IFL Puts the Hex on MMA; Looking for New Partners

Last week the IFL announced its plans to debut a new fighting surface later this year. The six-sided ring will be called the Hex. The ring verses the cage is a hotly debated topic in the MMA community as far as each surface's affect on competition and safety, however, the IFL's move is clearly about branding.

Traditional over-sized boxing rings say boxing, kick boxing, maybe even professional wrestling, but definitely not MMA. The cage says MMA, but maybe more specifically the UFC. The Hex seems to be a compromise designed to solve both branding problems, a surface clearly distinguishable from boxing and the rest of MMA and entirely unique to the IFL.

I still think MMA happens in a cage and other things that aren't seen as MMA happen in a ring, despite how many sides it has. The cage produces a visceral reaction that is a negative for IFL CEO Jay Larkin, but is a positive for the 18-34 male demographic that watches the sport. The only convincing argument against the cage and in favor of the ring was the idea that mainstream partners, television and otherwise, were uneasy being associated with the violence imagery of a cage. With CBS and Budweiser in the cage, that argument appears to be losing steam pending a major setback.

The biggest "news" of the press conference was Larkin's public declaration that the company is actively shopping the embattled company. "Are we actively looking for a partner or a sale? The answer is, yes," Larkin stated on the call according to MMAWeekly.com. "We entertain phone calls and questions almost on a daily basis from potential investors, potential buyers, people who want to get in the MMA business, people who are already in the MMA business."

Larkin also continued to push his bleaker, some would say more realistic, view of the current state of the MMA industry:

This harkens back to something I’ve been saying consistently, is that I do believe the MMA world is a fractured world, and the way to make it a healthier, stronger, and a mainstream sport and industry, is through consolidation and roll-up. There’s just too many little groups out there who are fighting over the same meatless bone.

News Wrap

• UFC Tackles Long Term Growth Issues - The last five pay-per-view events have produced three of the company's top ten events according to Dave Meltzer. UFC 79, 81, and 83 all drew between 525,000-650,000 buys and at $44.95. UFC 79 and 83 also produced the second and third largest gates in company history.
  
• Golden Boy Sticking to Boxing - Oscar de La Hoya recently said that Golden Boy will stick to boxing when asked about MMA.
  
• Viacom CEO Praises Iron Ring - Q1 profits for Viacom were up 33%. CEO Philippe Dauman said, "content creation is our central mission and our ongoing investments in programming are paying off as we see our television ratings continue to improve. Successful new programming across our networks during the first quarter included MTV's Randy Jackson Presents: America's Best Dance Crew, TV Land's High School Reunion and BET's Iron Ring among others, which joined new seasons of several proven audience favorites."
• Another Affliction Deal Falls Through - Negotiations with HDNet have reportedly fallen through. The promotion is now less than two months from its proposed first show and without a venue or television partner.
• UFC Targets Show for Latino Audience - El Octagono will debut on Galavision as the UFC attempts to expand MMA's demographic reach outside of 18-34 white males.
• WWE Q1 Results - Wrestlemania XXIV produced $31.3 million in revenue and $7.1 million in profits ($4.6 million net). The event drew 1,058,000 buys (including international).
  

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!

Sports Business Journal Offers MMA Industry Reality Check

The following article was originally published in the April 21 edition of Street & Smith's Sports Business Journal and is republished here with permission. Thanks to Dan Kaplan and Richard Weiss.

Filings Show 2 MMA Groups Financially Bloodied

By Daniel Kaplan

Two key players in the mixed martial arts industry may soon go down for the count, underscoring the significant financial volatility in the sport despite its tremendous hype.

International Fight League and ProElite Inc., the latter of which made waves in February by signing the first MMA broadcast contract, warned in securities filings last week that they may run out of money later this year. Both also cautioned they could have accounting irregularities that resulted in inaccurate financial reports.

“You have got maybe some 20 MMA groups around the world, and every single one of them is struggling,” said Jay Larkin, IFL’s chief executive. “In the last three or four months, 10 have either reorganized, folded, changed names or completely gone out of business. That is a very heavy casualty rate for a sport that is supposed to be the greatest thing since the NBA.”

