Fertittas Made Billionaires by Head Blows With Chokeholds
Cain Velasquez, a tattooed mixed martial arts fighter, slams his elbow into the face of Antonio “Bigfoot” Silva, opening an inch-long gash on the bridge of the 264-pound Brazilian’s nose. Blood sprays onto the Bud Light logo in the middle of the canvas mat.
Oscar-winning actress Charlize Theron, at ringside, yells, “Fight, fight, fight!” A few feet away, Dallas Cowboys running back DeMarco Murray and Arizona Cardinals wide receiver Larry Fitzgerald gawk at the brawlers through the black chain-link fence that surrounds the Octagon. Pockets of fans among the 15,000 spectators -- who have paid an average of $300 apiece -- wave Brazilian and Mexican flags.
Blood smears across Silva’s face and blinds him, as he grapples, kicks and punches furiously at his Mexican rival, unsuccessfully fending off repeated blows to his head. With 1:24 to go in the first round, the referee declares Velasquez the winner by a technical knockout. Two members of the ring crew summon extra towels to mop up the blood before the next fight begins, Bloomberg Markets magazine reports in its September issue.
The brawl is one of five heavyweight bouts staged by Ultimate Fighting Championship on a Saturday evening in May, at the MGM Grand Garden Arena in Las Vegas. The world’s largest promoter of mixed martial arts -- a violent stew of jujitsu, wrestling and kicking in which the victor often makes his opponent “submit” through holds that approach strangulation -- it’s also one of the fastest-growing and most lucrative draws in entertainment.
UFC today has 442 fighters from 38 countries under contract and will host 14 pay-per-view events this year, bringing in $500 million in annual sales. The Las Vegas-based company signed a seven-year television contract with News Corp. (NWSA)’s Fox Media Group in July 2011, and its content, broadcast in 19 languages, is available to more than 1 billion homes in 148 countries and territories.
That’s a long way from 2001, when brothers Frank Fertitta III, now 50, and Lorenzo Fertitta, 43, heirs to their father’s casino business, bought UFC for $2 million. “It was probably the worst brand in the United States because of all of the negativity surrounding it,” Lorenzo says. The brothers say that rules adopted in most U.S. states in the past decade -- outlawing practices such as eye gouging, biting and blows to the trachea -- make it safer than other sports such as boxing.
“This is a form of violence,” says Bob Reilly, a Democratic assemblyman in New York, the only state that still bans UFC competitions. “When you give a prize for the best knockout of the evening -- and that does serious damage to a person’s brain -- it’s troubling.”
Reilly says head injuries from the sport could have repercussions on participants decades later, similar to boxing or football. Boxers Muhammad Ali and Joe Frazier both showed a decline late in life that Reilly attributes to the effects of repeated blows to the head. “We know the sad cases of Frazier and Ali,” Reilly says. “This will happen to UFC fighters, too.”
The Fertittas respond by citing a 2006 study by doctors at the Johns Hopkins University School of Medicine that found “the lower knockout rates in MMA compared to boxing may help prevent brain injury in MMA events.” The study also found that facial lacerations accounted for almost half of all injuries, followed by damage to the hands, nose and eyes.
“They take pains to make sure fights are clean and that the medical supervision at all their events is stringent,” says Joe Ravitch, founding partner of New York-based sports consulting firm Raine Group LLC, who has worked as a strategic adviser to the Fertittas for five years. “The UFC is one of the fastest- growing sports franchises in the world. The biggest risk they face, just like any sport, is losing control over those things in a new country and getting enveloped in a corruption or injury scandal.”
U.S. Senator John McCain, a Republican of Arizona, who likened the sport to “human cockfighting” back in the early 1990s, says that’s no longer the case. “They haven’t made me a fan, but they have made progress,” he told National Public Radio in a 2007 interview, which a spokesman says still reflects his view.
Brutal or not, Ultimate Fighting has made Lorenzo and Frank Fertitta billionaires. Each owns 40.5 percent of Zuffa LLC -- named after the Italian word for fight -- the private company that controls UFC. Flash Entertainment, an Abu Dhabi government investment company, bought 10 percent in 2009 in a deal that valued Zuffa at more than $2 billion, according to a person familiar with the matter who asked not to be named.
