Zuffa Investor Alerts

Cage Fighting Investor: Eaton Vance Management

Recently, Zuffa enlisted Deutsche Bank, Goldman Sachs, J.P. Morgan, and Bank of America Merrill Lynch in order to refinance its existing debt with a new term loan B. While the deal underwriters are the usual Wall Street banks, a term loan B is aimed at institutional investors such as mutual funds and insurance companies. So what other money managers are willing to invest their clients’ money in this kind of bloody business? 

Here is one example of a money manager who has previously bought Zuffa debt:

Scott H. Page is a vice president of Eaton Vance Management, portfolio manager on Eaton Vance's bank loan team and head of the Bank Loan Investment group. He graduated from Williams College in 1981 and has a M.B.A. from the Amos Tuck School of Dartmouth College.[1] Pieces of Zuffa debt can be found in mutual fund and insurance fund portfolios that he manages.

Portfolios That Owned Zuffa LLC’s Term Loan B (2.25%, Due 6/19/2015), as of 12/31/2012

Xyience's Russell Pike Gambled Millions at Red Rock Casino

While Running UFC Sponsor Xyience, Russell Pike Gambled Millions at Station’s Red Rock Casino.

The primary owners of the Ultimate Fighting Championship (UFC), brothers Frank and Lorenzo Fertitta, are also the majority owners of Las Vegas locals casino company Station Casinos.  As we reported previously, energy drink-maker Xyience has been a sponsor of the UFC since 2004 and was founded and formerly run by Russell Pike, a four-time convicted felon with a history of civil judgments and bankruptcy.  Pike filed a personal bankruptcy in 1996[1] and he was the CEO and founder of a company, Advanced Cart Technology, in which creditors forced the company into bankruptcy that same year.[2]

While running Xyience as CEO from 2004 until late 2006, Pike and his wife Jennifer lived in an exclusive Las Vegas community called Queensridge a few miles east of Station Casinos’ flagship property, the Red Rock Casino, which opened in April 2006.[3]  Around this time, Xyience’s corporate headquarters was just up the street from the casino. 

Pike remained on Xyience’s board until early 2007 and Pike and his wife held 7.8% of the outstanding shares in Xyience when the company filed for Chapter 11 bankruptcy in 2008.[4] 

Pike, directly or through nominees, gambled significant sums at Red Rock in 2006 and 2007.  In 2006, from September until the end of the year, Pike’s handle (total money wagered) at the casino was $14,450,531.  He lost $582,057.[5]  In 2007 his handle hit $20,803,773 at the casino and he lost $2,150,501.[6]

UFC’s Ties to Xyience Run Deeper Than Sponsorship

We recently detailed the criminal and other legal problems of Russell Pike, the founder and former CEO of energy drink-maker Xyience, a sponsor of the Ultimate Fighting Championship (UFC) sponsor since 2004. It is perplexing why the UFC, whose majority owners are Nevada gaming license holders, would ever do business with someone like Pike and that the UFC’s connections to the troubled drink-maker only deepened over time. This report looks at some of those connections.

Founder and Former Principal of Xyience Convicted of Tax Evasion

Why Would the UFC Ever Do Business with Such an Individual?

One of the UFC’s sponsors three years after brothers Frank and Lorenzo Fertitta bought the cage fighting promotion in 2001 was supplement and energy drink-maker Xyience. The company’s signature product is Xenergy, the official energy drink of the UFC.[i]  Xyience’s founder and former CEO Russell Pike[ii] is a four-time convicted felon with a history of lawsuits, a personal bankruptcy, and other legal troubles dating back to the late 1980s.

While Pike is completely out of Xyience now, it is surprising the Fertittas, as Nevada gaming licensees, or any of their enterprises would ever do business or associate with a company founded and run by such an individual. Given the number of criminal convictions and judgments in civil lawsuits involving Pike in Nevada, some of which involved Las Vegas casinos or gaming-related businesses, it is hard to imagine even rudimentary due diligence would not have uncovered Pike’s troubled past.

Has Zuffa Bought Its Way Into New York?

ESPN’s NYFightBlog recently reported that UFC President Dana White is “so confident” of legalization of UFC-style cage fighting (so-called “mixed martial arts”) in the state of New York that “he has put a hold on Madison Square Garden, for one night in November, to hold the first UFC event in New York.”

Less than a year ago, an opinion poll of New York residents found that ”fifty-two percent side with opponents of mixed martial arts (MMA), who say that it is dangerous, even barbaric and that we should not allow such a violent sport to be practiced in New York.”[1]

Why does White now feel so confident of his company’s chances now? Has Zuffa spent enough money to move the elected officials in Albany this time?

Zuffa and MusclePharm: Once Bitten, Twice Not Shy

Auditors have questioned whether MusclePharm, a UFC sponsor and its official nutritional supplement supplier, can continue as a going concern, according to the company’s [OTCQB: MSLP] January 17, 2013 SEC filing.