IFL is looking to align with a media concern or another MMA outfit, Larkin said, though the three-year-old company also is confident of raising additional equity. The MMA industry must consolidate to survive, Larkin said.

MMA combines boxing, judo and other hand-to-hand combat disciplines.

The dominant company in the conversation is Ultimate Fighting Championship, the Zuffa Corp.-owned outfit that dominates MMA but does not release financial results. UFC, which has previously dismissed rumors in the MMA world that it is looking for a buyer, declined to comment for this story.

Standard & Poor’s in November downgraded Zuffa’s $350 million of debt, citing weak pay-per-view buys and poor results in England.

IFL, which has lost $31 million since its inception in 2005, said in its annual 10-K filing last week that it “will likely have a cash shortage which would disrupt our operations, have a material adverse effect on our financial condition or business prospects and could result in us being unable to continue our operations.”

ProElite, which lost $27 million in 2007 on $5.3 million in revenue, similarly disclosed in its 10-K filing that “our auditors have expressed substantial doubt about our ability to continue as a going concern.”

A ProElite spokesman, in an e-mail, said “The company is optimistic about its financial position improving.”

Later in its report, IFL stated, “Our auditors have identified a material weakness in our disclosure controls and procedures … due to insufficient resources in the accounting and finance departments.

“There is more than a remote likelihood that a material misstatement of the consolidated financial statements would not have been prevented or detected.”

ProElite also reported it has identified internal accounting control problems.

In 2007, IFL reported revenue of $5.7 million and a loss of $21.3 million. The company is cutting the number of events it stages from 13 last year to six or seven this year. Commissioner Kurt Otto, who earned $250,000 in 2007, was let go on March 31 and instead will be paid $10,000 per event as a consultant.

UFC is broadcast on Spike, while IFL has deals with Fox Sports Net and MyNetwork. ProElite, which recently signed renowned fighter Kimbo Slice, announced in February a broadcast package with CBS.

Pro Elite 10-K Notes

ProElite released its 10-K annual report last week. The company has lost a total of $31.3 million through the end of 2007, including $27.1 million last year alone. As with the IFL, the company's auditors have also expressed "substantial doubt" about ProElite's ability to continue as a going concern. However, the company's practical reality is much brighter thanks to the continued financial support of CBS/Showtime, whereas the IFL must find a financial patron.

The company generated $5.3 million in revenue in 2007 including $4.6 million in live event revenue, $447,679 in television and pay-per-view revenue, and $184,192 in merchandise, DVDs, and licensing fees. Live event expenses total $9.6 million including $2.9 million in production costs paid to Showtime. The company ran 18 events which would bring the cost per event to around $533,000, nearly one-third of the $1.2 million per event spent by the IFL. The difference would seem to be a step discount in production costs provided by Showtime, however, that's really just speculation, especially in comparing across companies and accounting practices.

In 2007 the company received no license fee from Showtime and bore all the production costs. This year the company will be receiving a licensing fee, reported by Dave Meltzer to be between $50,000 (for ShowXC events) up to $500,000 (for major events), to be split between ProElite and Showtime and the network will bear the cost of production. As part of the deal Showtime received a number of stock warrants and the right to appoint one member of the ProElite board of directors.

ProElite.com was the most eye catching item line on the company's balance sheet, costing $3.3 million in 2007 while generating only $68,782 in revenue. That is a mind boggling amount of money to spend on a website. The website is an integral part of the company's business plan:

Our business plan is to capitalize on the popularity and growth of mixed martial arts in building an “elite” fight brand, EliteXC, while also taking advantage of the Internet to capture fans, fighters and organizations in combat sports with its ProElite.com social networking web site. We plan on reaching MMA fans and participants through normal marketing channels (print, television, radio) and harnessing the efficient networking available over the Internet. We are in the process of acquiring multiple on- and off-line brands to increase our entertainment properties, content libraries and tool set offerings for fighters, fans and organizations in and around MMA. EliteXC, our fight brand, produces and promotes live events featuring the top fighters in MMA while ProElite.com has created an MMA grassroots online social network. We cross-promote our Internet and live properties so that each can strengthen the other.

