Ever since the UFC was purchased for around $4 billion by a group led by WME-IMG, there have been questions as to how they plan to recoup that investment. According to a report by Steven Marrocco and Ben Fowlkes, the answer for the immediate future is an increase in licensing fees and cost-cutting, with the recent layoffs just being part of it.
WME-IMG’s purchase of the UFC was partly financed through loans arranged by Goldman Sachs. The debt load as reported on August 3 of this year was $1.8 billion split between a $1.4 billion seven-year term loan issued at LIBOR + 400 basis points and a $425 million eight-year second lien Term Loan issued at LIBOR + 750 basis points, both with a 1% LIBOR floor.
For those unfamiliar with lending terms: LIBOR stands for the London Interbank Offered Rate and is used for the base lending rate with basis points being an additional 1/100th of 1%. At current rates, the UFC would therefore be looking at approximately $117 million a year in interest payment without any debt amortization. This would be more than five times what the UFC paid last year on their loan interest.
Earlier this month, Bloomberg.com reported that the Federal Reserve Bank had issued a warning to Goldman Sachs over risks posed by the debt deals they arranged for WME. Regulators have been trying to rein in risky lending practices by big banks and warning flags were raised by the difference between the new debt load and the UFC’s earnings. Based on the UFC’s current EBITDA (which is the Earnings of a company Before Interest, Taxes, Depreciation, and Amortization is deducted), of $170 million (note that Bloomberg reported it as $142 million) over the last 12 months ending on June 30, 2016, the UFC’s new debt load of approximately $1.8 billion is over 12 times its earning. The Fed suggests their debt loads be no more than six times EBITDA.
When seeking those loans the UFC gave potential lenders projections that showed EBITDA rising, thanks to add-backs, to $298 million within a year. While the UFC predicts that the next television deal will pay around $400 million a year that wouldn’t go into effect before 2019. The UFC will therefore have to find another way to increase earnings if they want to attain those goals.
According to documents provided to investors that were attained by MMA Junkie, the UFC plans on increasing profits mostly through shrinking expenses and an increase in revenue.
The UFC is expecting an additional $48 million from sponsors and a contractual increase in FOX television fees.
Greater increases to EBITDA will be made through cost-cutting. The recent layoffs of UFC employees is apparently only part of the cost-cutting measures that look to save the UFC $71 million. According to MMA Junkie:
An analysis of the business, conducted in part by corporate turnaround specialist Alvarez and Marsal, identified employee compensation as the biggest area of cost savings. The new group expects a payroll of $55.4 million to be slashed to $27 million, estimating a 44 percent to 53 percent reduction. Offsetting the cuts is a onetime $5 million severance payout.
Another $17 million will be saved by shaving the budget of “The Ultimate Fighter” from $27.6 million to $10 million.
The other $27 million will apparently be saved “through increased standardization and more rigorous corporate discipline, namely in ‘compensation practices, (travel and expense) policies, long-lived consultants, political contributions, overhead, etc.'”
If WME-IMG can attain these earning goals they stand to profit heavily. In addition to the $25 million a year management fee they are expected to collect for running the promotion, they will receive an $175 million acquisition payment if they achieve an EBITDA of $275 million by June 30, 2017, and a further $75 million if they can achieve an EBITDA of $350 million by December 31, 2018.
No word yet if fighters can expect to see an increase in their payouts.
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