Why the Arian Foster IPO Probably Isn’t a Good Investment

Great player, bad investment. Source: AJ Guel

Want to own a slice of Arian Foster's success? One company has a solution for you. 

Fantex has acquired the right to 20% of the running back's income, which it plans to sell to investors for $10.55 million.

Investors who pony up $10 for the 1.055 million shares will get their share of 20% of all of Arian Foster's future earnings including his NFL salary, endorsement contracts, and all other income. Fantex believes it can help Foster increase his brand value and annual income, delivering value for shareholders and the famous running back.

But there are a handful of reasons why this IPO may not produce Pro Bowl performance for investors.

1. Fees, and more fees
Fantex will discount its shares by 5% to underwriters to sell shares to the public. To counter this cost, it plans to sell 1.055 million shares of stock to raise a total of $10 million.

But the fees don't stop there. Along with a one-time 5% discount for underwriters, Fantex will take 5% of all proceeds received from the agreement with the all-star running back. Thus, if Foster earns $20 million in any given year, $200,000 will go to Fantex, and $3.8 million (proceeds after a 5% fee) will go to shareholders.

In addition, three corporate officers to manage the company are expected to cost the company $400,000 in the second half of 2013. On an annualized basis, that could add up to $800,000 in costs each year just to keep the contract in place. 

2. Fantex controls all the decisions
Ordinarily, shareholders have some input on a company's board of directors and its future strategy. However, when shares of Arian Foster's future income go public, Fantex will hold on to 99% of all voting power, giving it complete control of how the company is managed.

To be fair, Fantex does have an economic incentive to maximize its earnings, given its lucrative 5% management fee, but vesting complete voting control in one entity could leave investors holding the bag if Fantex turns out to be a poor promoter of the Arian Foster brand.

3. His existing contract is a relatively small part of the equation
Foster's current contract with the Houston Texans is worth up to $23.5 million through 2016. That contract, if it pays out entirely, would reward shareholders with gross distributions of $4.7 million, accounting for roughly 45% of the market value of the publicly traded shares.

Fantex admits that approximately 75% of its estimated future brand value for Arian Foster comes from contracts that are not yet in place. That is to say that buying a share at IPO is largely a bet on contracts that are, at this time, just pie in the sky.

4. Foster doesn't have to work
This is so important to the investment that I think it's worth quoting directly from the SEC filing:

Arian Foster has no obligation to take any actions to generate brand income, and subject to the limited obligation to reimburse us funds as discussed above, he may choose not to do anything to generate brand income following the date on which we pay the purchase price.

He's free to take the money and run, with only one restriction: If he retires from the NFL within two years, Fantex can request that Foster return $10.5 million back to investors. After the two-year period, the Texans star is free to retire, and keep the $10 million payment from investors.

Root for Foster, but keep your money in your pocket
Betting on your favorite sports star may seem like a perfect alignment between your money and your Sunday leisure time, but it's important to remember the facts. Remember that Foster agreed to sell 20% of his income for $10 million. He took this deal because he thinks he's getting a better risk-adjusted return than the people who buy a part of his income.

Secondly, take notice to the very high expenses that come as part of the offering. Fantex will get to keep 5% of gross income, and its handpicked executives will earn six-figure salaries for managing this contract.

Sometimes, public shareholders simply get the short end of the stick. This appears to be one of those sometimes. 

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