Why Under Armour, Inc. Might Spend $285 Million On 1 Athlete

Under Armour is trying to secure a massive deal with Kevin Durant. Here's why.

Aug 25, 2014 at 8:00PM
Under Armour Kevin

Image credit: Keith Allison/Flickr

Under Armour (NYSE:UA) has always seemed to enjoy taking Nike's (NYSE:NKE) things. And that might soon include a coveted sponsorship deal with none other than NBA league MVP Kevin Durant.

But it'll come at a price. According to ESPN's Darren Rovell, Under Armour has offered Durant a 10-year deal worth between $265 million and $285 million. The offer is said to include not only cash, but also an equity stake in the athletic-apparel maker and a community center built in his mother's name.

This would be Under Armour's single largest sponsorship to date. Not that it comes as a huge surprise: In January, the company announced that it had succeeded in wrestling away Adidas' longtime sponsorship of the University of Notre Dame, thanks to a new 10-year deal worth an estimated $90 million -- the largest in college sports history, by the way.

Under Armour's offer to Durant is also significantly higher than Nike's latest, which reportedly guaranteed a minimum base and royalty rate of a least $20 million per year. For perspective, Nike originally signed the Oklahoma City Thunder forward straight out of college in 2007 with a $60 million, seven-year deal that expires this summer.

But this doesn't mean Durant's loyalty to the Swoosh will also expire. In fact, he apparently wanted to sign so badly with Nike after college that he resisted the allure of an $80 million contract from Adidas. And per the terms of his current deal, Nike can legally prevent Durant from leaving if it matches Under Armour's offer.

Is he worth it?
That begs the question: Does Nike really think Durant is worth that kind of money? To be sure, I think he is.

Consider this: Nike sold roughly $175 million at retail of Durant's signature shoes last year in the U.S. alone, up from just $35 million at retail in 2012. But even though that came as Durant secured his fourth season in five years as the NBA's leading scorer, it was before he secured his first league MVP award, for which his powerful, emotional acceptance speech won the hearts of millions of basketball fans around the world.

So it appears a safe bet that the meteoric rise of Durant's brand will only continue gaining momentum.

Why Under Armour needs Kevin Durant
Securing this deal is unquestionably a big risk for Under Armour, and would mean spending nearly a tenth of its current annual marketing budget on a single athlete.

But given the momentum Nike is seeing from the brand, Durant could also be exactly what Under Armour needs to kick-start its young basketball footwear business. After all, Under Armour only launched its first basketball shoe back in 2010. The following year, Under Armour CEO Kevin Plank took a dig at Nike with this comment: "Basketball is a great example where one company dominates 90-plus percent of the market. And what I can commit to you is that I'm not going to make predictions on exactly how much market share, but I would much rather be sitting where we are because it's coming. We will take market share."

Alas, only $30 million of Under Armour's 2014 revenue is expected to come from basketball shoes, representing just 1% of its guidance for full-year sales in the range of $2.98 billion to $3 billion. Given the company's significantly smaller scale -- based on market cap alone, Nike is nearly five times as large as Under Armour -- UA investors should know it will take time to grow a Durant-centric line to the same level as seen at Nike. 

Nonetheless, a 10-year contract would give the company plenty of time to do so. As Plank stated last month, "We're still continuing to hunt down becoming the No. 1 athletic footwear brand in the world."

From an investor's standpoint, it's hard to think of a better way to accomplish that goal than to sponsor arguably the best player basketball has to offer.

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Steve Symington owns shares of Apple and Under Armour. The Motley Fool recommends Apple, Nike, and Under Armour. The Motley Fool owns shares of Apple, Nike, and Under Armour. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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