The filing also recognized what many outside the company have identified as a major flaw in the company's management, absentee executives:

The Company’s executives, directors and shareholders have business relationships requiring them to advise, manage and/or provide services to other businesses. The Company has engaged in transactions with some of these businesses. Due to the wide-ranging network of contacts and business relationships of our executives, directors and shareholders, the Company was not always able to devote sufficient resources to identify, monitor and report all transactions with such businesses in a timely manner.

These executives appear to have been well paid based on the salaries of CEO David DeLuca ($200,000), President of EliteXC Gary Shaw ($435,724), and President of ProElite.com Kelly Perdew ($475,224). The company recently went through a management restructuring with DeLuca being promoted to Chairman of the Board and replaced by Charles Champion as CEO. The move was made shortly after the CBS deal was announced and is believed to represent CBS's increasing influence on the company.

IFL 10-K Notes

The IFL released its 10-K annual report last week. The company has lost a total of $31 million through the end of 2007, including $21.3 million last year alone. The biggest news from the filing was the inclusion of an opinion from the company's independent auditors expressing doubt about its ability to continue as a going concern. From the filing:

As a result of our continued losses, our independent auditors have included an explanatory paragraph in our financial statements for the fiscal year ended December 31, 2007, expressing doubt as to our ability to continue as a going concern. The inclusion of a going concern explanatory paragraph in the report of our independent auditors could make it more difficult for us to secure additional financing or enter into strategic relationships with distributors on terms acceptable to us, if at all, and may materially and adversely affect the terms of any financing that we may obtain...

We expect that our revenues from operations will be insufficient to meet our projected expenses, unless we are able to increase our revenues through other sources, such as entering into a strategic alliance with a significant television broadcaster or sports or entertainment enterprise or exploiting our digital rights. Unless we can successfully increase our revenues through these other sources (in excess of the costs we incur to generate these revenues), we will likely be required to raise additional capital through equity or debt financings by the end of the second quarter or in the early part of the third quarter of 2008. Such capital may not be available, or, if it is available, may not be available on terms that are acceptable to us. A future financing may be substantially dilutive to our existing stockholders and could result in significant financial and operating covenants that would negatively impact our business. If we are unable to raise sufficient additional capital on acceptable terms, we will likely have a cash shortage which would disrupt our operations, have a material adverse effect on our financial condition or business prospects and could result in insolvency.

In other words, the end game is approaching for the company as it will need additional capital to continue through the end of the year. The inclusion of a going concern explanatory paragraph will make the company's efforts to find additional funding more difficult. At the end of 2007 the company had $6.1 million in cash.

The IFL's largest expense in 2007 was the promotion, staging, and production of live events. The company spent $15.9 million on 13 events last year, an average of $1.2 million per event. The company generated $5.7 million in total revenue including $2.4 million in live event revenue (mainly consisting of the live gate), $1.6 million in TV rights fees from MyNetworkTV, $1 million in international TV rights fees (with programming in 50 countries), $498,000 in sponsorship revenue, and $117,544 in branding revenue.

The company currently has 27 employees in two offices in New York and Las Vegas (20/7 split). The total staff payroll for 2007 was $4.5 million. Jay Larkin (CEO) and Michael O'Keefe (CFO) currently have base salaries of $325,000 and $240,000 respectively.

Ultimate Cash Machine: UFC on the Cover of Forbes

Zuffa, parent company of the UFC, is the subject of the cover story of the May 5th editor of highly respected and influential Forbes magazine. The piece is now available online at Forbes.com.

The article represents yet another mainstream breakthrough for MMA in general and the UFC in particular. The feature is very flattering and well worth reading in its entirety, however, the most interesting quotes concern the potential sale of the company. MMAPayout.com reported on rumors that the company was for sale earlier this year.

According the article the Fertittas "field pleas from private equity and media firms to sell UFC," with offers they claim exceeded $1 billion. The piece notes that price would be "rich in comparison with the $1.4 billion market value for publicly traded World Wrestling Entertainment, which has almost double the revenue" (SEE: Bird of a Feather: Zuffa's Future in Light of WWE's 2007 Financial Results).