The remaining shares are owned by Dana White, a fight promoter and former high school friend of Lorenzo’s who first suggested they buy UFC. White became UFC’s public face: starring in a reality TV show, lobbying for MMA legislation and lambasting fighters if they were out of shape or put on a boring show.
The Fertittas also own a majority stake in Station Casinos LLC, a Las Vegas-based gambling outfit founded by their late father, Frank Fertitta Jr., in the 1970s. Frank III is chairman and chief executive officer of Station, which owns 17 casinos in Nevada and other locales, while Lorenzo is chairman and CEO of Zuffa.
Wearing bespoke suits over their muscular bodies at the MGM Grand arena, sporting manicured salt-and-pepper stubble and flanked by their wives and some of their children -- each has three kids, whose ages range from 12 to 22 -- the brothers talk between fights about how they’ve managed to work in tandem, building their business without starting the feuds that are so common in ultrawealthy families.
Each Fertitta controls a fortune worth at least $1 billion, according to data compiled by Bloomberg. In addition to their company stakes, they own real estate, art and four jet planes. The brothers hold their assets separately and through family trusts, they say. Las Vegas-based Fertitta Enterprises Inc., a single-family office that employs about 60 people, manages the Fertittas’ wealth. The office staff vets investment opportunities (it turned down a chance to buy stock in Facebook Inc. before its public offering), handles art transactions (each brother has a collection of art worth more than $100 million) and arranges for personal security.
The brothers not only work together; they work out together. Six mornings a week, at a 4,000-square-foot (370- square-meter) gym underneath the Station Casinos corporate offices 10 miles (16 kilometers) west of the Las Vegas Strip, they spend two hours lifting weights, jumping rope and hitting heavy bags.
Both are obsessed with nutrition and have a personal chef make them meals at least twice a day. Bowls of protein-rich cashews and almonds are always within their grasp. While they exercise, the brothers talk business.
The brothers say their regular chats help them avoid clashes. That makes them unlike some billionaire families, such as Hong Kong’s Kwok brothers. When Dhirajlal Hirachand Ambani died as India’s richest man in 2002, he left no will. His two sons, Mukesh and Anil, embarked on a bitter battle for control of publicly traded energy conglomerate Reliance Industries Ltd. Three years later, the brothers’ mother, Kokilaben, brokered a deal to split Reliance in two, giving Mukesh the company’s petrochemicals, oil and gas, and refining businesses and Anil its telecommunications, financial services and power-generating operations.
The four sons of Koch Industries Inc. founder Fred C. Koch also had a fraternal feud. In 1983, Bill and Fred Koch sold brothers Charles and David their shares in the company for $1.1 billion. Bill and Fred sued two years later, claiming they were underpaid. A 15-year legal battle ensued, and Charles and David eventually defeated their brothers in court. Charles and David Koch are now worth more than $35 billion each, according to the Bloomberg Billionaires Index.
The Fertittas spend a lot of their free time together. With their family, the brothers funded Fertitta Field at Bishop Gorman High School in Las Vegas, where their sons now play football. And they gather at the home of their mother, Victoria, with their wives and children for dinner every Sunday night -- a tradition started by their father decades ago.
Also joining the dinners is their sister, Delise Sartini, 53, who sold her stake in Station Casinos during its 2007 leveraged buyout for more than $200 million. Her husband, Blake Sartini, 53, worked with the Fertittas for 15 years before creating Golden Gaming Inc., a closely held Las Vegas-based slot machine business, in 2001.
Both brothers say there’s no pressure for their children to join either business, where their succession plans involve one brother taking over for the other.
“I want my kids to do whatever makes them happy and what their passion is,” Frank Fertitta says. His oldest daughter recently graduated from college and will soon join a yearlong management-training program at Station. Then she plans to enroll in business school.
