UFC Sale Expensive??

So the UFC has reportedly been sold for $4.2BN. Ariel and New York Ric discussed this briefly today and Ariel believed it to be expensive compared to the recent purchase of the LA Clippers, I believe, for a reported $2BN. While the raw numbers seem comparable and, ergo, the UFC expensive, this is not an apples to apples comparison. This is mainly because the Clippers is a team within a sport, while the UFC is a dominant market maker, enjoying an almost monoplolistic status. Indeed, the UFC is synonymous with Mixed Martial Arts for many of the general public. Even SBNations main page's tabular divison of sports lists UFC.

If we look a little deeper and investigate the numbers reported we get a clearer picture. Dave Meltzer recently reported that the UFC had revenues of $620MN + in revenue in fiscal year 2015 with a net profit of $158MN. If these figures are correct the acquisition would be proceeding for a Price/Earnings ratio of approximately 26.6. While this figure is high in historical terms, low interest rates have driven up asset prices in general and made financing such an acquisition relatively cheap. However, given the unique status of the UFC there are not really similar types of acquisitions to make direct comparisons. Manchester United has, for example, a projected PE Ratio of 43 for 2016.

The acquisition is not without risks. Most fans are aware of certain headwinds which could potentially cause problems down the road. The lawsuit certain fighters are engaged in could have negative consequences, the introduction of the Ali Act could revolutionize the sport, greatly affecting the UFC's current business model, and the UFC's attractiveness to the main stream public is star driven in a way that the other major US sports simply aren't. It also has a much more variable production line of top quality athletes, unlike the othe NCAA production lines for basketball, football or baseball.

There are positives for the acquiring group. If the reported figures are correct, the almost 25% (which really highlights the issue of fighter pay, but that's a discussion for a different post, suffice to say leagues with a players union and negotiated payscales do not have owners with such high margins) net profit margin could stand some erosion and still support a high overall valuation. Plus, there is the issue of the new TV deal coming which should be a greatly improved source of revenue, if there is a bidding war and interest from more major broadcasting partners, providing further support to the extremely high profits currently enjoyed.

One other question I was asked involved scepticism about the acquiring groups ability to generate a return on such a large investment. This is potentially the easiest piece to understand. If the UFC is acquired for $4.2BN, the company is held private for three years, and the new, more lucrative TV deal comes into play, increaing the value of the UFC. The acquirers could list the UFC publicly, potentially selling 49% of the company for $3BN for instance. They would have in effect acquired a 51% controlling interest in the UFC for about $600MN, after the intervening years profits are factored, which would be valued more than $3BN, for a 500% return on the actual investment. Note this is hypothetical and ignores any time value of money considerations.

I hope this has been informative. Let me know in the comments what you think. Cheers.