Later in the article, when asked if he wants the Fertittas to cash out while the price is high, Dana White responded, "absolutely not. I love what I do and think we are just scratching the surface with this sport." The article states that "neither brother seems inclined to sell, either," with Frank Fertitta saying, "I'm sure we could find something to do if we did, but we're having too much fun."

At first blush, the article seems to have a certain "thou doth protest too much" element to it as it pertains to rumors that the company is for sale. The piece places Zuffa's value at $1 billion plus, projects $250 million in gross sales for the company this year, and estimates that the UFC controls 90% of the MMA industry.

Other interesting items in the piece:

• UFC 81 is said to have grossed $25 million, including 500,000 pay-per-view buys.
  
• The piece says the the UFC's pay-per-view events often draw 3 million 18-49 year old males (assuming six people watch at each purchasing household).
• Mark Cuban argues that the UFC is vulnerable because it is "completely dependent on pay-per-view." Cuban believes that fans will become increasingly less inclined to pay for events with HDNet and CBS offering live events for free. White responded: "I'm flattered that Frank, Lorenzo and I have made this business look so easy. But CBS doesn't understand the fight business, and Mark Cuban doesn't know anything about the fight business, either. All he's concerned with is drawing subscribers to HDNet so he can sell out to Time Warner or Comcast."
• White believes MMA will reach $1 billion in sales as an industry within five years.
• The piece states that most of the company's 275 fighters take home at least $100,000 a year for three or four fights each. Chuck Liddell and Quinton Jackson are said to make several million dollars per year including endorsements from companies including Dell and Nike.

Update on UFC's Push for Sanctioning in NY

The UFC's drive for sanctioning in New York continues. The company is bullish on its chances, targeting a debut by Q1 '09, if not later this year. The company is pushing hard the economic impact of MMA in its lobbying effort:

"Our events have brought millions of dollars in tax and tourist revenue to nearly every city we have held an event in," said UFC president Dana White. "Once New York joins New Jersey, Pennsylvania and 30 other states in regulating mixed martial arts, we will be thrilled to offer a UFC event this year to an upstate city and replicate its success all over the state."

According to the article UFC 82 in generated $11 million of economic activity in Columbus, Ohio.

WrestleMania 24 Early Returns

WWE presented its biggest event of the year two weeks ago in Miami. The 24th annual installment featured Floyd Mayweather v. Big Show, Ric Flair's retirement match, and a main event pitting arguably the company's three biggest stars against one another for the WWE title. The Wrestling Observer Newsletter reported the following early financial results:

• Reported Live Attendance: 74,635 (4th Largest crowd in company history).
  
• Paid Attendance: Approximately 64,000 (unofficial; would also be fourth best in company history).
• Live Gate: $5,854,590 (all-time record for the company; also breaks the North American MMA record of $5,397,300 for UFC 66: Liddell v. Ortiz II).
• Pay-per-view: No estimate available, but with a price tag of $54.95 it is expected to become the highest grossing pro wrestling event of all time barring a very disappointing number. The event is widely expected to top one million buys.
  
• Total Revenue: Including gate, pay-per-view, and merchandise, Dave Meltzer estimated that the company could gross $61.5 million for the event.
  

Two interesting thoughts from the report for MMA:

1. When will we see the first major U.S. stadium show (excluding the disasterous K-1 show in the LA Coliseum)? The UFC loves the spectacle and there is nothing more spectacular than a well attended stadium show.
   
2. The power of recurring event branding has yet to be unleashed in MMA. The UFC has began establishing its December show as the biggest of the year, but hasn't chosen to do recurring branding for it or any of its events. When will MMA establish its Superbowl, World Series, Daytona 500, WrestleMania, etc.?

Bodog Reportedly Close to Finished

After losing a reputed $38 million last year, Bodog appears to be on its last legs according to a report in The Wrestling Observer Newsletter. Most of the company's employees have been let go, there are no events planned (although they are sponsoring some smaller events), there is no new TV deal, and a recently proposed small budget (with the idea of slowly rebuilding) by Jeff Osborne was turned down.

