Ultimate Fighting Machines

The Fertitta brothers' bare-knuckled business approach built their casino empire into a Vegas power - and now they're hitting the jackpot with a sport once denounced as 'human cockfighting.'

By Joel Stein, Business 2.0 Magazine

(Business 2.0 Magazine) -- This would be a particularly awesome time for the Fertitta brothers to finally disagree. That's because the dispute resolution clause in their ownership contract of the Ultimate Fighting Championship states that "in order to resolve a Deadlock among the LLC Members, Frank and Lorenzo shall engage in a Sport Jiu-Jitsu match under the rules as set forth herein."

Those would be three five-minute rounds refereed by UFC president Dana White and "decided by submission or points." Points, of course, being accrued by kicking the other guy in the face.

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TOUGH GUYS: Frank (left) and Lorenzo Fertitta KO'd skeptics by turning Ultimate Fighting into mass entertainment.
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Having a major business decision decided by an ultraviolent martial arts contest between brothers worth more than $700 million would be cool enough on a normal week, especially since Frank, 44, and Lorenzo, 37, not only are pretty evenly matched but claim not to have had an argument in their adult lives.

But for it to happen right now would particularly kick ass, since both brothers are wearing leg casts after having knee surgery performed on the same day, by the same doctor, in the same hospital, for the same injury - Frank's from soccer, Lorenzo's from sparring.

Right now a disagreement would legally necessitate a fight so disturbingly stomach-churning that UFC fans wouldn't even enjoy it. Or, more likely, would pay twice as much to see it.

Brotherly love, with pain

The Fertitta brothers have turned their dad's suburban Las Vegas casino into Station Casinos (Charts), the fifth-biggest gaming company in the country, a gambling and hotel empire that took in more than $1.1 billion in revenue last year and earned $309 million, more than 17 times what it made in 2002. Its stock has soared nearly eightfold over the past five years.

As a hobby, the Fertittas bought the most damaged, worthless brand in America that doesn't make cars - the Ultimate Fighting Championship - and turned it into one of the fastest-growing sports in the world, with higher ratings and more coveted ringside seats than boxing.

They spend an almost creepy amount of time together: working out every morning at the UFC offices, sitting at meetings drinking identical cans of Diet Dr. Pepper, hanging at weekend barbecues with each other's families, playing practical jokes on their employees, taking vacations on matching 200-foot Dutch yachts, and sparring with each other.

"Our sparring would get to the point where we couldn't swallow our food the next day from choking each other's esophagus," Frank explains. "So we learned to tap out earlier." They are the Extreme Kennedys.

Selling sin...softly

In a town known for outsize entrepreneurial characters - think Kirk Kerkorian and Steve Wynn or, better yet, Benny Binion and Bugsy Siegel - the Fertitta brothers are carving out their own legend by modernizing the selling of sin. They're number-crunching, service-oriented, traditional businessmen who sell gambling, violence, and sex as if they're no different from frappuccinos.

Because to them they aren't. After all, these guys grew up in Las Vegas with a dad who owned a casino. Going to the movies, playing slots, being served by bikini-clad cocktail waitresses while your kids play in the pool, watching two shirtless guys pound the crap out of each other in a metal cage - they're all the same thing.

By equating gambling and bowling (which already exist side-by-side at one of their hotels), the Fertittas have broken all kinds of casino-building rules. They have located their properties far from the fabled Strip, and catered as much to the residents of suburban Vegas as to tourists. They let natural light into their casinos, so you know what time it is. You can actually go to the lobby, check in, and get to your room without ever seeing the casino floor.

"People will gamble when they want to gamble," Lorenzo says. "They don't want it shoved down their throats." The soft sell works: While the big Strip hotels make less than half their money from gambling (the average tourist plays only 3.3 hours in a four-day stay), 86 percent of Station's operating cash flow is from slot machines - the easiest revenue stream invented since the tithe.

That's a major reason that Station is expected to post an industry-leading profit margin of 40.6 percent for 2006; rival MGM Mirage, by comparison, is expected to come in at 32.3 percent (see "Winning Hand," above right).

A sport politicians love to hate

The other thing to understand about how the Fertittas have made their bones is their special relationship with risk. Of course, everybody who does business in Vegas has to have a high tolerance for risk. But the Fertittas took on so much debt to buy desert on Vegas's outskirts in the '90s that Wall Street cut the company's stock price in half over a few months in 1996.

They kept buying. Perhaps even crazier, they also decided to buy the Ultimate Fighting Championship - a widely ridiculed bloodfest that no less a player than Sen. John McCain once tried to have banned - pouring tens of millions of their personal cash into it.