Frank Fertitta Jr., the family patriarch, was born in Galveston, Texas, the grandson of Italian immigrants. In 1959, he moved to Las Vegas with Victoria and their infant daughter and landed a job as a bellman at the Tropicana hotel. He worked his way up in the casino business, acting as a blackjack dealer, pit boss and general manager for properties such as the Stardust, Sahara and Fremont.
In 1975, Fertitta Jr. joined with three partners to build a casino off Sahara Boulevard, on a patch of desert west of the Las Vegas Strip adjacent to the Mini-Price Motor Inn. Fertitta’s partners wanted to add a casino and some amenities alongside the small hotel.
“People thought it was crazy at that time to open a casino that wasn’t located either on the Strip or in downtown Las Vegas,” says Frank Fertitta III. “Dad wanted to cater to locals -- all the cabdrivers, cocktail waitresses, blackjack dealers.”
The Casino, which is now called Palace Station, opened in 1976 and featured 100 slot machines, six gaming tables and 90 employees. A year later, Frank Fertitta III started working in the family business, beginning as a construction worker, during his school breaks. After graduating from the University of Southern California with a business degree in 1984, Frank started managing the casino with his father during the day -- and dealing blackjack and craps at night. By then, the casino was generating $16 million in earnings before interest, taxes, depreciation and amortization.
Younger brother Lorenzo started in the casino’s accounting and food and beverage divisions during the summers while he was studying business administration at the University of San Diego.
In 1991, after Lorenzo graduated from college, the brothers used their own money to expand a slot route business -- renting slot machines out to pubs and other smaller establishments -- that they had created with brother-in-law Sartini in the mid- 1980s. The three bought land zoned for gambling in Missouri in 1992.
“We went around and around and around, planning the best way for the family to maximize its wealth,” Frank says. “We felt we could replicate and re-create the success of Palace Station over and over again.”
Their conclusion: Combine the family casino in Las Vegas with the slot route and their Missouri operations, which later included a riverboat casino, sell shares in a public offering and use the proceeds to expand the business beyond their one casino in Las Vegas. In May 1993, Station Casinos raised $294 million in its IPO, the largest gaming public offering in history at the time. It had a $600 million market capitalization at the end of its first day of trading. Frank was 31 years old, and Lorenzo was 24.
“When we took the company public, my dad decided to retire,” Frank says. Frank Jr., who had had his first heart attack at age 32, wanted to get out of the day-to-day operations and sold his stake for $230 million.
Las Vegas’s population was growing, and the brothers spent their weekends driving around town, scouting and buying up pieces of property in growing areas they believed would eventually be ideal for local gambling.
From 1993 to 2007, they developed and acquired 13 casinos in Las Vegas and other locales such as Sacramento, California, at a total cost of $5.4 billion. At the same time, the company’s stock soared almost sixfold, more than double the return of the Standard & Poor’s 500 Index.
In 2000, as the casino business took off, they were approached by White about investing in UFC, which had been founded by Brazilian fight promoter Rorion Gracie and pay-per- view entrepreneur Bob Meyrowitz in the early 1990s. UFC could be had for a song because it was a dying business: It had been banned from cable television because it was unregulated. The sport was also violent; head butting was commonplace. The only state that sanctioned the fights was New Jersey. The Fertittas themselves had recently become practitioners of jujitsu, one of the martial arts used in UFC bouts.
Their father was put off by the sport’s violent reputation. “Dad was a fairly conservative guy,” Frank says. “He asked us not to do it. I think that’s the only time that Lorenzo and I actually went against what he wanted us to do. Thank God we did.”
They bought the franchise, giving White a 10 percent cut to serve as president, and invested $38 million to rehabilitate the sport. Lorenzo, who had been on the Nevada State Athletic Commission when Mike Tyson bit off a chunk of Evander Holyfield’s ear in 1997, says he believed the only way to make UFC a viable business was to establish standardized rules for the events and have it regulated as a legitimate sport.
He held a summit in New Jersey with athletic commissioners from around the country to draft new rules for mixed martial arts. The Fertittas then lobbied state legislatures to pass laws that would sanction MMA events. In May 2012, New York Assembly Speaker Sheldon Silver, a Democrat, kept a bill that would have legalized the fights from reaching a vote.