IFL & ProElite File NT 10-Ks

The IFL and ProElite both filed NT 10-Ks in the last three days. The respective statements concerning each company's delay:

International Fight League, Inc. (the “Company”) is unable to file Annual Report on Form 10-K for the year ended December 31, 2007 within the prescribed time period because the Company could not complete the preparation of the required information without unreasonably effort and expense due to shortage of finance staff, changes in senior management and time delays to complete an internal control assessment.

In March 2008, ProElite, Inc. (the “Company”) changed management, including the Chief Executive Officer and the Chief Financial Officer. This new management is gathering information to make certain decisions, which require significant judgment, relating to the Company’s financial statements for the year ended December 31, 2007. The analysis of this information could result in non-cash charges to operations that could be significant in total. However, management has not yet completed its analysis and decision making. Therefore, the Company requires additional time to file its Annual Report on Form 10-KSB for the year ended December 31, 2007. It is anticipated that these financial statements together with the Form 10-KSB will be filed by April 15, 2008.

Zuffa Executive Speaks Out on International Expansion and Pro Wrestling Crossover

Fighting Spirit Magazine has a very candid interview with Marshall Zelaznik, President of Zuffa's United Kingdom division, Zuffa UK Limited. In addition to overseeing the company's UK expansion, Zelaznik is also responsible for extending the UFC brand internationally. The interview is one of the most revealing and candid ever given by a Zuffa executive. The interview is now available in its entirety on MMAPayout.com.

FULL INTERVIEW: Marshall's Law (Extended Version)

Art of War Restructuring

Last Friday SUN Sports and Entertainment Inc. (SSPE.PK), the producer of Art of War, announced a financial restructuring, changes in management, and the consolidation of operating facilities. The company now plans to produce events underwritten by strategic partners and major sponsors in an effort to control costs and reduce debt.

This is the latest reminder that as hot as MMA may be based on recent events such as the Budweiser-UFC and CBS-EXC partnerships, it remains an incredibly difficult business to be profitable in as a promoter unless you are Zuffa.

Birds of a Feather: Zuffa's Future in Light of WWE's 2007 Financial Results

World Wrestling Entertainment probably deserves more attention in the MMA industry than it receives. The company is the Zuffa's closest corporate comparable, not to mention growing evidence that suggests pro wrestling, not boxing, is MMA's true competition. Furthermore, Dana White is an admitted admirer of Vince McMahon and the similarities between the company's promotional models is undeniable. In many ways WWE is what Zuffa aspires to be.

This month WWE announced its results from the fourth quarter and full year of 2007. The headline number was an all-time record $485 million in full year revenue. That number represents a 17% increase over 2006.

The company posted a EBITDA of $77.8 million, up from $74.3 million last year. Excluding the $15.7 million loss the company took on a feature film, EBITDA would have been $93.5 million, a 26% increase over last year. For comparison, Zuffa is believed to have grossed $190 million in 2006, with an EBITDA of $76 million.

In looking at WWE's finances, compared with what we know about Zuffa's, it's interesting to see just how diversified WWE has become, which is perhaps an indication of where Zuffa's future lies. The company began, much like Zuffa, as primarily a live events and pay-per-view company, however, today those two sources account for only roughly 40% of its total revenues, compared to 75% for Zuffa.

Consumer products and digital media were WWE's growth leaders with each posting its own 24% increase in revenue over last year. Live and televised event revenue was up 8% with much of the increase attributable to increased international touring. Pay-per-view was relatively flat at $94.3 million compared to $93.6 million last year. That number includes Wrestlemania 23 which drew 1.2 million total buys and over 750,000 domestic buys.

The most obvious under developed revenue streams for Zuffa are in the area of merchandising and licensing. Zuffa appears to be moving in that direction with a video game in development and the mass mailing of a merchandise catalog last fall. However, it will be interesting to see how the company handles what may become a difficult situation moving forward as it tries to develop its merchandise business. Unlike WWE where performers get a cut of merchandise sales, Zuffa pays no merchandise royalties to its fighters per the exclusive ancillary rights clause in the standard Zuffa contract. That played a significant role in Randy Couture's dispute with the company and will become an increasingly sensitive issue as merchandise revenue accelerates.