Now the UFC is minting money: A single recent pay-per-view spectacle generated $30 million. "Frank and Lorenzo," White says, "have the biggest balls of anyone I've ever met in my life."

Which is a useful thing - now in particular. Because the risks may be increasing again for the Fertittas. They remain heavily exposed to Las Vegas real estate, a market that, after years of wild growth, is finally showing signs of a potential collapse. (See "The New Rules of Real Estate,")

Station's stock is under pressure. And though the UFC is on a roll, the sport is one ring death away from becoming a national pariah.

"You always have to consider risk," Lorenzo says. "But we continue to be positive about the strategy we have in place. We're believers."

High rollers upping the ante

Entrepreneurialism is in the Fertitta brothers' blood. Their father, Frank Fertitta Jr., came to Las Vegas from Galveston, Texas, during the 1960s recession. He worked his way up from bellman at the Tropicana to building his own 5,000-square-foot locals casino with 100 slot machines in 1976.

Life with Dad was a continuous education in business basics, from focusing on delivering value to regular customers to knowing when to make the bold move. "Sitting around the family dinner, we'd talk about business," says Frank Fertitta III. "He'd say, 'Are we going to do that expansion?' That's what it was like growing up."

With that training, the brothers decided to start their own company instead of just working for their dad. In 1987, after Lorenzo graduated from business school at NYU, they started a vending company that rented out pay phones. This being Las Vegas, it quickly morphed into a company that put poker machines in bars. After a while they figured it was easier just to buy bars to put the machines into.

As Vegas's population exploded in the 1980s, the Fertittas started buying up real estate for future casinos. They accumulated huge plots of land, many in barren desert with no roads, no electricity, and no people. They were places where the brothers figured people might someday build developments and, more important, where the state might legalize gambling. Looking for cash to buy even more land, they combined their business with their dad's casino and in 1993 took Station public, raising nearly $300 million.

In 1997, when the state delineated the areas in which gambling would be allowed, it turned out that the Fertittas had guessed well. But it also turned out they wanted a whole lot more, and they further extended themselves through, among other things, a complicated land deal that brought them 6.7 percent of the Palms casino.

"The size of our company couldn't really handle it, and we put all of our chips in," Lorenzo says. Adds Frank, "We were very long on raw dirt."

What happens in Vegas, stays...off the strip?

The maneuvers spooked Wall Street. By 1998, Station had a punishing debt-to-equity ratio of more than 3 to 1, and the company's stock took a beating.

But those early land gambles laid the groundwork for much of the company's success; Station now owns more than 950 acres in suburban Las Vegas and Reno and is building on a lot of it. The Fertittas just completed a $2 billion bank credit to ramp up more construction.

Tim Poster, a dotcom millionaire who used the money he made selling Travelscape.com to Expedia to buy the Golden Nugget casino, went to high school with Lorenzo and served on the Station board of directors during the brothers' frantic landgrab.

"One of their secretaries was always on the phone calling a board meeting in a half-hour," he recalls. "And you think, 'Oh, God, what did they come up with next?'"

The Fertittas' two most recent projects make their 1990s dice-rolling look penny-ante. Enormous superluxury resorts designed to compete with the Bellagio and Mandalay Bay, the Green Valley Ranch and Red Rock together cost some $1.5 billion. They're a 20-minute drive from the Strip.

Basically, the brothers were asking people to spend $300 a night to come to Vegas to gamble, eat, and hang poolside - without actually going to Vegas. Stranger yet, they were asking beautiful people to go to clubs next to a casino filled with locals killing time before a movie. It was like inviting the hot girl in high school over to play Dungeons & Dragons.

Office decor: Doughnuts and goats

Green Valley Ranch, built with developer Greenspun Companies, which owned the land, was a huge success - to meet torrid demand, Station has expanded the resort from 200 rooms to 500 since it opened in December 2001. In April the Fertittas opened their 14th casino, the crystal-dripping Red Rock, which at $1 billion cost more per room than any hotel in Vegas history.

"Our customer has seen the volcano and the jousting match," Lorenzo says. "He doesn't want to see the tourist traps. He wants to know where he can get the best meal for the best value. When we go to New York, we don't want to eat in Times Square."

The Fertittas aren't exactly what you'd expect of a pair of risk-taking, jujitsu-fighting guys. While Frank's office at Red Rock does have a refrigerator filled with Muscle Milk, it looks much like a modern art museum. Just outside in the hallway is a huge glass-door cabinet full of prescription medication, one of the Damien Hirst pieces that Frank owns. Lorenzo's office has several boxing-themed Basquiats and Warhols.

