How UFC owners pulled hundreds of millions out the company every year to pay themselves

An unsealed report from the UFC's antitrust lawsuit reveals just how profitable the company has been for the owners.

Last week, the Plaintiffs in the Le et al v Zuffa, LLC lawsuit filed an Opposition to Zuffa’s Renewed Motion for Summary Judgment with the Federal District Court for Nevada. Included in their filing were 143 exhibits.

Apart from previously unreleased UFC fighter payouts (part 1, part 2, part 3), another exhibit Bloody Elbow has obtained is also particularly notable. 

The Expert Report of Guy A. Davis, CPA, CIRA, CDBV, CFE.

Guy A. Davis is an accounting expert and the managing director of the consulting firm Protiviti Inc. He and his firm were engaged by the Plaintiffs to “provide financial advisory and litigation support services.”

His assignment was to calculate “Zuffa’s aggregate sources of capita”, “calculate Zuffa’s uses of capital” (including amounts used to fund “distributions to Zuffa equity holders, debt, interest payments, capital expenditures, acquisitions, and working capital requirements”), “analyze financial records to determine the aggregate amount Zuffa paid to, or the value of benefits Zuffa conferred upon, Zuffa equity holders”, and “analyze Zuffa’s financial records to determine the aggregate amount Zuffa paid to, or the value of benefits Zuffa conferred upon, its Bout Class and Identity Class fighters” for a period from 2005 through 2016, which includes the class period of December 16, 2010 through December 31, 2016.

The class period actually ends on June 30, 2017 but the data Davis worked with ended in 2016.

In order to accomplish this assignment, Davis and his team “reviewed several documents produced in discovery, including Zuffa’s audited financial statements, internal profit and loss reports, compensation and shareholder distribution workpapers, debt amortization schedules, and other accounting and financial documents.” They also “reviewed deposition transcripts, select e-mail correspondence, and confidential offering memorandums, as well as conducted independent research.”

What makes Davis’s report interesting and worthy of more attention is that it is probably the best source for information regarding what the equity shareholders of Zuffa (AKA the UFC) actually made from their investment using Zuffa’s own internal financial documents.

Background

In 2001, the owners of Station Casinos, Lorenzo and Frank Fertitta, purchased the Ultimate Fighting Championship (UFC) through their company, Zuffa, LLC, from Bob Meyrowitz’s Semaphore Entertainment Group (SEG) for $2 million. They installed Dana White as President “to promote the fighters and the brand,” granting him a 10% equity interest in Zuffa.

According to Davis’s report, from 2001 to 2005 Frank and Lorenzo Fertitta invested approximately $36.4 million in to Zuffa.

Sources of capital

From 2005 up until the sale to WME, Zuffa’s sources of capital were:

1. cash flow from operations earned each year (EBITDA)

2. debt proceeds from third party lenders

3. proceeds from the January Capital Investment

4. immaterial equity contributions during the period

Cash from Operations or EBITDA (Earnings Before Interest, Taxes, Depreciation, or Amortization)

According to Davis’s report, Zuffa consistently generated significant EBITDA each year. “From 2005 to 2016, Zuffa generated aggregate EBITDA of $1.25 billion. During the Class Period through December 31, 2016, Zuffa generated aggregate EBITDA of $774 million.”

Debt Financing

Between 2005 to 2016 Zuffa took out $1.415 billion in debt, most of which was used to repay or refinance existing debt. The remainder was used for acquisitions, working capital, or, distributing to equity shareholders.

In 2007 Zuffa took out a $325 million term loan. $56.4 million of it was used to acquire the PRIDE MMA promotion and $250 million was distributed to the Zuffa’s equity shareholders (the Fertittas and Dana White.)

In 2009 Zuffa took out an additional $100 million, of which $24.5 million was used to pay down their revolver and $70 million was distributed to the Fertittas and Dana White.

January Capital Investment

In December 2009, January Capital (a subsidiary of the Abu Dhabi-based sports promotion company Flash Entertainment) and Zuffa consummated a sale of 10% equity interest in Zuffa in exchange for $175.7 million.

Equity Contributions

During the period there were also some equity contributions totaling $7.8 million.

Uses of Capital

From 2005 through 2016 and during the Class Period, Zuffa used the majority of its capital to fund distributions to its shareholder, to pay the principal and interest on the company’s debt (a debt that was mostly used to pay out distributions to the shareholders) and to pay for the acquisition of the other MMA promotions.

UFC paid out billions to Fertittas, Dana White

From January 1, 2005 through December 31, 2016 Zuffa distributed more than $1.45 billion in dividends and other value to Zuffa’s shareholder - Frank Fertittas, Lorenzo Fertitta, Dana White, and, starting in 2010, January Capital.

More than 1/3, or $499 million, was paid during the Class Period of December 16, 2010 through December 31, 2016.

Zuffa - the Fertittas, White, and January Capital - also received approximately $3.77 billion from the sale of Zuffa to WME|IMG in 2016. The total amount received from distributions and the sale of the company by Zuffa shareholders from 2010 through 2016 was approximately $5.23 billion.

Zuffa paid a total of $1.2 billion in cash dividends to its shareholders from 2005 to 2015. In the first year, 2005, they paid out $9.1 million even though Zuffa saw only $6.3 million in net income that year. Starting 2006 Zuffa had an aggressive distribution policy, paying owners anywhere from $44 million to $306 million every year.

As the Andrew Zimbalist Expert report notes, the individual at Deutsche Bank. David Reid. who was in charge of the Zuffa account grew concerned enough about their distributions to comment: “How about them putting there [sic] hands in there [sic] pocket. Not doing it zero equity, particularly when they pull hundreds of millions of dollars out the company every year.”

Bloody Elbow Podcast: UFC owners took out massive loans to pay themselves

The distribution amounts were based on the ownership percentage each shareholder had. Originally, the Fertittas owned 90%, and Dana White owned 10%. In 2009, January Capital acquired 10%, diluting the Original Equity Holders' ownership.

UFC took massive loans, as payments to owners were almost double their income