The rules set out nine weight classes and limit most bouts to three 5-minute rounds. Opponents can wear only shorts, a groin protector, a mouthguard and gloves weighing about 5 ounces (140 grams).
The three most common ways a fighter can win are by a knockout, a decision or by forcing an opponent to submit -- when he either passes out or feels one of his bones is about to break, for instance. MMA rules also point out that in this so- called unarmed combat “a blow is usually struck which may reasonably be expected to inflict injury.”
To build an audience for pay-per-view bouts on television, the brothers spent millions of dollars to produce a reality TV show called The Ultimate Fighter that pitted rising brawlers -- most of whom are former college or Olympian wrestlers -- against each other with a chance to land a slot on a UFC pay-per-view event. The Fertittas gave the footage for free to Spike TV -- a cable channel aimed at men ages 18 to 34 -- and it quickly became a hit. By 2007, UFC had more pay-per-view buys than Time Warner Inc.’s HBO Boxing and World Wrestling Entertainment Inc.
The success was timely for the Fertittas, because Station Casinos’ luck was about to turn bad. In 2007, the Fertittas took Station private in a $9 billion leveraged buyout with billionaire Tom Barrack’s Colony Capital LLC. The brothers received about $1 billion in the transaction and reinvested $700 million into the private company.
Soon after, the worst financial crisis in 80 years began -- and the gambling business ground to a halt. “A few days after Lehman, we knew we were in a terrible spot,” Frank says.
Station couldn’t make payments on the $7.3 billion in debt the Fertittas and Colony had saddled the company with during the buyout. It filed for bankruptcy in July 2009. “For two years, we thought we were going to lose the company almost every Friday,” Frank says. “It’s a family-run business started by our father. There was a massive sense of pride in fighting for it.” Frank Jr. died in 2009 following heart surgery.
Station hired former Deutsche Bank AG analyst Marc Falcone as its chief financial officer, and he set to work renegotiating with banks to eliminate $4.8 billion in debt.
In June of last year, the company exited bankruptcy. The brothers invested $238 million -- much of it cash they had taken out of the company four years earlier -- for a combined 58 percent stake.
Former bondholders own 16 percent, and creditor Deutsche Bank owns 24 percent. The revamped Station Casinos now owns 17 casinos and is moving into new markets.
In June, the company broke ground on a $550 million casino resort the brothers will manage for the Graton Rancheria Native American tribe, 43 miles north of San Francisco. Station will receive a 2 percent development fee, plus 24 to 27 percent of net gaming revenue for seven years, to manage the casino, which will have 3,000 slot machines, 150 gaming tables and 18 poker tables.
The brothers have also set up Fertitta Interactive, which is eyeing the market for online gambling. Last year, the U.S. Department of Justice reversed its interpretation of the Interstate Wire Act of 1961, which had made intrastate and interstate online gambling illegal. At least 10 states are looking at passing bills to legalize online poker.
The Fertittas acquired poker platform CyberArts Licensing LLC in October 2011, positioning them to take poker wagers if states begin to legalize the activity. The plan would be to then run online poker games for the predominantly young and male UFC audience, they say. In July, the brothers set up a free poker game on Facebook called Ultimate Poker.
UFC’s audience continues to expand. This year, the promoter will provide Fox Media with more than 300 hours of programming, including 56 live fights. The content can be seen in more than 200 million households that are also watching Major League Baseball, National Football League and Nascar events. Spinoffs of The Ultimate Fighter are airing or in development in Australia, Canada, India and Latin American countries -- including Brazil, where UFC is second only to soccer as a spectator sport.
If, as UFC grows, the Fertittas ever wind up disagreeing on the company’s direction, they’ve found a unique way to settle things: They had their lawyers draft a document that stipulates the brothers fight each other. “If we can’t resolve our differences, we’ll have three 5-minute rounds of sport jujitsu,” Lorenzo says. “It’s on a point system, so whoever gets the most points gets to vote the other guy’s share. Dana White would be the referee.”
So far, they haven’t come to blows. “Lorenzo got the best of me on that one,” Frank says of the deal. “The older I get, the better his chances.”
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