(Long Read)
We often see people on this site decrying Zuffa and predicting the end of the UFC based on scattered public information, while others seem overly optimistic.
I am going to try and pull a lot of that information together here in one comprehensive forward looking analysis. This is a big part of what I do in my job, so hopefully I can do a credible enough job of it to satisfy the sherdog masses and not get trolled. :icon_chee
PPV - a lot is said about the UFC falling PPV numbers. It is suggested by some that doom is imminent and the numbers point that out clearly, while other call it a mere blip due to injury and other external factors. And others still point to the # of events, over saturation, as the problem. The truth seems to lie somewhere in between.
By Nov 1, 2011 the UFC has staged 13 PPV events drawing in a total 5,125,000 PPV buys. That is an average of 394,000 per event.
By Nov 1, 2010 the UFC had staged 14 events so clearly # of PPV's is not the factor. In the first 13 events of 2010 the drew a total of 6,920,000 PPV buys. that is an average of 532,000 per event.
That is a 25% drop in year over PPV average buy numbers or 138,000 per event. A serious drop. But what happens when you look inside and 'Normalize' them?
The 'Normalization' process for any company can be questioned and counter opinions are valid so I will lay out my normalization rationale.
I am removing all GSP and Brock events from both 2010 and 2011 since they greatly effect numbers when they fight and they fought far less in 2011 then 2010. that leaves us an Apples to Apples comparison of all events that do not involve those two. I am also removing the Rampage/Evans event which did over 1M buys as an outlier that does not represent the Norm (thus the process of normalization which is to remove all non-normal factors) and I suspect some of you will take issue with that, which is fair. At minimum an asterisk should be placed beside that removal.
Removing those events our 2010 Ave ppv buys 394k per event and out 2011 Ave drops to 360k buys for a difference of 34k per event.
Still a noteworthy trend but no where near as alarming as the Gross numbers suggest.
To me it suggests that the core MMA market of PPV buyers has matured and drawn back about 10% which suggests growth going forward in those markets will be relatively flat and slow going forward. It does not suggest doom and gloom nor the imminent demise of the UFC.
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The state of Zuffa debt and what we should expect going forward.
I have looked at every Zuffa S&P Debt rating report as the best information we have on Zuffa as a private company. You can see many of them linked
here in the middle of this article on MMAPayout.com.
First off, a private company issuing debt does not have to submit to a debt rating. it is voluntary but the reason a large bond issuer like Zuffa would do it is to allow for wider distribution or sale of their debt. The law of supply and demand says the more potential buyers of your debt, the cheaper you will be able to sell it for.
So once Zuffa submits to debt rating, it means they have to give the auditors full access to the finances, pro forma's and all assumptions going forward for intensive analysis. A rating group like S&P or Moody's then has to audit or verify past audits all existing financials and challenge and verify and rate all assumptions going forward based on soundness of plan and ability of management to execute. There is a lot of 'art' in the 'going forward' assumptions. Obviously S&P and Moody's cannot know the Zuffa business better then Zuffa.
What I notice is that every year Zuffa's debt has basically been upgraded by S&P as it floats between a BB- and BB (Stable) ranking. Anything below BBB is considered a "junk" Bond which is what pretty much any unsecured corporate bond will be considered, even from the most stable companies.
what you notice in the filings is that Zuffa is always very debt heavy using pretty much all of their credit line. 49M of 50M was in use at the time of their last report. OVerall Zuffa has $425M in long term debt that must be repaid or re-organized by 2015.
Debt is used as the cheapest way to grow in growth companies. If a company predicts its ROE (return on equity) will exceed the debt costs (interest payments) then they should take as much debt as possible to grow, expecting at the time the debt comes due their equity growth would have outpaced debt costs and they can sell some of that equity to pay off the debt. That or they refinance the debt again based on ROE expectations. If your ROE growth is not expected to be greater then debt carrying costs then the company should grow via issuing equity, or selling stock and diluting existing shareholders.
So Zuffa's use of maximum debt seems sound here and based on S&P showing little concern over it, I think that assumption is fair. Zuffa will and should continue to maximize debt going forward.
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Fertitta's and Zuffa... short, mid and long term....buy, sell or hold Zuffa Stock??
the Fertitta's are business men first and foremost. I can tell you that very few business men get married to any financial holding. Your decision to buy, sell or hold any stock is based on ROE expectations as compared to the ROE you could get with that same money invested elsewhere. It is an exercise in growth expectations.
What we have to consider is that the Fertitta's have a very strong competing potential growth market in their Station Casino and other Vegas holdings.
If indeed the UFC has flatlined in its growth in its traditional markets (N.American PPV's) the ROE expectation on Zuffa stock will reduce massively. It then becomes either a stable long term 'safe' investment that protects principle and maybe pays dividends and other cash distributions to unit holders (nothing wrong with that) or it could decline and draw back first before finding its stable core, thus eroding a lot of value.
Many investors will choose to sell at this point due to uncertainty as to how the company will stabilize. They will lock in their profits and move on to the next opportunity.
What we can see in the S&P reports is that foreign markets adoption of the UFC has been slower then expected and more costly then expected. Zuffa has pulled back from pouring money into growing those markets with the expectation that revenue's will scale and follow and now they are taking a more measured and slow approach. That along with even marginally shrinking markets domestically could be greatly concerning to a 'growth' minded investor.
the wildcard in this is Brazil. If indeed the UFC believes Brazil has the potential to be the next 'Canada' in terms of per capita market support that could potentially translate into more growth then the UFC has known to date in all markets combined. Brazil offers to the UFC what can only be called Mexico on steroids, when you look at what Mexico has done for boxing stability. If the UFC can translate the huge reported Brazil introductory viewers into stable viewers of free tv and buyers of PPV then Zuffa growth gong forward could greatly outstrip anything they have experienced prior, in their history.
it is my view that 'Brazil' is truly the question that needs to be answered before anyone can pronounce anything about Zuffa's and the UFC's future with regards to growth or decline and we simply do not yet have that information to predict accurately. At this stage I would not be shocked to see a PPV headed by Anderson/Chael to sell 2M PPV's in Brazil alone, which is a crazy amount considering the best ever PPV's tend to only sell that much. But Brazilians are passionate sports fans once they get behind a sport and if you add 'nationalism' to the picture.
What is competing for the Fertitta's interest and investment dollars is the Station Casino and related properties. About 14 casino's in total and a number of other related gaming properties they own.
The Fertitta family has a long term interest in the Vegas strip and being a big player in that industry can be massively lucrative. Station Casino and the Fertitta interests were at great risk after the Fertitta's made moves to buy out the other partners and take the company private between 2006-2008 with the company eventually having to file for bankruptcy.
Fortunately for the Fertitta's was that at the time of their Casino struggles, their Zuffa holdings value was soaring due to TUF, turning the tables on the long suffering UFC from a slow growth debt accumulator to a fast growing, ROE machine.
I am guessing that had TUF not given the Fertitta's a stable base that they would have had to cut their ties with one or both organizations (ZUFFA and Station Casino) to fortify their own personal positions.
If you look at the S&P filings re debt you can see that Zuffa has maximized cash distributions to the shareholders most years while at the same time you can see the
Fertitta's have invested over $200M of their own money to increase their position in Station Casino and other gaming properties by taking advantage of the fact that in tough markets, cash is king, and those with cash can dictate any re-orgs.
cont...
