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Goldman Sachs reportedly cautioned due to large debt financed in UFC purchase

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Esther Lin, MMA Fighting

Bloomberg reported this week reported the Federal Reserve bank supervisors have issued a caution to Goldman Sachs Groups, Inc. regarding WME-IMG taking on more than $1.8 billion in debt financing in its purchase of the UFC from the Fertitta family.

The money was a combination of $1.4 billion for the actual sale of the company to get the bid up to the $4 billion valuation mark, plus another $425 million as part of the company's existing debt.

In August, when the first $500 million of the debt went up for sale, largely due to offering 8.5 percent interest, they went in an instant to 70 different investors, which included hedge and mutual funds.

The demand was such that UFC was able to lower the interest rates and still was able to raise the entire $1.825 billion.

An August Bloomberg article said banks at first shied away from offering the loans, feeling that the market wouldn't be there for them, but the opposite ended up being the case. It was described as investor frenzy, largely due to the difficulty in today's marketplace of getting 8.5 percent interest on investments.

The fact the demand was there shows Wall Street is seeing UFC as a hot property, but the Federal Reserve bank was uneasy about debt being more than six times that of annual EBITDA.

UFC reported EBITDA of $142 million during the 12-month period from July 1, 2015 to June 30, 2016. That number is significantly down than for 2015 as a whole, meaning essentially that the period of January 1 to June 30 of this year was well down in profitability from the same six month period in 2015. That would mean debt would be nearly 13 times annual EBITDA. 

That is even with a video game release in the spring of 2016, and what the company has claimed was its biggest pay-per-view up to that point in history on March 5 headlined by Conor McGregor vs. Nate Diaz. The second McGregor vs. Diaz fight, as well as UFC 200, both of which topped 1 million buys, took place after the June 30 cut-off. With those two shows and the Madison Square Garden event on November 12, the final six months of 2016 figure to be the most successful the company has ever had by a wide margin.

A key to selling the debt was that prospective investors were shown estimates that the annual EBITDA of the company would increase to $298 million per year, based on a strategy going forward of cost cutting within the company as well as projecting growth in the licensing revenue.

At $298 million per year, the debt would fall into the parameters of roughly six times EBITDA.

What that means is that Wall Street has tremendous confidence in the future of the brand. The $4 billion sale price came partially with the belief that UFC's U.S. television revenue would increase greatly in 2019 when the current deal with FOX expires. According to sources within the company, they are looking at following major sports like the NBA, MLB, NASCAR and the NFL in having events aired on multiple networks rather than an exclusive deal.


This may all sound like good news as far as expansion of the brand and financial growth, but if the annual interest on $1.825 billion averaged 7.5 percent, that is nearly $137 million. In other words, the company has to essentially make an annual profit of $137 million just to break even. And that doesn't even figure paying back the debt itself, just the interest.

That's not good news for fighters who no doubt hope to see pay increase under the new owners.

When one considers that the EBITDA at this point is only slightly above that number, and that the last 21 months have seen business boom, particularly on pay-per-view due to the star power of Ronda Rousey and Conor McGregor, they are banking on being able to continue at that level of profitability. Even though injuries, losses or early retirements of one or both of the big two would leave a gaping hole a far as the kind of drawing cards able to pull the necessary numbers.