Zuffa also has the potential for substantial growth of its television rights fees, especially if the company is able to establish a successful live weekly format scheduled to debut in 2010. WWE took in $92 million in television rights fees last year, principally for four hours of original weekly programming. In contrast, the UFC is believed to receive roughly $33 million per year in television rights fees from Spike for two seasons of the Ultimate Fighter, four live events, and a handful of new episodes of Unleashed under the terms of its recent contract extension.

Diversifying its revenue streams is particularly important for Zuffa because there doesn't seem to be much room for significant growth on pay-per-view, at least not domestically. It's hard to imagine the company can do much better than the 500,000 per show it averaged in 2006. In fact, many believe that is is unlikely to be able to merely sustain those numbers. Pay-per-view in the United States at this point is simply not a growth business.

Buys for typical shows should flatten out at best over the long term while there is room for growth on the mega shows (with two million looking like the ceiling base on Oscar De La Hoya's last fight). The realities of domestic pay-per-view are likely a big factor in the company's international push. WWE has already developed a very strong international pay-per-view business.

Like WWE, new media and international expansion are also key growth areas. For Zuffa, international expansion still seems a bit premature given that by White's own admission the company has only scratched the surface of its potential in the United States. However, it is becoming obvious that part of the company's urgency regarding international expansion relates to its major new media initiative with Yahoo!. White has consistently associated the two together in public, including in last week's announcement of Yahoo! as the UFC's online pay-per-view distributor.

As discussed before, internet pay-per-view has the potential to change the entire industry, a subject worthy of a discussion all its own.

The comparison between WWE and Zuffa takes on even more significance given a recent report in the Wrestling Observer Newsletter that WWE is at least investigating the possibility of entering the MMA space. This is not a new development, however, it has taken on increased scrutiny in light of rumors that the UFC may be for sale. The company has flirted with MMA before including a meeting with Dream Stage Entertainment about purchasing Pride last year and being solicited by Dana White in 2004 when the Fertitta's were considering selling the UFC.

It is interesting to consider the value of Zuffa in light of the recent sale rumors and the closely comparable relationship between the two companies. WWE has a market cap of $1.28 billion, roughly 16.4 times its 2007 EBITDA. Therefore, using Zuffa's reported 2006 EBITDA of $76 million, Zuffa would be valued at roughly $1.25 billion.

However, it should be noted that 2006 represented the company's best year and all indications are that 2007's EBITDA, and thus value, was significantly lower, perhaps as much as 50% lower. The company has also secured a $350 million secured credit facility since that time, which must be factored into valuation.

Perhaps most importantly, it remains to be seen whether or not Zuffa's current business model, the one that closely resembles the WWE, can be maintained going forward. Most within the industry believe that a model more closely resembling boxing is inevitable and there are growing signs that the company's current promotional model is under attack.

If true, Zuffa's window to become the WWE of MMA may be closing before it was ever really opened.

New Details on Zuffa's $325 Million Loan

According to a document obtained by MMAPayout.com, the interest rate on Zuffa's $325 million senior secured credit facility was 7.357% as of July 31, 2007. At that rate, annual interest rate payments would amount to approximately $23.9 million.

According to the document, Zuffa's bonds appear to be variable rate securities. The interest rate on variable rate securities change constantly as they are tied to a benchmark, often the famous Libor index. Therefore, because of the decreasing rates in the credit market over the past six months, it is likely that Zuffa's interest rate costs have actually declined since June of 2007, despite a cut in its credit rating from BB to BB- last fall.

SEE: Behind the Curtains: Zuffa's Finances Come Into Focus and S&P Cuts Zuffa's Credit Rating, Issues Negative Outlook

Jay Larkin Interview

Sam Caplan has a great interview with IFL President and CEO Jay Larkin at CBSSports.com. Larkin gives a very frank assessment of the current landscape in the MMA industry, a look ahead at where he thinks its going, and where the IFL fits in moving forward. One key quote:

It's a tough slough, because you basically have got an 800 pound gorilla and the UFC's name has become -- for better or for worse -- synonymous with MMA. UFC has proven to be extremely proprietary and extremely closed to the outside world. They've done a magnificent job positioning themselves to be the only name in this sport. So when people such as sponsors and networks hear "MMA," they immediately assume you're talking about UFC. That may be good for them in the short-term (but) it's very bad for the industry and the sport in the long-term...

