In May, Bloody Elbow reported on a $925 million lawsuit filed in Kansas City federal court by disgruntled shareholders of funds purportedly invested in the corporate entities of Al Haymon, boxing’s mystery manager and the man behind the Premier Boxing Champions (PBC) television series which first aired on Mar. 7, 2015.
That lawsuit was dismissed voluntarily and subsequently taken to Kansas state court along with a change in some of the plaintiffs, but the thrust of the allegations remained the same – that trustees of two Waddell & Reed Financial (Waddell) investment funds, Ivy Asset Strategy and W&R Asset Strategy, permitted and approved purchases of roughly $925 million in private securities in a “start-up and potentially criminal company in the field of professional boxing promotion” in violation of the stated terms of the funds’ prospectuses.
The optics of the deal didn’t look good when Ryan Caldwell, one of the Waddell portfolio managers purportedly involved in brokering the massive alleged investments into Haymon entities, later left the mutual fund firm to become Chief Operating Officer of PBC, an entity allegedly financed by investments he helped facilitate.
According to an Amended Petition recently filed in Kansas state court, in April 2013 the two Waddell funds – Ivy Asset Strategy and W&R Asset Strategy – began investing in Media Group Holdings (MGH), alleged to be “a ‘shell’ holding company owned by the Funds or [Waddell] which, in turn, invested in one more [sic] business entities owned and controlled by Alan Haymon.”
The Amended Petition further alleges that the funds’ trustees knew the risks of their MGH investment, “were prepared to lose it all,” but may have also been given a board seat on Haymon companies to protect their investment.
From the very beginning, PBC’s business model was reportedly to spend money on risky deals in the hopes of earning future high returns. It would undertake time buys to get on television networks such as NBC, NBCSN, ESPN, ESPN Deportes, CBS, FOX, Fox Sports 1, Spike TV, and Bounce – something Caldwell described to Sports Business Daily as being “the irrational player for a while” and “turning the model completely upside down.”
“You have to be capitalized for three to five years to do this,” said Caldwell when Haymon asked for “X” and Caldwell offered “X-plus.”
Well, we’re three years into an experiment whose financing purportedly began in 2013, so how are the alleged investments into Haymon entities doing?
The Amended Petition shows initial investments into MGH totaling $925,339,000. Bloody Elbow has confirmed this total from SEC filings and it appears that the bulk of the investments were made in 2013 with some occurring as late as Jan. 23, 2015.
Using quarterly SEC filings from Dec. 31, 2014 through Jun. 30, 2016, Bloody Elbow has constructed a time series of the fair value of MGH investments which were allegedly used to finance Haymon entities including the PBC.
Think of fair value as a stock price, except MGH and Haymon entities aren’t publicly-traded companies with instantly-available share price quotes. Per SEC filings, Waddell investments into MGH are instead valued “as determined in good faith by the Board or Valuation Committee pursuant to procedures approved by the Board… These methods may require subjective determinations about the value of a security.”
According to SEC filings, the fair value of Waddell’s MGH investments through the Ivy Asset Strategy and W&R Asset Strategy funds has plunged by $624 million over the course of roughly three years from $925 million to $301 million, for an overall return on investment of -67.5%.
From the time initial investments were made through the end of March 2015 – when the first PBC events began airing – the combined value of Waddell’s MGH securities only dropped $136 million. Since then, it’s been a bloodbath in fair value losses, and in the last year from Jun. 30, 2015 – Jun. 30, 2016, Waddell’s MGH investments have been on a $434 million freefall.
Declining valuations do not necessarily represent equivalent earnings losses or negative cash flows, but earnings and cash flows would certainly influence valuations. If Waddell uses a valuation company to analyze its investments in private securities, they likely use, among other things, information such as earnings, cash flows, margins, growth rates, comparable investments, and – in the case of the PBC – viewership numbers to calculate fair value each quarter.
In February, Lance Pugmire of the L.A. Times sampled 10 California and Nevada PBC events and found only $3.9 million in gate revenues to go along with $19.2 million in fighter purses and state fees and wrote, “…the early financial returns suggest Haymon’s business model is not working.”
Now Waddell’s financial returns from MGH investments can be added to the list.
While certain quarters haven’t been nearly as bad as others, the three biggest quarterly declines of over $100 million all came in the last year. [Writer’s Note: The $116.1 million decline for Dec. 31, 2014 is over 20 months of activity since the first investment appears to have been made on Apr. 23, 2013.]
The clear, negative time trend of Waddell’s MGH valuations is the exact opposite of the typical trends for companies with strong future growth or profitability prospects. Even unprofitable companies that burn through investor money every quarter tend to see their valuations increase as future prospects improve. But that doesn’t seem to be the case here, at least not yet.
We’ll find out in October how the third quarter of 2016 played out. Fund trustees were allegedly prepared to “lose it all” according to the Amended Petition, and it’s looking more and more like that might be a very real possibility. Barring a surprise turnaround, by the end of September the value of Waddell’s MGH investments should be in the $200 million range – at or approaching a $700 million drop in value and making the $44 million the Fertitta brothers sunk into the UFC during its unprofitable years look like chump change.
We’re in the midst of perhaps the grandest financial experiment the sport of boxing has ever seen. The numbers involved are staggering, the valuations keep declining, and, to go along with concerns such as inconsistency in fighters and scheduling, there doesn’t seem to be an Ultimate Fighter Finale to help pull a Zuffa-style turn around.
Spike TV President Kevin Kay said in February, “It's premature to have discussions about if this [PBC] will make it after one year.”
With the SEC-documented three-year collapse in the value of investments allegedly used to finance Haymon entities including the PBC, it might be safe to start having some of those discussions now.
Paul is Bloody Elbow’s analytics and business writer. Follow him @MMAanalytics.