The Arian Foster IPO: Fantasy Football in Real Life
Arian Foster is one of the NFL's most intriguing players. He recently spoke out about the NCAA, he has been described as an "avid writer of poetry," and went "mostly vegan" last summer.
Because Foster is so quirky, today's news that a company named Fantex is holding an IPO on Arian Foster's earnings in perpetuity might sound like a joke. But it's far from it. The paperwork to offer shares tied to Foster's earnings were filed this morning with the SEC.
This is beyond fantasy football at its most extreme -- this is turning pro athletes into investments.
Is there any way this is a good idea?
What is Fantex?
The company behind the "Arian Foster IPO" is Fantex. It's by no means an amateur operator. Its president was previously the co-president of a $6.5 billion hedge fund and previously worked in Goldman Sachs' investment banking division. On its board sits John Elway, one of the best quarterbacks of all-time and now the executive vice president of the Denver Broncos.
Arian Foster is just the beginning for the company. Its goal is to create a marketplace around trading the brands of athletes. Beyond being a marketplace, the company's vision is to acquire minority interests in athletes' brands and increase their value through increased marketing endeavors.
Fantex's vision is that the deal runs in perpetuity, meaning that income from athletes -- even if it means they're speaking at an event 20 years from now -- is paid out to stockholders.
How do the economics work?
In the case of Arian Foster, 1.055 million shares are being sold for $10 a piece. In return, investors are entitled to 20% of all brand-related income from Foster in perpetuity. Fantex highlights areas like Foster's football contracts, endorsements, broadcasting, and speaking engagements all as "brand-related" areas of income. If Arian Foster appears in a television show as himself (as he recently did in Hawaii Five-O), shareholders are entitled to that income. If he appears as a different character, they're not.
Once all shares are sold, income generation goes back to Feb. 28, when the company signed a contract with Foster.
For potential investors in Foster, the big problem is that he's 27-years old. For most athletes, that's the prime of their careers, but running backs have notoriously short careers. Foster has about $23.5 million left to be paid on his contract with the Texans, which runs through the 2016 season. Assuming he collects all income on that contract, shareholders would collect a bit less than $5 million.
The problem is that the final three years of his contract aren't guaranteed and 2016 looks particularly dicey. If the Texans cut him that year, they get just a $2.5 million hit to their salary cap. If Foster is following the usual trajectory of running backs, there's a good chance he won't be collecting his $6.5 million contract in 2016.
So investors in Arian Foster are not only counting on him to continue performing past the time running backs begin to struggle, but also on his endorsement deals and his "brand" living on well past his playing career.
What could possibly go wrong?
But even more than the questionable ROI, there's really no shortage of potential problems with the idea.
Owners of a publicly traded company, through an elected board, can force changes. If a CEO isn't working, he can be ousted in favor of someone who has a better chance of building shareholder value. That's not the case with the Fantex deal.
Let's look at Arian Foster, an athlete who comes across as more than a bit mercurial. What if he decides to retire in two years, and rather than being a lifetime "brand," decides to write poetry instead of becoming a broadcaster or taking part in other shareholder-friendly activities? In such a case, you can't fire Arian Foster from being Arian Foster. Shareholders are simply out of luck.
Also, while the board of directors of Fantex is permitted to pay dividends, it's by no means required. That means owners of Arian Foster will likely have to count on his stock appreciating if they want to make money on the investment.
Which presents a glaring problem -- will there really be a liquid marketplace for trading shares of Arian Foster, or for that matter, other professional athletes? If there is a marketplace, will it be based on the value of the athlete's career, or unpredictable intangibles like fan's wanting to "own a piece" of their favorite players?
And if most of the value of Foster's brand value comes from his long-term brand, will shareholders really be interested in collecting 20% from Foster's potential speaking engagements and broadcasting income across the next 20 years? Will Fantex be around to facilitate trades and enforce Foster's contract?
Finally, while Fantex says they vetted Foster's financials, it's not a secret that a whole lot of retired athletes go bankrupt. ESPN's 30 for 30 recently filmed a special on the phenomenon called "Broke." There are no restrictions on the players taking out debt or acting financially irresponsible. While this might not come into play with Foster, at a larger scale of players, it's definitely a concern.
At the end of the day, the bottom line is that Fantex is a start-up, which makes it inherently risky, even if it does have some very smart and experienced employees and board members. If you want to own a piece of your favorite professional athlete, make sure you're using money you're willing to see disappear.
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