If you look around the MMA landscape, from what I can see, no one is making money except UFC. Some are hemorrhaging money (and) some are surviving, but no one is making money except UFC. Now that is not the sign of a healthy sport. That is not the sign of a growing category; it's the sign of a growing company. So that's troubling.

Larkin is one of the most impressive people in the sport and the interview is well worth the read for anyone interested in the business of MMA.

Declining Bonuses Sign of Belt Tightening for UFC?

Dave Meltzer reported in this week's Wrestling Observer Newsletter that bonuses for best match, submission, and knockout at UFC 80 were $35,000. At UFC 78 the bonuses were worth $55,000 while at UFC 79 the bonuses paid $50,000. Meltzer cited the decline as symptomatic of across the board belt tightening for the company.

It should be noted that the disclosed performance bonuses have fluctuated greatly over the last year as the company attempted to find the right price point to incentive fighters into pushing the action. There are some indications that the bonuses are being priced based on the profile of the show, however, the decline of bonuses from UFC 78 to 79 is inconsistent with that theory.

Sources have told MMAPayout.com that the cuts have also affected the undisclosed discretionary bonuses typically given to top fighters following their fights. However, in recent media appearances White had given some indications that the company would be moving away from undisclosed bonuses in the wake of the Couture dispute.

Tough Sledding: UFC Finding International Expansion Isn't Easy

International expansion is all the rage in the information age. Technological advances have made global domination more feasible, while access to relatively cheap credit in recent years has made the process more affordable than ever. As a result nearly every major company has some global expansion plan.

Not to be left behind, the UFC launched an aggressive international expansion campaign of its own last spring. With UFC 80 emanating from Newcastle, England this Saturday and a report that the company has canceled its next planned international event, the time seems right to take stock of the effort thus far and to date the results have been mixed at best.

In Q1 and Q2 of 2007, operating costs more than doubled as a result of production expenses associated with two events held in the U.K. and an aggressive marketing campaign to establish the UFC brand in the U.K. At the time, S&P stated that it expected Zuffa "to reduce the scale of its international UFC bouts going forward, with the intent to limit potential losses generated by these events and return consolidated cash flow to a level more consistent with 2006 results."

However, following Q3 the company's credit rating was cut as Zuffa was again chided by S&P for its "material losses in international markets" with an accompanying threat of another rating cut if results do not improve.

According to sources within the industry, the company spent roughly one-to-one on marketing-to-revenue on its international events last year, which including increased production costs would make the events large loss leaders. Dave Meltzer reported in the Wrestling Observer Newsletter last year that financial officers within the company opposed the scale of the international expansion effort at the time it was implemented.

To his credit, UFC President Dana White has openly acknowledged the challenge the company has faced in its expansion efforts. "I don’t think there is anything profitable about the European market right now," White said in a recent conference call. "We’re getting our ass kicked over there." White went on to say that the television and pay-per-view markets are completely different in Europe, but the company is "stomping through this thing until we can figure out."

The latter statement is emblematic of the company's entire international expansion effort and perhaps explains a great deal of the problems they've faced. Figure it out as you go is not exactly the best business strategy. For whatever reason, the company seems to have jumped into international expansion head over heels on the assumption that the UFC brand would carry it through.

It's the same type of hubris the company showed in its purchase of Pride and its bold plans to resurrect the brand in Japan. Of course, the company was ultimately forced to abandon Japan and the Pride brand altogether. Whether that same fate awaits its European expansion effort remains to be seen. At present, the most interesting questions revolve around why the company was so eager to expand internationally, particularly in Europe, and why the 3/8 event is being moved back stateside.

No one questions the wisdom of international expansion in the long term, but the sense of urgency with which the company has pursued it has raised some eyebrows within the industry. The timing seems rushed, especially with the company still struggling to firmly establish itself in the United States, much less in North America where the company has yet to run live events in Canada or Mexico. The explanation may be as simple as hubris or perhaps there are greater motives at the heart of the initiative that are yet to be revealed.