Having an art collection is so antithetical to their tough-guy shtick that above Frank's conference table hang two enormous close-ups of doughnuts - a gag gift from Rob Wells, head of the firm's ad agency.

And, for tough guys, the brothers seem to have a lot of fun. Their in-house attorney, Rich Haskins, once spent a full day working in his office without complaint despite the fact that the Fertittas had filled the room with goats. When you work for businessmen this guy-oriented - they also privately own the Gordon Biersch brewery - you learn to live with practical jokes.

If it's big and bad, it's good

On the other hand, guys who can build a goat pen overnight obviously have a certain flair for getting things done.

The brothers are heavily involved in every part of their operations: scoping real estate, designing buildings, obsessing about ambience. Lorenzo recently walked into one of the Red Rock restaurants and asked for the background music to be turned up.

"The minute you stop micromanaging is the minute you're unsuccessful," he says. "When you're self-made, you see that the little things are what separate you from other people," Frank adds. "And if you don't care about them, people who work for you will say, 'Why should I care about the details if he doesn't?'"

Despite their micromanaging, they give the people they hire a lot of room to innovate. Rande Gerber was given so much control of Cherry, the nightclub at Red Rock, that the urinals are shaped like open, lipsticked mouths.

"At Cherry, I said I wanted the biggest, baddest sound system and lighting system of anywhere in the world," Gerber says. "They didn't ask me what it was going to cost; they just said, 'Great. We want the same thing.'"

They are, however, known for being highly demanding - you do not want to show up for a meeting with the Fertittas unprepared. It's not uncommon for employees at the UFC to be pushed so hard they quit.

"You can tell Frank that we're making millions in revenue here and millions there," White says, "and he'll say, 'What aren't we doing?'"

To make up for that kind of pressure, the Fertittas keep people around by doling out big rewards. When they hired White, they gave him 10 percent of the company. Gerber says that at the last UFC title fight, when Renato "Babalu" Sobral went down by a TKO in just 95 seconds to Chuck "The Iceman" Liddell, he saw the Fertittas run to the ambulance taking Sobral to the hospital to slip him a bonus check.

"You see him open the check, and all of a sudden he's got tears in his eyes," Gerber says. "All they said was, 'You're a champion, and we're going to see you again.' They take care of their people."

Resisting temptation

And their customers. Above all, the Fertittas believe that gambling and entertainment are a service industry.

"This business is all about convenience: ingress, egress, parking - the little things that people overlook," Frank says. They're able to generate repeat business by raking off only 4.5 percent on slots, significantly less than the major hotels on the Strip take.

Their success with locals has made Station a highly sought manager for Native American casinos and is allowing it to expand into suburban Reno. "We're all about trying to stay disciplined," Lorenzo says. "We've been tempted to go on the Strip."

The mistakes the Fertittas have made came when they strayed from their turf. When riverboat gambling was legalized on the Mississippi, the Fertittas built a casino outside St. Louis. It was a bust.

"The river floods," Frank says. "They're raising your taxes every time you turn around." They blew another $7 million on an offshore gambling website before giving up because of legal hurdles.

'Human cockfighting' on the Senate floor

But their biggest best was on the UFC, a purchase made more out of passion than business sense. The Fertittas' father took his sons to boxing matches when they were kids. Lorenzo became such a huge fan that, at age 27, he became the youngest member of the state athletic commission. A few months into his dream job, Mike Tyson bit off part of Evander Holyfield's ear.

"I was one of the guys who had to tell Mike to pack up and go," Lorenzo says. That's when it became a little less of a dream job.

At a high school friend's wedding in 1995, Lorenzo ran into another classmate, White, a boxing manager who was handling some UFC fighters. The Fertittas became instant fans and practitioners of the sport.

Most upright walkers, however, were less impressed by the UFC. The no-rules gladiatorial gorefests were so violent they'd been banned in every state with an athletic commission. McCain railed against the sport on the Senate floor in 1996 - "human cockfighting," he called it. By 1998 the UFC had lost its pay-per-view distribution. In 2000, its owner contacted White and told him he was interested in selling the league. A few months later the Fertittas, using private funds, bought it and put White in charge.

"It was taking your passion in these things you love and then making them profitable ventures," Frank says.

But early on, it looked like the Fertittas would end up coldcocked. After establishing the UFC's first rules other than "no biting, no eye-gouging, no fishhooking, and no strikes to the windpipe," as well as rounds, refs, and weight classes, Lorenzo did manage to get the sport reinstated with his friends at the athletic commissions in Nevada and New Jersey.

