The biggest player trade: IPOs for sports stars

Buying a share in a star athlete's success presents a whole new ballgame for investors, but a sudden career-ending injury could mean that losing money is just a hit away.

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“You just lost 9 per cent of your value, what’s your response to that?”

That’s how an interview with your favourite football player might kick off if US startup Fantex succeeds in building a global trading market for professional athletes.

Fantex is currently seeking regulatory approvals for a US IPO offering “tracking stock” linked to an individual athlete.

The first investment opportunity is to buy a share in the career of American NFL player Arian Foster, with around 1 million shares of “Fantex Series Arian Foster Convertible Tracking Stock” being offered to mum and dad investors for $US10 per share.

In exchange for the $US10 million raised, the athlete must then handover 20 per cent of his or her future earnings from both playing and off-field activities like endorsements, or TV appearances.

Fantex is essentially a fantasy league with real money. It’s an opportunity for people to feel a sense of ownership and deal on a real live platform.

The company is basing its business model and potential success on this sense of desire for ownership. It vicariously involves diehard sport fans in the real action, whereas 10 or 15 years ago the only involvement would be sitting in the stands at a live match or with their friends cheering their team on in the pub.

But for the privilege of being able to play that game investors will potentially take the risk of investing $10 and it returning $2. This will happen, for example, when a career interrupting, or worse, career-ending injury makes the future earning capacity of the sporting star negligible, and the stock’s value drop instantly close to zero.

The risk for the athlete is straightforward to calculate, because they enter into a deal where upfront they know what the deal is worth. The only thing they do not know is their future earning potential, 20 per cent of which goes to Fantex to offset what the athlete gets upfront.

The “risk” for the athlete is the “loss” of 20 per cent of such a big amount of money that it would have been better not to receive the upfront payment, but ride out the career and bank the money along the way. But for the public, who invest in the athlete, the risk is huge.

In many ways, the deal is an insurance policy opportunity for athletes and their management to bank potential value early and offset the risk of injury and non performance by a take of future revenue.

But as soon as the athlete’s career ends, or the performance drops, there is very little that anybody can do to lift the value of that athlete’s stocks. The mining value of the stock has a limited life.

For athletes and in particular their management agencies, this is a potentially very beneficial opportunity. Who would not want to be paid for potential that is yet to materialise? Most athlete stocks, unless you are Michael Jordan or Roger Federer, are unlikely to create equity that can be leveraged beyond their active sporting career and turned into value-added services that keep revenues coming in.

Could it work in Australia?

For such a model to work, you need a lot of athletes to allow investors to build a portfolio and spread the risk and returns of investment. For now, Fantex is trialling the platform with just one.

When the athlete’s career nears an end, Fantex suggests investors would then convert their athlete stock into platform common stock. If you liken this to a situation where you buy and sell on a regular stock exchange, when a company goes into receivership or is unsuccessful, the stock is worthless and investors are forced to take a loss.

In the Australian Football League, four or five years is the average career of a player and, at the end of it, there’s very little earning capacity left other than for a few superstars.

So in other words, you need for listed athletes to have long, successful careers because otherwise the only way to create value would require the exchange to sign them up very early, at a low cost, and then offer potential for growth.

A third requirement is that listed athletes need to represent massive earning potential in order to offer the prospect of value growth. This is unlikely in an Australian context, in that the best paid athletes in Australian competitions would equate to the worst paid athletes in some US or European-based competitions.

Although contract values are increasing in Australia, along with other major sporting markets, Australian salaries are growing from a low base. Take the example of Australian “diamond kid” Lance Franklin, who recently signed a ten-year $9 million contract with the AFL. His stock, for example, would not offer significant scope for growth, even when he only is in the middle of his career.

Last but not least, for investors to have a sense of control and flexibility, you need to be able to offer portfolio options, if nothing else to spread risk. Punters need the opportunity to invest in properties that have different risk profiles and earning capacity, so that one loss could be offset by another win.

If a smart Australian entrepreneur were to secure a large number of Australian athletes, the platform could work, albeit on a much smaller scale. But absolute growth in the value of player contracts is always in line with the potential they have to tap a market and influence a market in which sponsors try to gain market share. The biggest sport in Australia domestically is AFL, but there is very little growth potential beyond our shores, given that the AFL sponsors are limited to a market of 23 million people.

Side effects

If Fantex manages to create a market and ends up with hundreds of athletes and potentially teams trading on the exchange, what about the pressure to perform on behalf of the stockholders?

The listing on the exchange would amplify existing pressure on athletes to perform, especially when their performance is debated daily in terms of their stock value. For example, an injured athlete may lie about his or her health, play on, and be more likely to choose to play with the assistance of performance-enhancing drugs.

But irrespective of all of the above, the Fantex model might actually work, largely thanks to our insatiable appetite for the drama, rivalry, passion, emotion and energy that come with being involved in elite sport.

To own a piece of the action and have a sense of involvement in the outcome of the sporting contest might just convince ordinairy mums and dads to put their money into backing the next Ian Thorpe.

Hans Westerbeek does not work for, consult to, own shares in or receive funding from any company or organisation that would benefit from this article, and has no relevant affiliations.

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