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Volume 22 No. 19
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UFC ownership borrows $1.8B for acquisition

The incoming owners of the UFC plan to borrow $1.8 billion as part of their acquisition of the mixed martial arts company, finance sources said, making it one of the largest debt financings in sports.

The only one believed larger is WME’s own $2.1 billion of borrowing to buy IMG in 2014. Now WME-IMG is scooping up one-third of the UFC alongside private equity firms. WME, insiders said, does not consider the new UFC loans part of the agency’s debt, which currently totals $2.55 billion. But the debt, or leverage, on WME is a topic of concern on Wall Street.

“[L]everage is very high and … the ratings would come under negative pressure if leverage was unlikely to decline,” Moody’s Investors Service wrote in a report last month on WME-IMG’s B2 bond rating, which means the debt rating agency considers the bonds speculative and a high credit risk.

Moody’s, however, will treat the debt on UFC as a separate matter from the WME loans. The MMA company will remain a stand-alone company, with WME-IMG an investor and the operator.

UFC Revenue

2015: $600 million-plus
2014:
$522 million

Note: As estimated by Moody’s
Source: SportsBusiness Journal

In fact, Moody’s said last week that it would review for downgrade the new debt on the UFC’s parent company, Zuffa, which already is rated speculative.

The UFC has roughly $500 million of debt that will be retired as part of the $4 billion acquisition. While UFC is more than tripling its debt, the new owners are anticipating a new media deal with Fox that is up to four times larger than the current $115 million annual one, as well as other growth opportunities.

“When UFC’s rights come up for renewal with Fox, there aren’t any other meaningful sports rights available, which creates significant scarcity value,” said a source close to the deal. “That dynamic, combined with the ability to parse content into multiple packages like the NFL has done could be a very substantial driver of future value.”

Minus the existing debt, that leaves about $3.5 billion of equity. To pay for that, the investors are borrowing the $1.8 billion, and receiving a preferred equity contribution from Michael Dell’s investment vehicle, MSD Capital. Preferred equity is similar to debt because it requires regular interest payments.

Ten percent of the company is owned by Abu Dhabi, and a similar amount by UFC President Dana White. Both are rolling over some equity into the new deal, as are the primary sellers, Frank and Lorenzo Fertitta. It’s unclear how much their new equity positions total.

Nevertheless, the cash the investors are putting in is high by private equity standards, experts said.

“Normally anywhere between 20 percent and 30 percent would be equitized, the balance would be levered,” said one private equity fund manager, who requested anonymity because of the confidential nature of his business. “In this case, that’s not the case. The reason for that could be … you have got very changed credit markets in the last three months, and credit has been tightened.”

A source close to the deal said it’s simply a case of reaching the maximum amount of debt possible to place on the UFC, but still needing to hit the $4 billion valuation the owners insisted on.

WME-IMG declined to comment on the equity-to-leverage ratio. A source close to the firm said, “The majority of the purchase price was financed with equity, not debt.”

Four banks are leading the debt process: Deutsche Bank, Barclays, Goldman Sachs and Credit Suisse, according to a press release last week from WME-IMG. They have agreed to underwrite the debt, one finance source said, meaning they would make the money available even if unable to syndicate the debt.

Typically, lead banks sell pieces of loans to other financial institutions, a process called syndication. That’s still expected to occur, but underwriting guarantees for the borrower that the loans are available if hypothetically a syndication misses expectations.