WME-IMG anticipates quadrupling next media rights contract, leading to expected IPO in the near future

Unlocking the value of WME-IMG’s $4 billion acquisition of the UFC will hinge largely on the next round of media rights negotiations, where the UFC projects revenue to grow by nearly four times.

Based on numbers the UFC supplied to potential buyers during its sale process, it says that media rights revenue could grow from its current average of $115 million per year from Fox Sports to an average annual payout of more than $400 million beginning in 2019.

That figure does not include projected increases from pay-per-view and its over-the-top Fight Pass service, and certainly will depend on what shape media deals take in the future. The UFC told at least five potential buyers that it expects its next media rights deal to run 10 years or more.

WME-IMG plans to maximize UFC’s content and media rights opportunities.



That kind of future revenue growth would go a long way toward justifying the massive price WME-IMG and its fellow investors — Silver Lake Partners, KKR and MSD Capital — paid for the global mixed martial arts events and entertainment business.

The UFC is expected to start negotiating its new media deal in 2018, the last year of its current pact with Fox, and should have some leverage because most major sports media rights deals run well into the next decade.

WME-IMG, which will serve as the UFC’s majority owner and operator, will have substantial insight into what the media rights are worth. The agency, through WME-IMG co-CEO Ari Emanuel’s longtime friendship with UFC Chairman and CEO Lorenzo Fertitta, has negotiated all of the UFC’s TV deals in the United States, first with Spike in 2005 and more recently with Fox in 2011.

EMANUEL



Whether the UFC can attract that kind of increase remains to be seen.

At least three media companies — ESPN, Fox and Time Warner — kicked the tires on buying the UFC, sources said, in addition to Chinese investors China Media Capital and Dalian Wanda Group.

Time Warner was interested in splitting UFC content between Turner Sports and HBO, with iStreamPlanet handling Fight Pass. Time Warner pulled out of negotiations relatively early.

Fox Sports took a strong run at the company, eventually submitting a $3.6 billion bid that the UFC rejected, sources said. Fox executives decided not to increase that bid.

ESPN was interested and received the UFC’s sales deck, but it never submitted a formal offer and dropped out of the process early on.

Ultimately, sources said, each media company was skeptical about the media rights valuation.

Media executives love the UFC’s passionate and large TV audience that’s heavy on millennials, and they are confident that advertisers will want to target them. They also spoke glowingly of the huge potential for Fight Pass and the UFC’s international business.

But they expressed doubts that a UFC deal would apply enough pressure to have pay-TV distributors increase their affiliate fees, which is what the media companies would need to profit off any deal. They also pointed to the current financial situation, where ESPN is cutting costs and Fox Sports recently went through a period of company-offered buyouts, as evidence that the once white-hot market for sports media rights could be cooling down.

Let’s Make A ($4 Billion) Deal



Financial advisers and attorneys for buyers (WME-IMG, Silver Lake Partners, KKR, MSD Capital):

■ Paul, Weiss

■ Kirkland & Ellis

■ Simpson Thacher & Bartlett

■ Proskauer

■ Freshfields (legal adviser to MSD Capital)

■ Silver Lake Partners

■ KKR & Co. Paul, WeissKirkland & EllisSimpson Thacher & BartlettProskauerFreshfields (legal adviser to MSD Capital)Silver Lake PartnersKKR & Co. UFC advisers:

■ Nakisa Bidarian, UFC chief financial officer

■ Milbank, Tweed, Hadley & McCloy (legal)

■ The Raine Group and JPMorgan Chase (financial) Buyer financing provided by:

■ Barclays

■ Credit Suisse Securities (USA)

■ Deutsche Bank Securities Inc.

■ Affiliates of Goldman, Sachs & Co.

■ KKR Capital Markets Source: SportsBusiness Journal

The purchase price of $4 billion, based on UFC’s earnings before interest, taxes, depreciation and amortization, means that WME-IMG paid a 22 multiple for the business. UFC’s gross revenue is $600 million, with EBITDA at $180 million, sources said.

