After months of speculation the UFC has finally announced its next television deal. In something of a surprise its new linear broadcast partner is ESPN, the same network that won the rights to UFC’s streaming digital content only two weeks earlier. Starting in 2019 all of the UFC’s pay-per-view prelims and 30 Fight Nights will air exclusively on either ESPN or ESPN+. The price tag: a reported $300 million a year, nearly twice what FOX is currently paying the UFC for content in 2018.

While $300 million is a healthy increase the question is will that be enough?

When Zuffa, the parent entity of the UFC, was purchased from its original owners in 2016 by a group led by WME-IMG (which has since renamed themselves Endeavor) many were surprised at the $4 billion valuation. This valuation was 22 times that of 2015’s record setting $189 million EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization). One of the major reasons given to justify this apparent inflated price was the increase in revenue from domestic media rights that their next television deal was expected to bring.

According to the Sports Business Journal, starting in 2019 - the first year of their next television deal - Zuffa’s EBITDA was expected to rise enough to lower that multiple to a more respectable 13-14 times the selling price. Projections before the sale were that these new media rights would be for as much as $400-450 million a year, an amount that is not only 3-4 times their current FOX deal, but also up to 50% more than their recently announced ESPN deal.

Now obviously $300 million is a lot of money but it isn’t $450 million. The big question is will that be enough to meet the investors’ and lenders’ expectations? We can try to answer this question using Zuffa’s July 22nd, 2016 Presentation, which they prepared shortly after the change in ownership. The presentation includes a breakdown of previous years costs and revenues, as well as forward looking statements and projections.

According to their presentation the UFC had $280 million in (guaranteed) contracted revenue in 2015. Over the next few years contracted growth in international media, licensing, and sponsorship would add $22 million to this number. The contracted value of the US media (FOX) for 2015 was $127 million, so the new ESPN agreement would represent an additional $173 million in revenue. Zuffa also estimated a $10 million (+/- 20%) increase in sponsorship driven by the sanctioning of MMA in New York. All together this would raise their contracted revenue from $280 million to at least $485 million.

This of course is only the contracted revenues. There is also the matter of the unpredictable non-contractual pay-per-views, ticket sales, Fight Pass subscriptions and merchandise sales, all of which can fluctuate greatly. In 2015 the UFC had one of its best years as the company’s gross revenue reached $609 million thanks in large part to $237 million in PPV revenue and $76 million in live event revenue. In comparison, the UFC’s total revenue in 2014 was a much lower $450 million, This was mostly due to the lower non-contractual revenues, including only $116 million in PPV and $55 million from live events.

If 2019 has the same lackluster sales as 2014 had for the UFC, then thanks to the increase in contracted revenue, total revenue should be around $685 million. But if next year is more like 2015, where non contracted revenues reached $329 million, the UFC should be looking at a company record $814 million in total revenue.

Revenue is not earnings, though. To meet that 13x multiple of the $4 billion selling price EBITDA would have to climb to $307 million. This would be a significant increase from their 2015 EBITDA of $189 million (a 31% margin), which was significantly higher than 2014’s EBITDA of $96 million (a 21% margin). Both though were less than 2016’s reported $226 million in EBITDA (a 31% margin.)

According to their presentation Zuffa was projecting that the new management would be able to enact around $70 million in cost saving measures (from a low of $61.5 million to a high of $89.3 million in savings, with $70.7 million categorized as the middle) while adding a $25 million a year management fee for WME-IMG. These actions were therefore projected to add about $45 million in total to Zuffa's EBITDA.

While fighters will surely be happy to see that amongst the $267 million in addressable costs their compensation was not included. The presentation does earmark all new revenue towards EBITDA though. The $153 million in costs not addressed, which apparently includes athlete costs such as compensation, insurance, medical and travel, is treated as something like fixed cost that does not rise with additional contracted revenue.

(PPV is obviously the exception, but even there, only a few fighters receive a (small) share of PPV revenue. The margins on PPV are high enough that, according to the presentation, every 1 million incremental increase in PPV sales added $25 million to their EBITDA.)

Number such as these should more than justify the UFC’s $4 billion price tag

What this means is that with those savings and additional contracted revenue the UFC could be looking at EBITDA margins of 45-50% ($315 million from $685 million of total revenue all the way up to $415 million from $814 million of total revenue.) As high as these numbers are the lower of the two is actually below Zuffa’s target of $350 million in EBITDA for 2018. An amount that, if reached, would apparently net the Fertittas a $75 million earn-out. (The Fertittas apparently were paid an $175 million earn-out last year, indicating that Zuffa's EBITDA was at least $275 million for the last twelve months ending on June 30, 2017.

Number such as these should more than justify the UFC’s $4 billion price tag and allow them to easily pay the estimated $120 million a year in interest on their approximately $2 billion loans. They may even justify the $5 billion valuation reached last year when the Fertittas sold their remaining equity. But according to sources familiar to the projections made by Zuffa, expectations for the company were of revenues near $1 billion in 2019 or 2020, with 45-50% margins. If that’s the case, they fall a little short.

While these last numbers seem overly optimistic it is still too early to say that they won’t be reached. In addition to the new domestic media rights, Zuffa had high expectations for their media rights in China, where their current streaming deal with PPTV only pays around $7 million a year. They are also scheduled for a renewal of their PPV distributor contracts, where they should be able to negotiate a larger cut. And finally there is Fight Pass which may or may not be targeted for an increase in subscribers.

In the end we can probably judge the new ESPN deal as being “adequate” only because Zuffa’s expectations are so high.