighters with some form of marketability, this acquisition should make them at least a little bit giddy on the inside.
We live in a world where content is king, where content creators and content owners - especially DVR-proof content - have enormous value. Add in that licensing rights fees are rising, mainland China has yet to truly be cracked, UFC revenues are becoming more stable and less PPV-dependent, and Fight Pass has a virtual stranglehold on non-boxing combat content along with incredible distribution potential down the line and a $4 billion investment all of the sudden doesn't seem so enormous.
Common sense might suggest that the purchase of the UFC in the middle of an antitrust lawsuit where damages and expenses have nine-figure potential means WME-IMG isn't worried about losing the case in any sort of meaningful way. But I'm not so sure.
Emanuel and Whitesell didn't seem to have a problem before with possibly throwing around an extra $300 million in order to purchase a coveted company. Plus, it's possible the Fertitta brothers and Dana White had to make certain representations and warranties regarding the antitrust lawsuit before selling their member units in Zuffa. It's also possible a portion of the purchase price will be held in escrow pending the outcome of the case, limiting WME-IMG's liability.
I'm not so certain this purchase signals anything about the antitrust lawsuit. The MMA Ali Act? That's a different story.
Muhammad Ali Expansion Act
Would you spend $4 billion on a sports franchise with a pending congressional bill that could potentially blow up the sport's business model? I for damn sure wouldn't unless I was positive the bill would fail or be sufficiently neutered by the time it passed.
This purchase certainly appears to be a bad sign for proponents of expanding the Ali Act into MMA. As John Nash and I previously discussed, there already seem to be many loopholes in The Act as presently drafted. At minimum, this purchase probably signals that we can kiss all the sanctioning body and inter-promotional bout talk goodbye.
What an amazing week it's been in the fight world. Our beloved sport is moving on up.
Let's just hope the WME-IMG people hate the Reebok designs, too, so we can add another opportunity for growth to the list.
Writer's Note: The author's wife works at a company that is part of the Silver Lake Sumeru portfolio. All opinions in this piece are his own.
Paul is Bloody Elbow's business and analytics writer. Follow him @MMAanalytics.