If UFC can hit those lofty media rights goals, it would grow revenue enough to lower the multiple to the 13-14 range, essentially making UFC look like a much better buy.

WME paid a 12 multiple for its $2.4 billion acquisition of IMG in 2014.

UFC will operate as essentially a stand-alone business, meaning it will maintain its own capital structure and WME-IMG will not assume UFC’s debt.

The UFC acquisition also will have an impact on the overall valuation for WME-IMG, which reportedly was $5.5 billion in March when SoftBank, the Japanese telecommunications company, invested $250 million in the agency.

The question industry insiders were asking in the aftermath of the UFC deal was not if WME-IMG will go public, but when. Emanuel and co-CEO Patrick Whitesell have hinted at going public in past interviews, but they haven’t tied it to a timetable.

They insist that if WME-IMG does go public, which is not expected until late next year at the earliest, they’ll do it because it’s best for the company, not because they’re forced to.

Even though the IPO market has slowed in 2015 and ’16, going public would enable WME-IMG to pay off its debt from previous acquisitions, financial insiders say.

Emanuel, Whitesell and global COO Jason Lublin took the lead for WME-IMG on the deal, while Silver Lake’s managing partner Egon Durban and managing director Stephen Evans were integral for the private equity firm, which holds a majority interest in WME-IMG.

What’s clear, after 17 major transactions as the merged WME-IMG, is the agency’s desire to grow revenue and own properties rather than simply represent their rights. It’s why WME-IMG made a bid to buy the Formula One racing series from F1’s main investor, CVC Capital Partners, earlier this year. F1 was asking for $8.5 billion and the two sides couldn’t reach an agreement, industry sources say.

WME-IMG’s buying spree over the last 26 months has included properties such as Miss Universe, Professional Bull Riders and the creation of ELeague, the esports gaming league with Turner Sports.

The UFC fits the model of those other acquisitions because it owns all of its content, and WME-IMG stresses its ability to further monetize its media rights, sponsorship sales and other content opportunities.

Those factors help justify the price for the UFC, say insiders, who also tout the strength of the UFC brand, the regulatory hurdles that already have been cleared, the UFC’s over-the-top channel, its potential for growth internationally, especially in China, and the limited number of live-event properties like this that come up for sale.

Longtime friends Lorenzo Fertitta (left) and Dana White built the UFC from virtually nothing to its $4 billion sale value.



Will Wynperle, a partner at Shamrock Capital Advisors in Los Angeles, said the UFC acquisition is another strong indicator of the value of live sports.

“Content that draws a large audience and is largely consumed on a live basis will drive strong interest,” Wynperle, who didn’t work on this deal, wrote in an email. “Given the audience’s size and demographics, it is a unique opportunity to own content with scale that is hard for sponsors and advertisers to reach.”

Adding the UFC and all of its content does not surprise Wall Street, which has been watching WME-IMG diversify from its portfolio heavy on licensing, talent representation and marketing over the past two years.

At closing in May 2014, WME and IMG had a combined $303 million in EBITDA. Prior to the UFC acquisition, the Hollywood Reporter wrote that WME-IMG’s EBITDA had jumped to $405 million. That growth appears to have come mostly from acquisitions and strategic partnerships, financial insiders say, because they’ve seen little organic growth and few signs of the $151 million in cost-cutting that WME-IMG projected in 2014.

Wall Street has been expecting big moves like the UFC because of the expectation that WME-IMG is readying itself for an IPO.

“WME is looking for consolidation opportunities to increase their [cash flow] in preparation for going public and maximizing Enterprise and Equity Valuation,” a senior private equity source wrote in an email.

“If they can buy sizable properties like UFC at a multiple that is accretive (i.e. less than where they could price an IPO), then they get a double benefit. Proceeds from IPO would pay down debt. But there’s a lot here that needs to work.”

Staff writer Daniel Kaplan contributed to this report.