But after getting back on pay-per-view, the UFC staged a disastrous fight night so disorganized that it got cut off before the top card ended. The Fertittas lost $1.5 million that night.

A throwaway show becomes a hit

By 2004 they were $34 million deep into the UFC and had little to show for it.

Having allowed the Discovery Channel to shoot the reality show American Casino at Green Valley, the brothers decided that a series where a bunch of UFC fighters live together and face weekly elimination in the ring was their Trojan horse for getting on television. Their pitch was turned down by every network. So they made Spike TV, the only channel specifically designed for overly testosteroned young men, an offer it couldn't refuse: The Fertittas agreed to produce the $10 million show themselves; Spike could just air it with no production costs.

The show the Fertittas put together, called Ultimate Fighter, debuted last year, became the anemic channel's first hit, and made White a TV star. Between live bouts, taped fights, wrap-up programs, and the fourth season of the reality show, Spike TV now beams an average of 15 hours of UFC programming each week. The live fight that ended Ultimate Fighter last season drew more viewers than any HBO boxing match this season and twice as many as a Nascar race televised at the same time.

This year the show outdrew preseason football with men ages 18 to 49. Front-row spectators at recent fights have included Donald Trump, Cindy Crawford, and Paris Hilton. A UFC videogame has been made. The Fertittas are about to launch a European UFC division and have a five-year plan that they hope will put them in Canada and Mexico.

Now the financial payoff is coming. The Matt Hughes vs. Royce Gracie fight in May generated an estimated $30 million in pay-per-view fees; a UFC tournament in August drew a live gate of $3.1 million.

Taking a few knocks

The Fertittas themselves remain among the biggest fans of the league's brand of combat - and at some level, UFC wannabes. They train like madmen, hitting the gym almost every day by 7 a.m., honing a Brazilian style of jujitsu introduced to them by White. Lorenzo sometimes spars with professional UFC fighters.

"I thought Lorenzo handled a couple of guys in the UFC," says Liddell, the UFC light heavyweight champion. Frank may be even tougher. On a trip where he kept throwing friends off his yacht, someone finally threw him over, and he cracked his head on the side of the boat. Blood gushed, but he refused to go to the hospital, Gerber recalls.

Eventually he relented. "An hour later he's back with stitches in his head and a martini in his hand," Gerber says. "It was so Frank."

In fact, White says Frank is the single most aggressive person he's ever met. And White is a guy who, in order to re-sign star fighter Tito Ortiz this summer after he left the UFC in anger, agreed to let the former champion go at him for three rounds.

A Cain and Abel destiny?

The Fertittas will need every ounce of that toughness if the real estate bubble, now leaking, bursts. Promotional costs and discounts at Red Rock have crimped early returns there, and the Fertittas recently raised the cost estimate on another planned development, Aliante Station, by about a third, to $600 million.

Station's long-term debt is expected to reach $3.2 billion by year's end - troubling by some Wall Street standards, if not the brothers'. Station's stock is off about 25 percent since April. The UFC, meanwhile, is facing a growing number of copycat rivals and ongoing regulatory risk.

Still, some analysts believe that the company can weather short-term hits. "Station has a lot of upward potential, given its growth pipeline," says Brian Gordon, a partner in Vegas-based consulting firm Applied Analysis. "We believe there's clearly upward potential for the company."

The Fertittas, of course, are up for any challenge that comes - and think their unique symbiosis developed over a lifetime of working together will serve them well, whatever unfolds.

Lorenzo, despite a love of earsplitting punk rock, is the mellower of the two. "In 20 years, I can count on my hand the number of times I've heard him raise his voice," Poster says. Frank is more of a gambler, Poster says, and Lorenzo's job in the partnership is to temper Frank's instincts.

"Frank might be pushing the train in a certain direction, but Lorenzo makes sure it stays on track," he adds. "One wouldn't work without the other."

Which seems scary, since brothers who work together are supposed to have some kind of massive falling-out eventually: the Kinks, Oasis, the Mondavis, Cain and Abel, apparently some of the people involved in the Civil War.

But these guys just don't seem able to act out of sync - they even injure their knees at the same time. "They always back each other up," White says. "Even if one of them is dead wrong and the other knows it."

Maybe what Cain and Abel didn't understand was that you can avoid a lot of trouble if you're evenly matched in Brazilian jujitsu.

Joel Stein is a writer in Los Angeles. Top of page

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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer.

Morningstar: © 2014 Morningstar, Inc. All Rights Reserved.

Factset: FactSet Research Systems Inc. 2014. All rights reserved.

Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved.

Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor’s Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2014 and/or its affiliates.