Earlier this month, a company named Fantex announced a trading exchange for investors to buy income streams of professional athletes. For now, Fantex is offering the public the opportunity to purchase a 20% stake in NFL running back Arian Foster’s football-related earnings.
This sounds exciting, especially if you believe Fantex CEO Buck French: “By building a marketplace that allows customers to buy shares in a tracking stock linked to the value and performance of an athlete brand, Fantex is enabling a new level of brand advocacy through ownership. For the first time, people can now invest real money in a stock linked to the brand of a professional athlete.”
Fantex appears to be trading on the belief that fans will pay a premium for the opportunity to be financially involved with professional sports—or to be precise, a piece of an athlete’s income.
Fantex filed its sales prospectus with Securities and Exchange Commission, which lays out the offering in greater detail.
Here’s how Fantex’s deal works:
Fantex will attempt to sell Fantex Series Arian Foster Convertible Tracking Stock to the public. They will offer 1,055,000 shares at $10 per share. If it is fully subscribed (meaning investors purchase the entire offer), it will raise $10,550,000. If Fandex fails to raise the full offering, the deal with Arian Foster is off and investors would get their investment back.
If Fantex succeeds, $10,000,000 would be paid to Arian Foster in exchange for 20% of his football-related future earnings. It exempts several potential income streams and existing deals, including the signing bonus on his current deal and non-football income such as acting. The remaining $500,000 from the IPO goes to the underwriter. Also, Fantex Series Arian Foster has received nearly $2 million in capital from its parent company, Fantex Holdings, which is another liability.
Additionally, Fantex Holdings, the parent company, is entitled to a 5% management fee, which will further erode potential return on investment.
Worth noting: Fantex Holdings says it will spend “approximately $1,408,665 million” on legal, accounting and printing costs and various other fees associated with registration of Fantex Series Arian Foster.
If you’re scoring at home: Fantex Series Arian Foster hopes to raise $10,550,000, but it will cost an estimated $1,908,665 to do so.
NFL Hall of Famer John Elway is a member of Fantex’s board. In Fantex’s press release, Elway said, “Fantex represents a powerful new opportunity for professional athletes, and I wish it were available during my playing days.” Of course Elway wishes he could have sold a portion of his future income at a premium.
It is a great deal for athletes like Arian Foster, but what about investors? Buyer beware.
Selling a celebrity’s income stream is not a new thing. In 1997, David Bowie pledged his music catalog as collateral and then agreed to pay music royalties derived from his catalog for a 15-year term. The “Bowie Bonds” paid Bowie $55 million upfront against future royalties. Additionally, the music rights reverted back to him after 10 years. Unlike Fantex Arian Foster, there was no “marketplace,” per se, for the Bowie Bonds: The entire $55 million offering was purchased by Prudential Insurance Co. of America and Prudential held onto the bonds for the full duration.
The Arian Foster offering is different: the bond is securitized by Foster’s future income stream, which is largely unguaranteed and very unpredictable. Unlike the Bowie Bonds, there is no specified end game.
The key statement from the IPO filing: “In addition, approximately 75% (before applying any discount rates for future earnings) of the total brand income that we estimated for Arian Foster is derived from anticipated future contracts that do not exist as of the date of this prospectus, such as future endorsements, playing contracts and/or additional brand generating income from coaching, broadcasting or the like.”
Fantex hopes to raise $10.6 million in the next couple months. Despite taking place at the tail end of 2013, the deal includes “gross monies that Arian Foster receives from and after February 28, 2013.”
Foster is scheduled to earn $23.5 million from the Houston Texans over the next four seasons (including this year). However, only $8.5 million is guaranteed. Additionally, he can earn up to $2 million in performance incentives.
Foster also earns approximately $687,750 annually from endorsements and other outside income.
Let’s run the numbers: Assume the Texans keep Foster through the 2016 season under its existing deal ($23.5 million) and that Foster earns the maximum bonuses ($2 million). Let’s also assume he earns an additional $1 million annually in outside income ($4 million).
Under the above scenario, at the end of the first four years of the proposed Fantex offering, Foster will have earned $29.5 million, while Fantex investors would recoup $5.6 million ($29.5 x .20 less 5% management fee).
Fantex investors are betting that Arian Foster will get fully paid on his current contract and signs at least one more big NFL deal. Assuming the Texans pay Foster all the monies on the current contract, investors will still be $4.4 million short of breakeven. After 2016, Foster will need to earn at least $23.2 million more just for investors to breakeven.
At that point, investors must hope he signs one more lucrative NFL deal, but the market for 30-something NFL running backs is historically soft. As ESPN’s Bomani Jones astutely pointed out: “You know who doesn’t invest in the future of running backs? NFL teams, but you’re going to do it?”
And remember, if Foster repays Fantex $10.6 million, investors would simply breakeven. In order for investors to reap a reasonable return on investment, Foster would have to earn substantially more than $50 million.
What about post-career earnings? “The brand contract is intended to be effective in perpetuity…” Foster would be under no obligation to pursue coaching or broadcasting, but if he does, 20% of such income will be owed to Fantax. In perpetuity!
Clearly, Foster and his agents have signed an excellent deal with extremely favorable terms. To date, Foster is the first and only professional athlete to sign up, so he had great leverage to negotiate.
It will be interesting to see if fans, er investors, buy $10.6 million worth of Foster’s stock. It doesn’t help that in his first game after the IPO was announced, Foster left the game in the first half with a pulled hamstring.
