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"Show me the money" became much more than a famous and funny line from Jerry Maguire recently. It took on a whole new meaning with the launch of Fantex, a company that allows everyday folks to buy stock in a professional athlete. At the moment, the only "stock" slated for future sale on the Fantex exchange is Houston Texans running back Arian Foster, though the company expects to add more players from all of the major league sports.
Do they really expect to be able to make a go of this, investing in a professional sports player's brand value the way we invest in a company? "We absolutely have an expectation to pay out a dividend," says Buck French, co-founder and chief executive of Fantex. (On Oct. 17, the Fool ran an excellent article on Fantex that explains the platform in great detail.)
The seed of Fantex
Why on Earth does the team at Fantex think that we will buy stock in major league players? My guess is that they see the tremendous untapped value safely lodged away in the bodies and personas of professional athletes. And then there's the fact that last year the Los Angeles Dodgers sold for a cool $2.1 billion to an affiliate of Guggenheim Partners LLC, raising the value of Major League Baseball teams by about 35%. A rising tide does lift all boats, or in this case, all bats.
The hidden value in professional sports
That wild value was for an entire team, and everything that comes with that team's brand. Does that really translate to individual players? Let's have a look under the hood of a team's value.
The New York Yankees (my home team) is one of the 10 MLB teams valued at more than $1 billion. That's right, $1 billion. Here's where it gets really interesting: the team value (the revenue related to the actual sport as played by the players) is the largest component of the valuations of 29 out of the 30 total MLB teams. (The only exception is the New York Mets.)
The remaining amount of value is split among several other components: regional cable TV network ownership (the largest amount of the value for the Mets), related business such as real estate, and media content. The largest portion of the value of a team by and large is locked up in the activity of its players.
Show all of us the money
Fantex is liberating that value and then giving all of us a way to access it for our benefit, and the benefit of the players.
After all, when you invest in an individual player, that player is receiving a hefty share of that investment. In the case of Foster, if all 1,055,000 shares of "Fantex Series Arian Foster Convertible Tracking Stock" sell for the asking price of $10 per share, he gets $10 million and in exchange agrees to deliver 20% of his future earnings to shareholders. Not bad for a pro ball player who's been in the game at the professional level for 5 years (already 1.5 years longer than the average NFL player.) Also, keep in mind that running backs tend to have the shortest careers of any NFL players because the very nature of their role on the field causes them to get the heck knocked out of them more than players in any other position.
We, the fans and investors, get to have a piece of a player and hopefully a nice tidy sum as the player's career progresses on and off the field. The player gets an early payday, plus an added incentive to work harder day in and day out to build his (or her) brand.
At second glance, this isn't weird at all
While it initially boggles the mind to think about the big business of professional sports, and the potential that exchanges like Fantex hold for all of us as fans and investors, it shouldn't surprise us at all. Look at the companies that make their homes in Silicon Valley, Silicon Alley, Silicon Prairie, and everywhere in between. How does a VC or angel investor value a company? The initial idea, product, and traction that the product gains in the market among customers, advocates, and fans are certainly important.
However, what's the largest part of any start-up's valuation? The people. Who are the founders? Where did they go to school? Whom do they know? What do they know? How driven are they? Can they get the job done in a highly competitive environment, jump over any obstacle, and plow through hardship while continuously radiating a never-say-die passion for the company they're building?
Can we count on them to deliver, no matter what? That's what really matters to an investor. And it's what really matters to us as sports fans, too.
Another way to invest
Skeptical about investing in athletes? A better investing approach is to choose great companies and stick with them for the long term. The Motley Fool's free report "3 Stocks That Will Help You Retire Rich" names stocks that could help you build long-term wealth and retire well, along with some winning wealth-building strategies that every investor should be aware of. Click here now to keep reading.