When the UFC was for sale and eventually purchased by WME-IMG, Goldman Sachs marketed the debt. The Federal Reserve cautioned Goldman Sachs about the risks of taking on so much debt. The Federal Reserve has been monitoring Wall Street to ensure that banks are following the lending guidelines created in 2013.
Between July 1, 2015 and June 30, 2016, the UFC recorded $142 million earnings before interest, taxes, depreciation, and amortization (Ebitda). Goldman Sachs marketed the Ebitda value after the purhase to be $298 million with adjustments for cost savings and expectations in more revenue from licensing.
From the Forbes article:
n the case of UFC, they’re focused on accounting adjustments that more than doubled the mixed martial arts promoter’s cash flow projections, said the people, who asked not to be identified because the matter is private.
Such earnings adjustments — known as add-backs — are a common practice when estimating a company’s future profitability after an acquisition or buyout. What regulators are reviewing is whether they are too optimistic, making companies appear more creditworthy than they are.
MMA Fighting goes into detail on how an investing “frenzy” began when the UFC wanted to sell $500 million of debt for 8.5% ownership. Rarely can investors find that value in an investment and there were immediately 70 investors. Banks were reluctant to loan the money becuase of a perceived lack of demand. However, the demand for the available ownership was so high that the banks might have taken on too much risk with their loans.
As Dave Meltzer pointed out in the MMA Fighting article, Wall Street sees the UFC as a hot item with a lot of demand while the Federal Reserve sees the UFC as a large risk. Based on the projection used the debt could be between six and thirteen times Ebitda.
Wall Street’s projections showed earnings would nearly double after the purchase, which takes a very optimistic look at the possible revenues from licensing and a renewed television agreement with FOX. While the UFC is on pace to break its record for revenue in a fiscal year, WME-IMG is still betting against the live sports television bubble bursting. The projection must also take into account expansion into the Asian marketplace. Ari Emanuel, co-CEO of WME-IMG, has been pushing for nearly a decade to break into Asia.
We will see if the extreme optimism Wall Street has for the UFC will pay off for the investors or if becomes another example of Wall Street continuing overly risky investments.