How’s that for ROI…

In July 2016, the Ultimate Fighting Championship (“UFC”) was sold for a price tag of $4 billion, making it the most expensive transaction in history for a sports organization.

To give some perspective to the magnitude of the sale, Manchester United Football Club, one of the most popular football clubs in the world, with a touted global fan base of over 600 million supporters, is valued by Forbes at $3.31 billion and is quoted on the New York Stock Exchange as having a market capitalization of $2.76 billion.

For those not familiar with the sport, the UFC is a mixed martial arts promotion that allows fighters to compete in a cage fight to showcase their athleticism while giving viewers a healthy dose of show business entertainment. More fascinating than the sport itself, however, is the return on investment achieved by the first investors of the UFC, Zuffa LLC, way back in 2001 when the company was bought for just $2 million.

Based on the modest original investment, in economic terms, the sale price represents a 72% annual return, every year, from 2001. It is also an excellent example of the opportunity that lies in a good business idea that is not well executed.

Way back in 2001, the UFC was considered a violent and brutal form of entertainment that was illegal and inaccessible in most parts of the world. The initial challenge of Zuffa was to legitimize a controversial business in a manner that would allow it to be sold as a sport. In pursuit of this objective, they sought to regulate mixed martial arts, introducing rules and regulations to protect the safety of their fighters in an attempt to make it available to a wider audience.

This approach was hugely successful, with mixed martial arts eventually being accepted as a sport and fighters as athletes – a factor that has safeguarded its continued growth in popularity. Zuffa also sought to embrace different tiers of revenue, which back in 2001 was limited solely to ticket sales for live events.

Since then, the company has pushed to produce their own media content as opposed to relying on broadcasters. In so doing, they introduced pay-per-view for premium events, which today is the largest source of revenue for the company, media rights through deals with broadcasters such as FOX, and a subscription based platform which allows fans to access the UFC’s library for a monthly fee.

Succinctly put, Zuffa had identified 3 different ways to monetize their content in a manner that allowed it to evolve from a distressed event company to one worth $4 billion.

Irrespective of whether you are a fan of the UFC, there are a number of lessons one can draw from this remarkable transaction. The principal of all, however, is the fact that poorly executed businesses present a real opportunity for investors and companies looking to expand through acquisitions since they are often severely undervalued. Having been initially bought for $2 million and eventually sold for $4 billion, the UFC is an excellent example of unlocking such hidden value and monetizing from it.