Novel investment firm aims to tap sports stars’ income potential

SAN FRANCISCO — Professional athletes frequently get traded to other teams, but San Francisco 49ers tight end Vernon Davis is about to be the first ever to be traded like a stock.

Davis, an eight-year veteran of the National Football League, is the litmus test for a risky concept: that sports stars should be treated like public companies, whose moneymaking potential can be bought and sold on an exchange by ordinary investors. San Francisco-based Fantex Inc. plans to operate the exchange and will orchestrate Davis’s initial public offering of stock after getting regulatory approval from the Securities and Exchange Commission.

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The deal requires Fantex to pay Davis $4 million in exchange for 10 percent of his future earnings, including some of his off-field income. To cover Davis’s fee, Fantex seeks to sell 421,100 shares of stock at $10 apiece. The company hopes to complete the initial public offering in the next few weeks.

Davis, 30, will need to make more than $40 million just to deliver a small return on Fantex’s investment in him.

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Fantex is counting on him to earn most of that money after his contract with the 49ers expires in 2015. By then, Davis will be at an age when it might be difficult for him to land another big payday, although there are precedents for it. That means the deal could prove to be more profitable for Davis than the investors who buy the Fantex stock tracking his performance.

IPO expert Francis Gaskins advises investors to stay on the sidelines. Fantex’s concept ‘‘just sounds like something that P.T. Barnum would try to sell,’’ says Gaskins, IPOdesktop.com’s president. ‘‘I don’t think it’s going to work out.’’

Fantex CEO Buck French has been trying to overcome skepticism while traveling around the country for pre-IPO meetings that began in early February. The journey included traveling to 12 cities in two weeks last month on an old bus that retired NFL announcer John Madden used to ride to get to his broadcasting assignments.

‘‘We are successful businessman, and we are putting together a transaction we believe in,’’ French says.

Fantex will cover its expenses by taking a small cut of the revenue generated by Davis. Investors who own the Davis tracking stock could profit from a combination of the player’s earnings and gains in the value of their shares.

The income will come from Davis’s career football earnings dating back to October, as well as any money he makes from off-the-field endorsements or other jobs, such as sports broadcasting, for the rest of his life.

The deal covers only earnings tied to his athletic success. If Davis decides to do something like sell insurance after his playing days are over, Fantex won’t get any of that money. His income from his holdings in a Jamba Juice franchise and a San Jose, Calif., art gallery is already excluded.

The Fantex IPO is part of ‘‘a land rush to see who can come up with the next clever concept to bring fans closer to the game,’’ says veteran sports agent Leigh Steinberg. ‘‘It’s a manifestation of the different ancillary revenue flows that players, speculators and investors can engage in, all of which is created by the love of sports.’’

No US sports operation is more popular than the NFL, which has seen its annual revenue soar from $4 billion to about $10 billion during the past 14 years. Commissioner Roger Goodell has set a goal of reaching $25 billion by 2027. Most of the money is coming from TV networks that are willing to pay steadily higher fees to attract large audiences that watch games live instead of on DVRs later — a major draw for advertisers.

Major League Baseball, with annual revenue estimated at about $8 billion, and the National Basketball Association, with estimated annual revenue of about $5 billion, also are thriving.

As the stakes in sports are rising, so is the money paid to athletes. Forbes magazine’s 2013 list of the world’s 100 top-paid professional athletes required a minimum annual income of $16 million. New Orleans Saints quarterback Drew Brees, with $51 million in annual income, led the 13 NFL players who made the Forbes list.

Fantex is focusing on players in a lower-income bracket. Besides Davis, the company also has lined up IPOs tied to Houston Texans running back Arian Foster and Buffalo Bills quarterback EJ Manuel. None of them have a contract that will pay more than $6.5 million next year. Fantex hopes to eventually sign similar IPO deals with other athletes outside of football.

Athletes who sign deals with Fantex get a guaranteed payment upfront and promises of help managing their personal brands for years to come. Some of the guidance may be provided by NFL Hall of Fame quarterback John Elway, a director on Fantex’s holding company, and retired golf star Jack Nicklaus, who is a Fantex adviser.

Davis isn’t discussing his reasons for participating in the IPO yet because of securities regulations that discourage public comments that could sway investors considering whether to buy newly issued stock. He is normally outspoken and has a wide range of interests. Besides his art gallery and Jamba Juice franchise, Davis is such a big fan of curling that he was honorary captain of the USA’s team during last month’s Winter Olympics.

French, Fantex’s CEO, is a long-time entrepreneur who scored his biggest windfall 14 years ago when he sold one of his previous companies, OnLink Technologies, to software maker Siebel Systems for $760 million. He came up with the idea for Fantex two years ago with another former Silicon Valley venture capitalist, David Beirne, and Dave Mullin, who had been a chief financial officer at several other companies and is now filling the same role at Fantex.

Fantex is piggybacking on the rising popularity of fantasy sports — a pastime that involves people forming leagues that revolve around the statistics of real athletes. Each fantasy participant drafts players to fill different positions. Points are scored based on how well players do in real life. At the end of the season, the winner of the fantasy league wins a prize, usually a financial jackpot consisting of the entry fees.

An estimated 33.5 million people in the United States participated in at least one fantasy sports league last year, according to the Fantasy Sports Trade Association. The money spent on the fantasy games totaled about $3.7 billion, or an average of $111 per person, the group estimated. Football is, by far, the most popular sport for fantasy leagues.

The performance of the stock tracking Davis’s career will probably hinge on whether he lands another big contract after his deal with the 49ers expires. He could end up making nearly $10.3 million, including bonuses, during the next two seasons, according to Fantex’s IPO documents.

None of that money is guaranteed, highlighting the pitfalls of betting on the ephemeral careers of athletes. Injuries are a hazard in all sports, but they are more severe and frequent amid football’s jarring collisions.

Davis has never had to sit out an entire season, though he has missed some games because of injuries. After analyzing the longevity of 212 other tight ends from 1990 through 2010, Fantex concluded Davis should be able to play for nearly 14 years.

Article source: http://www.bostonglobe.com/business/2014/03/25/risky-ipo-seeks-new-way-trade-star-athletes/94EQLbNuYZS395MvwIAb7H/story.html

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