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Pay the man: Making the case for giving Conor McGregor equity in the UFC

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Article Source – bloodyelbow.com

The UFC’s might be better off giving Conor McGregor a share in the company

After a record year for revenue in 2016 the UFC is off to a slow start this year. First a scheduled event in Anaheim was canceled followed by what appears to be lackluster sales for their first two pay-per-view events. Normally, this could easily be written off as the usual slow period the sport always experiences. But with the UFC’s new owners apparent high expectations for earnings, and with pay-per-view events historically being responsible for a large share of the promotion’s revenue, it’s not hard to imagine that WME-IMG has some questions. Namely when will Conor McGregor fight again and how much will it cost them when he does?

There is little doubt that Conor McGregor is the biggest star in the UFC — not only on the current roster, but in the history of the promotion. Of the 7 UFC events that have sold over 1 million PPVs, McGregor headlined 4 of them, including the 2 highest selling events in the promotion’s history. His events also rank as 5 of the 7 biggest gates in UFC history, with UFC 205: McGregor vs Alvarez holding the title of the biggest ever for the UFC.

One Million+ Selling UFC Pay-Per-Events

UFC 202 1.5 million**

UFC 196 1.317 million*

UFC 205 1.3 million**

UFC 100 1.299 million

UFC 194 1.2 million*

UFC 193 1.1 million*

UFC 200 1.009 million*

Source: * July 22nd, 2016 UFC Lender Presentation ** industry veterans’ estimate

Highest Selling Gates For The UFC

UFC 205 $17,700,000

UFC 129 $12,075,000

UFC 200 $10,700,000

UFC 194 $10,100,000

UFC 196 $8,100,000

UFC 202 $7,692,010

UFC 189 $7,200,000

Source: State Athletic Commissions

While astronomical number like these are impressive by themselves, McGregor.s true value becomes even more apparent when compared to what the average UFC PPV event generates.

According to the UFC’s lender presentation from July of last year, in 2015 the UFC averaged – per numbered PPV event – 573,077 buys and $18 million in PPV revenue. Each numbered PPV also generated $3.7 million in live event revenue. That is, approximately $22 million in revenue per event from those two sources.

The July presentation also claimed that the average UFC PPV event added $17 million to the UFC’s EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization). This, of course, was the average with blockbuster events adding even more. According to the document, for every million pay-per-views sold the UFC added $25 million to their EBITDA.

McGregor has headlined more blockbuster cards than any fighter in MMA.

The 5 UFC events headlined by McGregor have averaged 1.229 million in PPV sales and $10.16 million at the gate. This averages out to approximately $48 million in PPV and live gate revenue and an additional $35 million in EBITDA per event. Therefore McGregor’s three shows in 2016 may have been responsible for over $100 million of the UFC’s EBITDA last year.

What makes McGregor so essential for the UFC though is not just the numbers, it is also how much they need those earnings in the wake of the $4.2 billion purchase.

Interest payments on the loans will cost them an estimated $117 million a year, and according to Bloomberg the Federal reserve reprimanded Goldman Sachs twice for flouting lending guidelines when it arranged the debt deal for the UFC’s buyout. The FEDs warning was directed at the UFC’s rosy projections, which, according to the lender’s presentation, predicted an increase in EBITDA by more than $100 million to almost $300 million by June 30 of 2017.

Besides their lenders, WME-IMG has an additional incentive to hit earnings targets -$250 million in potential earn outs.

$175M paid contingent upon achieving $275M of LTM EBITDA(1), but no earlier than June 30, 2017

$75M paid contingent upon achieving $350M of LTM EBITDA(1), but no earlier than December 31, 2018

While cost cutting, contracted growth and additional PPV events are expected to increase earnings, the projections are also dependent on the promotions PPV events doing as well as they did in 2015. A difficult feat without the presence of Conor McGregor or Ronda Rousey, who has apparently retired from the sport.

McGregory is obviously fully aware of the impact he has on the UFC’s bottom line and the projections they have made, for he has made his intentions to get paid a larger share of the proceeds apparent. One would guess he has the leverage to get it, for without him it seems impossible for the UFC to reach those numbers. Unfortunately, the catch-22 is that it is just as likely to be impossible for the UFC to reach those numbers if they have to pay McGregor the amount he is seeking. This impasse could help explain why he has been considering a boxing match with Floyd Mayweather: the UFC is unwilling to cut into their own EBITDA margins to meet his demands.

What’s the solution? Well McGregor offered one in the post fight press conference after UFC 205:

Where’s my equity? If I’m the one that’s bringing this, they’ve got to come talk to me now. That’s all I know. I’ve got both belts. A chunk of money. A family on the way. You want me to stick around? You want me to keep doing what I’m doing, let’s talk. But I want ownership now. I want equal share. I want what I deserve. What I’ve earned.

While this idea was laughed at by most, perhaps the UFC should consider it. It has got to be better than the alternatives, which are not making your earning goals because McGregor is not fighting in the Octagon, or seeing your number one attraction lose badly in a boxing match with Floyd Mayweather.

Preventing either of those just might be worth a slice of the pie.

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