Finances: UFC’s revenues and earnings drive Endeavor IPO

A new Moody’s Credit Opinion was released on May 5. This, along with the March 31 S-1 Investment Prospectus (and the updated April 26 S-1/A) give us some details regarding how the UFC did financially last year. (Spoiler: they did great.)

According to Moody’s “UFC’s revenues for 2020 were well over $800 million.” Elsewhere it is listed as $0.9 USD Billion. A graph included in the report showed the following approximate amounts:

2016: $690 million

2017: $750 million

2018: $695 million

2019: $860 million

2020: $890 million

Moody’s also reports the debt-to-EBITDA leverage ratio as 6.3x at the end of last year. With S&P Global reporting that the UFC had a $2.304 billion term loan B and a $150 term loan B-2 in 2020 (that were combined earlier this year as a single $2.353 term loan) and a $212.75 million revolver, that would put their 2020 EBITDA at $423 million. Their EBITDA margin would be 48%.

This is an improvement over 2019, when their debt/EBITDA was reported as 6.7x. With their debt reaching $2.34 billion that year and a $162.75 million revolver, their EBITDA would have been $374 million, or a 43% margin. This is also much better than the 8x leverage Moody’s projected, as they foresaw that “cash flow from operations will decrease as long as the pandemic impacts the ability to hold live events with spectators in attendance.” Instead the UFC found it little more than a nuisance, as:

Media and PPV agreements with ESPN support operating performance as long as the events take place. While attendance revenue at many events were lower, attendance revenue accounted for only 12% of revenue in 2019 and fees earned from the Fight Island events offset lost revenue at other events held without or with limited spectators.

Moody’s also reported that the UFC paid out $312 million in distributions to shareholders in 2020. Even with those payments, the UFC still had a cash balance of $282 million as of December 31, as well as $205 million available in their revolving credit facility.

For 2021, Moody’s projected mid-single digit revenue and EBITDA growth for the UFC. They projected their debt/EBITDA leverage at 6x (or $444 million) and that their free cash flow as a percentage of debt ratio would be 10%, or approximately $267 million. According to the S&P Global and S-1 filing, based on current LIBOR rates the interest on their term loan should decrease slightly, from $101 million for 2020 to $99 million for 2021. Amortization would remain the same, at 1% annually with payments quarterly, or approximately $25 million each year.

The S-1A Investment Prospectus offered additional details. While finances for the UFC was for the most part not reported on specifically, it was included along with Endeavor’s Euroleague Basketball interests and PBR (Professional Bull Riding) as part of the Owned Sports Properties. It is also fairly obvious that the UFC makes up the bulk of the business for the Owned Sports Properties, so any information revealed pertains mostly to the UFC.

Based on the Moody’s estimates for revenue and EBITDA, the UFC makes up around 90% of the total business for Endeavor’s owned sport properties. According to the Investor Prospectus, most of the gains between 2018 and 2020 can be directly attributed to the UFC.

• The $163.0 million increase in revenue for 2019 “was primarily driven by increased UFC media rights fees.” This included an increase from 2019 of $278.0 million in Media rights and a decrease from Events and performance revenue from 2019 of $116.4 million. This was credited as being “primarily related to the transition of sales of residential pay-per-view for UFC events from cable and satellite providers on an event-by-event basis to inclusion in the long-term media rights contract with ESPN.”
• The $16.9 million increase in revenue for 2020 “was driven by increased rights fees at UFC of $20.0 million, in addition to a $24.9 million increase from a contract termination fee,” offsetting losses of ticket revenue for UFC and PBR and the cancellation of the Euroleague season.
• Adjusted EBITDA increased from 2018 to 2019 by $146.0 million. This increase “was due to the ESPN contracts signed in 2019 for the U.S. television rights and U.S. pay-per-view rights as well as improved live event revenue, additional events, and improved sponsorship revenue and was partially offset by the increase in selling, general and administrative expenses.”
• Adjusted EBITDA increased by $40.4 million in 2020 over 2019. This was “primarily due to increased revenue at UFC as well as decreased direct operating costs, partially offset by declines in PBR and Euroleague due to the COVID-19 related impacts described above.“
• Direct operating expenses decreased by $17.9 in 2019 and “was primarily attributable to a decline in production expenses related to The Ultimate Fighter, which was not produced in 2019, and a reduction in commission expense associated with domestic residential pay-per-view after entering into the fixed media rights fee arrangement with ESPN.”
• Direct operating expenses decreased by $19.5 million in 2020 compared to 2019. This was attributable in part “to reduced event costs at the UFC by holding certain events at the UFC APEX facilities.”
• Selling, general and administrative expenses for the year ended December 31, 2019 increased $39.4 million and “was primarily related to cost of personnel associated with opening the UFC Shanghai Performance Institute and the UFC APEX facilities in Las Vegas in addition to other operating expenses”
• Selling, general and administrative expenses for 2020 increased $5.7 million and was primarily attributable to higher cost of personnel of approximately $10 million partially offset by cost savings initiatives in other operating expenses.”

