Wednesday, November 6, 2013

#page462 Buying and selling athlete futures - welcome to Fantex

When I speculated about the company that will eventually replace Walmart (and Amazon), I assumed that this company would reduce cost by passing most employee costs and all inventory costs on to other parties. In my example, a store (Empoprisorium) would provide a company (for example, Vizio) with an area of floor space within the store. Empoprisorium would operate the cash registers for the entire store, but (unlike Walmart) Vizio would be responsible for providing the employees to staff its store area, and would also be responsible for managing the inventory and stocking the shelves. Vizio would end up paying Empoprisorium - among other things, Empoprisorium would get 25% of all of the gross sales from Vizio.

The idea of one business taking a cut from another business is nothing new. We see it all the time. Think of the world of athletes and sports agents; the agent gets a cut of the athlete's earnings.

But what if an entire business is based upon getting a cut from the earnings of others?

Welcome to Fantex:

Fantex Inc. has agreed to buy 10 percent of the future earnings of San Francisco 49ers tight end Vernon Davis for $4 million in advance of selling shares to the public.

Two weeks ago, Fantex announced the first public offering for an athlete when it filed to raise $10.6 million priced at $10 a share, according to a filing with the Securities and Exchange Commission. Fantex’s main source of income was listed as Arian Foster, a running back for the Houston Texans who has pledged 20 percent of the money he earns both inside and outside the National Football League to the company in exchange for most of the proceeds of the IPO.

But that's only part of it. Fantex also lets you "buy" and "sell" shares in these athletes. Here's how it works:

Fantex is an all-new marketplace where you can buy and sell shares linked to the value and performance of the brand of an athlete — It's real money, real investments, and a real athlete’s brand. However, because you can only trade Fantex, Inc. tracking stocks on this platform, there is no assurance as to the development or liquidity of any trading market.

Now in the social media world there is a lot of starry-eyed wonder (and a lot of jokes) about a social media "expert's" personal brand. However, in the case of professional athletes, they truly are personal brands. Fantex counts on this relationship:

Fantex, Inc. creates a unique brand building platform for athletes to increase the reach and engagement of their brand. Fantex, Inc. signs a contract with an athlete to acquire a minority interest in their brand and builds a plan with a goal to increase its value, leveraging its marketing expertise.

So what does Fantex get?

To finance the acquisition of the contracts, Fantex, Inc. intends to offer equity securities in Fantex, Inc. and establish a tracking stock linked to the separate economic performance and value of the brand associated with the tracking stock – such as income earned from contracts, endorsements and appearance fees. Fantex, Inc. will typically attribute 95% of the acquired brand income under the brand contract to the tracking stock. In addition Fantex, Inc. will attribute to the brand certain expenses of Fantex, Inc. including in certain cases specified expenses related to other tracking stocks that may be issued in the future. Holders of shares of a tracking stock will have no direct investment in the business or assets attributed to the brand contract, associated brand or athlete. Rather an investment in a tracking stock will represent an ownership interest in Fantex, Inc. as a whole.

However, as is true of any investment, there are risks:

[Vernon] Davis lost an endorsement deal with Vita Coco brand coconut water when he talked about a rival drink on his Twitter site this month, according to ESPN....

[Arian] Foster injured his hamstring in a game against the Kansas City Chiefs on Oct. 20.

And later, Foster left a November game with a back injury.

It's no secret why "Fan" is part of the name of Fantex. In the same way that stamp collectors buy stamps and get nothing tangible in return, Fantex presumably hopes that fans will snap up tracking stock in specific athletes that they like. It takes the game of fantasy football to a whole new level. I'd call it "fantasy football on steroids," but perhaps that isn't the best choice of words.
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