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UFC Over-leveraged?

Investorwords.com defines financial “leverage” as: “The degree to which an investor or business is utilizing borrowed money. Companies that are highly leveraged may be at risk of bankruptcy if they are unable to make payments on their debt; they may also be unable to find new lenders in the future.”

The UFC has been widely reported to be worth approximately one billion dollars. It’s also been widely reported and that the UFC has incurred debt of approximately $475 million dollars; $375 million of which was borrowed to purchase Pride (reportedly $65 million) and to provide working capital and make distributions to the owners (Lorenzo and Frank Fertitta and Dana White) and the other $100 million to pay down the existing $375 million debt and make additional distributions to the owners.

Although any valuation is extremely difficult and highly speculative, relying on numerous assumptions and differing methodology, to consider the possible ONE BILLION dollar valuation for the UFC, let’s consider the value of other sports franchises (based upon Forbes valuations):

Manchester United                   $1.8 billion

Dallas Cowboys                          $1.6 billion

Washington Redskins               $1.5 billion

New England Patriots               $1.32 billion

New York Giants                        $1.18 billion

New York Jets                             $1.17 billion

Oakland Raiders                         $797 million

New York Yankees                      $1.3 billion

Los Angeles Dodgers                  $694 million

Boston Red Sox                           $617 million

Florida Marlins                           $256 million

New York Knicks                        $613 million

Los Angeles Lakers                    $584 million

Boston Celtics                             $447 million

Cleveland Cavaliers                   $477 million

Milwaukee Bucks                       $278 million

Toronto Maple Leafs                 $470 million

Pittsburgh Penguins                  $222 million

Phoenix Coyotes                         $138 million

Although sports vernacular throws around seven digit numbers like one throws around their little brother, its important to keep one thing in mind: a BILLION dollars is an extraordinary amount of money. It has NINE zeros in it. Forbes estimated nineteen of the 32 NFL teams were valued at one billion dollars or more; one Major League Baseball franchise was valued in excess of one billion; and no NBA or NHL franchises were valued over one billion dollars. Debt to value ratios range from 2% (Packers) to 64% (Jets) in the NFL; 0% (Knicks, Pistons and Clippers) to 71% (Nets)in the NBA; 0% (Cubs, Braves, Blue Jays) to 95% (Yankees) in MLB and 0% (Rangers, Red Wings, Blackhawks) to 112% (Devils) in the NHL. One of the primary reasons for the lofty NFL team valuations is that those valuations include over $20 BILLION of NFL shared television revenue from cable and satellite broadcast companies for multi-year contracts that extend through 2011 for the major networks and 2013 for ESPN. The UFC has no such long term guaranteed revenue streams or broadcast distribution. Just like any product, the value of that product is only as valuable as its channels of distribution. You can make the best t-shirt in the world, but if your t-shirts are only in a few stores and its difficult and expensive to obtain your t-shirts, your company probably isn ‘t as valuable as Hanes or Fruit of the Loom.

It’s interesting to ponder if you would prefer to own the New York Yankees, Dallas Cowboys, Los Angeles Lakers or the UFC. Again, it is difficult to estimate the value of the UFC, but, without any additional debt other than the $425 million which has been reported, and depending on the outstanding balance of its existing debt, it’s probable that the UFC’s debt:value ratio is well in excess of 50%, making it highly leveraged compared to the major sports.

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