It is worth noting that Direct Operating Costs, which would include fighter costs in this category, decreased in both 2019 and 2020. Perhaps it is also worth mentioning that the Fertittas were paid $75 million in 3rd quarter of 2019 for their final earn out.

Back in 2016, the UFC projected in a Lender’s Presentation that cost saving measures could cut expenses anywhere $61.5 million to $80.3 million year. If we assume the highest amount was achieved and that non-fighter expenses have not increased since then besides for the additional expenses listed above for personnel mostly associated with the Shanghai Performance Institute and Apex in Las Vegas, then the maximum available for fighter expenses was $157 million. This would give the fighters a wage share of 18% which falls in line with the UFC’s plan to keep fighter expenses below 20%. It is also similar to the “less than $150 million” reported by the New York Post for 2019.

The low share for fighters did not go unnoticed by Moody’s, who highlighted it as a strength for the UFC’s outlook:

In our opinion, the variability of fighter costs is a credit strength for UFC especially during the global pandemic, with those costs being lower as a percentage of revenues than the player costs in other long established major sports leagues (NFL, MLB, NBA, NHL, and Premier League). These largely fixed costs are the single most significant cost for other teams/ leagues and the primary reason why profits are low and deficits are not unusual in other sports.

Even with these stellar numbers from the UFC, Endeavor’s finances do not that look that particularly strong. Losses last year were over $650 million. And pre-pandemic 2019 losses were still over $500 million. That’s $1.2 billion in losses in just the last two years.

And these numbers would be much worse if it wasn’t for the UFC.

In 2020, Owned Sports Properties, of which the UFC makes up 90% of the business, was 27% of the Endeavor’s total revenues. It was also responsible for 63% of the company’s EBITDA. Without the UFC, Endeavor would have likely reported close to $1 billion in losses.

Even in 2019, when there was no pandemic, Endeavor’s finances without the UFC were not very strong. Owned Sports Properties were still 44% of Endeavor’s EBITDA and the company still reported losses of over $500 million.

These losses are partly explained by the debt they’ve used to finance the acquisitions of IMG and UFC. Total debt is approaching $6 billion for the company, with the UFC’s responsible for $2.4 billion. The interest payments from this debt along with other liabilities are a huge anchor around the company.

According to a former studio head quoted by The Wrap, Endeavor needs this IPO just to survive. “If they don’t do this, it’s the end of Endeavor. They’re blowing $500 million a year. Right now they can hide under the pandemic — but as they come out of it, it’s not a fluke. Right now he can say our numbers are good because of the pandemic. But he can’t say that in 12 months.”

David Trainer was even more pessimistic in Forbes, calling it “Another Overvalued IPO” and noting that “at its 2020 cash burn rate (-$1.5 billion), Endeavor only has enough cash to survive another 8 months.”

As gloomy as these two analysis of Endeavor’s IPO were they likely would have been even bleaker if they had taken into consideration the unique threat posed to the UFC by their current antitrust lawsuit, something that seems to escape the attention of those not particularly knowledgable about how MMA operates.

For their part, both the Moody’s Credit Opinion and Endeavor’s Investor Prospectus highlight the risk it poses.

According to Moody’s:

There is legal risk as the company has a pending lawsuit brought by former MMA fighters alleging monopolistic behavior in MMA. This litigation has the potential to impact UFC’s profitability and operations.

Meanwhile, Endeavor in their Investor’s Prospectus notes that:

Plaintiffs in class action lawsuits may seek recovery of very large or indeterminate amounts and the magnitude of the potential loss relating to such lawsuits may remain unknown for substantial periods of time…. They seek treble damages under the antitrust laws, as well as attorneys’ fees and costs, and injunctive relief.

While a win by the Plaintiff’s is no sure thing, if it did happen, it would guarantee a transformation of the UFC’s business — something most investors have probably not taken into consideration. Of course, by the time it would impact the UFC’s business, it’s possible that the majority of shares held by Endeavor have been sold to the public. It is thus very conceivable that if the Plaintiff’s win damages, much of it will be paid for by fans that wanted to own a piece of the UFC.

For the fighters, Endeavor going public probably means more of the same. As we well know, the UFC has never paid the fighters much, and this is likely not going to change. Even though the UFC’s margins are approaching close to 50 percent, Endeavor’s financial problems and need for every dollar generated by the UFC means we should see no change in the fighters’ share of revenue.