On its face, the movement of the 3/8 event looks like a cost cutting measure. With the company facing growing pressure from its creditors to control costs, specifically by reducing the scope of its international presence, it may be that the cooler, more financially prudent, heads in the company finally prevailed over White's unbridled, some would say irresponsible, optimism. However, it is also possible that the company has secured a network television deal and the event is being moved to accommodate a live prime time television event. Time will tell.

Ultimately, the international expansion initiative is quintessential White: impetuous, ruthlessly ambitious, and visionary. Its the management philosophy and style that has delivered the company to its current destination, atop the MMA industry. Whether or not the company has outgrown that paradigm remains to be seen. What is clear is that White has a lot riding on international expansion and the outcome of the effort will loom large on his legacy and the company's financial future.

MMAPayout.com's 2007 Power Rankings

MMAPayout.com's 2007 Power Rankings are based on the following formula: gross pay-per-view revenue ($40 per buy) + gross live gate revenue. Fighters are credited only for pay-per-view events headlined in 2007. A minimum of two main events is required in order to appear on the list, resulting in the exclusion of Tito Ortiz, Quinton Jackson, Tim Sylvia, Georges St. Pierre, Michael Bisbing, Travis Lutter, Matt Serra, Yushin Okami, Gabriel Gonzaga, and Keith Jardine, as well as Dan Henderson.

MMAPayout.com's 2007 Power Rankings:

1. Chuck Liddell - $81.1 million (3 Events)*
2. Randy Couture - $48.7 million (2)
   
3. Anderson Silva - $38.3 million (2)
   
4. Rashad Evans - >$33.7 million (2)**
   
5. Wanderlei Silva - $32.5 million (2)***
   
6. Rich Franklin - $24.7 million (2)
   

*NOTE - Includes UFC 79 at an estimated 600,000 buys.
**NOTE - A complete pay-per-view estimate for UFC 78 is not yet available, however, it is believed to have done in excess of 325,000 buys. Therefore, Evans grossed is credited with at least $33.7 million in gross revenue.
***NOTE - Includes UFC 79 estimate as well as Pride 2/24 show which did 40,000 buys and a $2 million gate.

For comparison, here are the 2006 Power Rankings using the same criteria. Excluded from the list are Couture, David Loiseau, Forrest Griffin, Renato Sobral, BJ Penn, Anderson Silva, and Georges St. Pierre.

MMAPayout.com's 2006 Power Rankings:

1. Tito Ortiz - $102 million (3)
   
2. Chuck Liddell - $89.9 million (3)
3. Matt Hughes - $67.4 million (3)
4. Royce Graice/Ken Shamrock - $62.1 million (2)*
5. Rich Franklin - $27.6 million (2)

*NOTE - Gracie and Shamrock would not qualify for the list, but were so significant to business and so similar in drawing capacity that it seems to make sense to include them as a pair.

Cumulative rankings for the current boom period look like this:

MMAPayout.com's 2006-2007 Combined Power Rankings:

1. Chuck Liddell - $142.1 million (5)
2. Tito Ortiz - $120.6 million (4)
3. Randy Couture - $68.1 million (3)
   
4. Matt Hughes - $67.4 million (3)
5. Royce Graice/Ken Shamrock - $62.1 million (2)
6. Rich Franklin - $52.3 million (4)
7. Anderson Silva - $52.1 million (3)
8. Georges St. Pierre - $40.9 million (2)
   
9. Rashad Evans - >$33.7 million (2)
10. Wanderlei Silva - $32.5 million (2)*

*NOTE - Not including Pride PPV events from 2006.

UPDATE: S&P Cuts Zuffa's Credit Rating, Issues Negative Outlook

I have full details on S&P's most recent report on Zuffa at Sherdog.com. The lead:

Standard & Poor's, a leading financial services company, cut Zuffa's credit rating in a report issued Tuesday. The downgrade from "BB" to "BB-" was the result of the company's weaker than expected performance in the third quarter of 2007. This marked "the second consecutive quarter of operating performance that was meaningfully below [S&P's] expectations."

FULL STORY: S&P Cuts Zuffa's Credit Rating, Issues Negative Outlook