Second Opinion: Englebrecht on IFL & ProElite 10-Ks

Roy Englebrecht is the owner of Roy Englebrecht Promotions, California’s third largest boxing promotions company. Oscar De La Hoya purchased the company in December of 2001 and Golden Boy Promotions was formed, with Roy serving as COO for the first three years. At the end of 2004 Roy Englebrecht Promotions was again reestablished, with Oscar De La Hoya now as a minority partner. Roy offered MMAPayout.com the following Second Opinion on the IFL and ProElite's recent 10-K filings.

I have been reading the stories about the awful 10-K annual reports for IFL and ProElite, and I just have to comment.

I want you to know I pray for humility every day, and I don't want to sound like I am tooting my own horn, but what are these guys doing in the fight business in the first place if they don't know how to be profitable!

According to Jay Larkin of the IFL, and I thought Jay's leadership and creativity at Showtime boxing was as good as anyone in the sport, but he says 20 MMA groups are all struggling. Well, I'll promote eight to 10 pro mma clubs shows in 2008, and I won't lose money on any of them!

In 2007, my fight business did $1.1 million in gross revenue, and I read that the IFL only did $5.7 million in gross revenue and ProElite did only $5.3 million in gross revenue.....you mean that my company, which is all of two people, me and my matchmaker Arnold Berber, did over a million in revenue and we turned a profit, and the IFL and ProElite with their vast staffs and network partners did just awful!! With their staffs and resources they should have made $35 million, not lost $35 million!!

While I respect Dana White for the way he has grown the UFC, and though I don't agree with some of his statements in the past, I give him my top kudos for his statement in the Forbes UFC article, where he was quoted in regards to some comments about competitors like ProElite on CBS and HDNet Fights, that "CBS doesn't know the fight business, and Mark Cuban doesn't know anything about the fight business, either."

He hit the nail on the head.....these so called "fight promotions companies" don't know the fight business. Their executives can negotiate nice fighter agreements, and secure great site fees with venues and casinos, but they have never "promoted a show" never rented a venue, created the marketing, had to sell all the tickets, hire an event staff, made sure towels, water and ice were in the dressing rooms, and had to stay within a show budget. These companies aren't fight promoters, they are syndicators.

My MMA Fist Series will promote four hotel ballroom shows and fill them with 1,250 young fans. We'll do two SummerFist Fair shows in Fresno and Orange County, free to fair goers, and I will do one SummerFist show at a minor league baseball stadium, and every one will turn a profit!

I have lived by a credo that I came up with 20 years ago....I give my fans great entertainment, at the right price, in a clean environment, and say thank you and mean it! Because I am anal about doing all four points all the time, my fans come back!

I'm afraid some of those "struggling mma groups" are missing one or two of the points that I preach!

Second Opinion: Zuffa Finances Come Into Focus

Tom Berryman has experience in corporate finance and offers the following second opinion on Behind the Curtain: Zuffa's Finances Come Into Focus:
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There has been some debate about the health of Zuffa according to a recent series of S&P reports. One thing is clear, Zuffa's revenues are growing. The decrease in 2007 operating margins is misleading because the EBITDA margin went from 40% in 2006 to 20% in 2007 due to a readily identified one-off impact (that is, the increased international marketing effort). While they claim the margin will be pressured by increasing fighter wages, I find it hard to believe that this will not be a function of increasing revenues. Consequently, the sustainable margin will lie somewhere in the middle (I have assumed a 25% margin for my analysis, which I feel is conservative given the 40% margin in the year without the one-off expense).

Additionally, the credit downgrade only signifies that S&P views the company as risky. This term should not be over-analyzed. Yes, the UFC is a new business with unproven cash flows. No, this assessment of risk does not indicate that it is "high-risk.”

Some other points of clarification:

• EBITDA margin is paramount - this, although an accounting measure, is the closest measure of cash from operations generally available and barring any unusual accounting policies indicates the "operating margin" of the business.
• Interest on $325m might seem high, however, we are talking about a financeable corporation, and we need a figure to determine if this is the case here. Assuming a pretty high rate of interest (and here is where I am completely out of my area - the work I do is entirely UK or Europe based and generally specialized to one industry area. To be honest I don't have a feel for what this rate might be) of 14%, roughly the rate on a risky piece of subordinated debt, the interest payable every year on a balance of $325m is around $45 million. I think this is surely at the top end of what the expense might be. Assuming historically moderate growth in revenues of 50% over the next 5 years and a sustainable operating margin of 25% (probably conservative business forecasts for such a fast-growing sport), the amount payable on the debt is exceeded by operating cash flows by at least 30% (a fair premium for the high cost of debt assumed)
• Debt/revenue and debt/equity ratios are not that meaningful. Debt/EBITDA can be revealing, and this appears to be in the range 4.0x - 6.5x - this is not unusual.
  The reason the company might have negative equity is due to the large distribution that may have been paid from retained earnings. However with no detail on the mechanism of the distribution nor the state of the accounts prior, this is a structuring issue only, one which I'm sure Zuffa has hired sufficient accountants to solve.
• There is an empirical argument here: very few people screw the bank. A lender who specializes in making sure their money is safe has lent to Zuffa—therefore it’s probably a good deal!
• Regarding the notion that the Fertittas and Dana White have “cashed out:” This is no less than they deserve for piling in investment at a time when the company was about to collapse. Do not forget that it has been significant quantities of their money at risk for the last six years and they deserve to be rewarded for that. Obviously we don't know the details, but a few simple assumptions about how the business will perform indicate that this structure might not only be not risky, but potentially financially prudent.

Second Opinion: Zuffa's Finances Come Into Focus

This site is blessed with a large professional readership interested in the business of MMA. I welcome your thoughts, for publication or not, attributable or not, on the stories that appear here or on the business of MMA generally. I hope to make Second Opinions a regular feature on the site. - AS

An attorney at a large Atlanta law firm with experience in the areas of bankruptcy and accounting malpractice offers the following provocative second opinion on Behind the Curtain: Zuffa's Finances Come Into Focus:

I am not a finance expert, so please correct me if I have a flaw in my reasoning, but isn't the gist of S&P's report that, even though Zuffa's revenues are growing, its margins are decreasing and it now has a highly-leveraged structure, making it a very risky business to lend money (i.e. it is likely to go bankrupt)? I usually don't think of a potential credit downgrade as a signal that a business is "healthy," even if it simultaneously reports revenue growth. Usually, S&P doesn't rate the debt of healthy companies as high-risk.

EBITDA can be a very misleading thing to look at, especially given that interest on the $325 million term note is likely quite substantial. I wouldn't equate an EBITDA margin with profit margin for a company that has such a high a debt-revenue or debt-equity ratio. On paper, the company probably now has negative equity. Cash flow that would have been profits in the past are probably now being used to pay interest on the note.

It looks to me like the Fertitas and Dana White "cashed out" and purposely switched to a very risky capital structure. Can't say I blame them; they get to keep all the upside potential of the company while passing off the downside to their lender. This sort of thing often proceeds a bankruptcy. It signals to me that Zuffa's owners may not be all that confident in the long-term profitability of the company. Honestly, I am surprised that a lender would make this deal, and I suspect that Zuffa is paying for it with an exorbitant interest rate. Anyway, it may be true that Zuffa will continue to be profitable long into the future, but this credit outlook downgrade and the new highly-leveraged structure certainly makes me wonder.