Fantex, the platform that lets investors trade stock in professional athletes and entertainers, has just announced it is opening reservations for its Vernon Davis IPO at $10 per share. A couple months ago, I envisioned how Wall Street might analyze this area, and after speaking with its CEO and co-founder Buck French, it's clear there's more to the story.
How it works
The way Fantex's business works is relatively simple: It acquires a minority interest in an athlete's brand value, which is financed through an IPO. Any investor willing to purchase shares of an athlete's tracking stock should be confident that: (a) he'll stay healthy, and (b) he's marketable. Having a brand that stretches beyond the field into areas like broadcasting, journalism, and art is a major bonus.
Source: Fantex.
As seen in Fantex's prospectus, an athlete's "fair value" is determined by a range of criteria including:
- Current playing contract
- Current endorsement deals
- Future on-field earnings potential
- Future off-field earnings potential
- Age and career longevity
- Social footprint, i.e. number of Twitter followers and Facebook Likes
- "Intangibles," like personal drive, ambition, and ability to communicate
- TV contract value and attendance trends in athlete's market
With each of its players, Fantex uses these factors, among others, to create a "forecast of … potential gross brand income," according to French.
A case study
Vernon Davis, who signed with the company in October, will sell 10% of his brand value for a reported $4 million. This implies that Davis, a star tight end with the 49ers, is worth an estimated $40 million for the remainder of his football-related career.
The soon-to-be 30-year-old will make a little under $14 million in salary before becoming a free agent in two years, and assuming he retires after his age 37 season like fellow TE standout Tony Gonzalez, a similar salary means Davis would accumulate an additional $42 million in on-field income. Throw in endorsement deals worth another $500,000 or so per year with NutraClick, New League Productions, Krave Pure Foods and Disney (DIS -1.43%)/ABC owned KGO-TV, and this places his total discounted brand value at $54 million before he retires -- an upside of nearly 35% from his post-IPO price.
The earlier Davis stops playing football, the smaller these potential gains. If he retires at age 36, the estimated brand value falls to $48 million with a smaller upside of 19%. At age 35, the gains would theoretically be 3%, and if Davis retires in 2018 at age 34, an investment in his Fantex tracking stock would probably lose money.
| Retirement Year | Retirement Age | Contract Income (est.) | Endorsements (est.) | Perceived Investment Return* |
|---|---|---|---|---|
| 2016 | 32 | $7.0M | $0.5M | -46% |
| 2017 | 33 | $7.0M | $0.5M | -29% |
| 2018 | 34 | $7.0M | $0.5M | -13% |
| 2019 | 35 | $7.0M | $0.5M | 3% |
| 2020 | 36 | $7.0M | $0.5M | 19% |
| 2021 | 37 | $7.0M | $0.5M | 34% |
Source: Author's calculations. *Discount rate of 2.5% used.
Of course, there are a lot of variables at play here. A cheaper contract near the end of his time as an NFL player would likely hurt investor returns, as would a loss of endorsement deals. The discount rate, as always, can also be debated, and if a higher figure is used, the upside falls.
Vernon Davis in 2010. Source: U.S. Air Force, Public Domain.
On the flip side, these calculations assume Vernon Davis won't be able to replace his on-field salary with other sources of income after retirement, but if he could -- as a highly paid broadcaster or coach, for example -- investor returns might be greater.
Want a hypothetical example? Using this line of reasoning, someone like the Eagles' Trent Cole is probably more valuable than linebacking peer Tamba Hali of the Chiefs, despite the fact that their average salaries and ages are similar (neither are under contract with Fantex). Cole has a bigger social media presence and arguably more marketable intangibles -- he's the host of Blitz TV, an outdoor show on Comcast's (CMCSA -6.16%) NBC Sports. This bodes well for Cole's brand after he retires, in the same way that Clay Matthews' strong interview skills, or Peyton Manning's potential to become a TV broadcaster give their careers more longevity than the average NFLer.
Post-retirement value is a crucial factor every Fantex investor needs to think about, and it's one of the three things French emphasized in our conversation.
Here are the other two.
Don't forget about dividends
A common misconception about Fantex's tracking stocks is that they won't appeal to those looking for a dividend. On the contrary, this is what French had to say about the topic:
It is absolutely our expectation to pay dividends on a regular basis. As any company, we reserve the right not to, [but the] goal is to pay out a minimum of 20% or greater of available funds as dividends…. We think that's a tremendously important component to the security.
Fantex should pay dividends as long as it becomes profitable, which will depend on its ability to cultivate the brand values of its athletes. The more valuable a brand is, the more brand income Fantex receives from its minority stake. A major endorsement deal for Vernon Davis, or a signing bonus, will likely boost his tracking stock's intrinsic value, but it will also directly improve Fantex's ability to pay dividends.
There's a brand value cap
Additionally, there's a 30% cap on the amount of football-related income an athlete can sell to Fantex, and the reason is simple: moral hazard. According to French, the company's "goal is always to have the vast majority of the brand income owned by the brand," so players are "incentivized to continue to do what they do." He adds, "There's a balance that has to be struck," and it makes sense.
I'll let an earlier article I wrote sum up this point:
If you're an NFL rookie and your brand value is estimated at $50 million, would you have any incentive to put your body on the line if a brokerage already guaranteed you $40 million of this value?
The future
Going forward, you have the decision whether to invest in the Vernon Davis IPO or not. For a two-time Pro Bowl tight end playing on a perennial contender, his endorsement deals are surprisingly under-developed. If Fantex is able to boost Davis' brand value, there's probably upside to his tracking stock, as well as potential dividend payments.
On the other hand, Davis isn't exactly young, and he has had his share of injuries. The chart above illustrates this risk clearly: An early retirement would likely lead to a massive investment loss.
True value hunters might want to wait for a younger player to hit Fantex's platform, assuming that happens in the next few years. The NFL's wage scale depresses rookies' contracts, and this may give investors a better opportunity to get in on the ground floor of a potential superstar like Johnny Manziel or Teddy Bridgewater. As French puts it, "the up and coming brands...are the ones that obviously have tremendous upside," and it's easy to understand why.
Regardless of your opinion on sports as an investment, a world where athletes are analyzed like stocks is a win for fans. There will be more analysis, more coverage, and ultimately, more information about everyone's favorite players. That's something no one can cheer against.
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