 MusclePharm announced a sponsorship deal with the UFC on Sept. 19, 2011, shortly after the supplement company signed convicted felon and NFL footballer Michael Vick to a three-year $1.55 million endorsement deal. A federal district court judge sentenced Vick on Dec. 10, 2007 to 23 months in prison after he pleaded guilty to bankrolling an illegal dog fighting operation. Mainstream sponsors Rawlings and Air Tran ended or declined to renew their endorsement deals with Vick after his involvement in dog fighting became public.  MusclePharm was Vick’s first major endorsement deal following his 2009 return to the NFL.[1]

Death and Profits, UFC and Deutsche Bank

Zuffa LLC is certainly aware of the risk of death to UFC fighters. According to promotional agreements between Zuffa and UFC fighters (dated 2006, 2008, and 2010) we have reviewed, the company gives itself the right to purchase life insurance on its fighters:

ZUFFA shall have the right, at its election, to obtain, at ZUFFA's cost and expense, life or other insurance upon Fighter, including, but not limited to, insurance against the failure of Fighter to appear and to participate in any Bout, for the benefit of ZUFFA, and in such amounts as ZUFFA may desire.

We don’t know whether Zuffa has purchased life insurance on its fighters nor, if it has indeed done so, whether – and how much – such policies would pay the company in case a fighter dies in the octagon cage during a fight or otherwise. 

Can Zuffa Still Count on Deutsche Bank?

Since 2007, Deutsche Bank has been the main Wall Street supporter of Zuffa. Richard J. Byrne, CEO of Deutsche Bank Securities, Inc., the bank’s U.S. investment banking business, became a fan of mixed martial arts through his relationship with the Fertitta brothers and Deutsche arranged $350 million of financing for Zuffa in 2007 and helped it raise another $100 million in 2009.

Is this relationship between Zuffa and Deutsche Bank changing? Two interesting developments point to a possible shift.

First, Goldman Sachs, another Wall Street heavyweight, led the newest round of financing for Zuffa this past June, a $60 million add-on to its term loan.[1] It is not clear what role, if any, Deutsche Bank played in this transaction, but this was certainly a break from the pattern. It should also be noted that Goldman, rather than Deutsche, “brokered” Flash Entertainment’s purchase of 10% of Zuffa in 2010.

Second, Deutsche Bank’s Richard Byrne may be a fan of mixed martial arts still (see this New York Times profile), but he might have found a better investment than the UFC. According to FINRA, the financial industry regulator, Byrne became a board member of Bellator Sport Worldwide LLC in the fourth quarter of 2011 and has an $878,249 or less than 5% ownership interest in the company.[2]

Bellator Sport Worldwide, of course, is the parent company of Bellator Fighting Championship, a competitors to Zuffa’s UFC. Majority owned by the conglomerate Viacom, Bellator is going to debut its fights on SPIKE TV, also owned by Viacom, starting in January, 2013.

Are the prospects of Bellator so great that Byrne would choose not only to have an equity interest in it but also to sit on its board? Will Zuffa still be able to count on Deutsche Bank in the future if the latter’s top U.S. investment banker is personally invested in one of its competitors?

 

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[1] Chris Donnelly, “Zuffa wraps upsized $60 million add-on TL at par,” Leverage Commentary & Data, 6/7/2012. 

[2]See this FINRA BrokerCheck Report on Richard J. Byrne, dated 1/9/13. 

Zuffa Basic Financials

Total Debt Outstanding: $485 million, due June 18, 2015 (with a $50 million revolver available)

Annual Interest Expense: $20 million

Est. Annual revenue: $360 million

Est. Annual EBITDA: $144 million

Here’s how we arrived at the above numbers and estimates:

Brawling For Dollars

Zuffa LLC is a private company owned by Frank and Lorenzo Fertitta, who are majority owners of Station Casinos of Las Vegas, company president Dana White, and Flash Entertainment of Abu Dhabi. Zuffa (Italian for “brawl”) is the parent company of cage fighting promotion the Ultimate Fighting Championship (UFC).

Zuffa has borrowed nearly half a billion since 2007 and its term loan has been sold in pieces to institutional investors such as mutual funds and CLOs. Frankfurt-based Deutsche Bank has arranged most of the financing for the cage fighting firm, starting with a $325 million term loan in 2007. After two add-on deals, the firm’s covenant-lite term loan now stands at $485 million and will mature in June, 2015.

In addition to monitoring current business trends with respect to the UFC, this site also aims to provide a better understanding of how Zuffa has used the money it's borrowed, such as its high-profile 2007 purchase of Japan’s Pride Fighting Championship. There will also be profiles of Zuffa investors such as Abu Dhabi’s Flash Entertainment of Abu Dhabi and various mutual funds.

If you have any questions, suggestions or information regarding Zuffa LLC, please send an email to contact@zuffainvestoralerts.org.