They don't ring bells at the top, but when a company called Fantex Holdings plans to sell shares in professional athletes and possibly actors and musicians, a chill should race up the spine of investors.
You know this isn't your grandfather's market when a company pushing chicken wings (Buffalo Wild Wings) sells at over 40 times earnings. And when a company that dominates retail but doesn't make any money (Amazon) trades for $350 a share. And when a company that pumps old movies, TV shows, and a sliver of new content to subscribers trades at 280 times earnings (Netflix).
Let's just say that American industry ain't what it used to be.
“As General Motors goes, so goes the nation,” was relevant a long time ago. Today's nation is gaga for something different: fantasy football. Adults lining up players against each other like toy soldiers is a billion-dollar business for the companies facilitating the fun and games.
Bloomberg reports: “About 25.1 million people play fantasy football in the U.S.… About $3.38 billion is spent annually in the U.S. on fantasy sports… [T]hree-quarters of that, or about $2.54 billion, is spent on football.”
With all of this fantasizing, Wall Street doesn't want to be left out of the money. Fantex Holdings intended to sell an IPO of Houston Texan running back Arian Foster until he was injured. The plan was to market 1.06 million shares of Foster stock at $10 a share. The shares would trade on a Fantex exchange, and the company believes the shares would track Mr. Foster's future brand income, including his playing contract, corporate endorsements, and appearance fees.
Investors would be one hit away from losing all or most of their money. Luckily for them, Arian Foster's season-ending injury happened prior to the floating of his stock. However, as Peter Lattman and Steve Eder write for the New York Times:
“Risks aside, the offering is intended to capitalize on the mammoth popularity of the National Football League and fantasy football, where fans draft players and score points for touchdowns, yardage and other notable plays during the season.
If thousands of fans are willing to pay as much as $250 for an Arian Foster jersey, the thinking goes, why wouldn't they pay up for a few shares of Arian Foster stock?”
Wondering what Foster was to get out of this? $10 million, in exchange for 20% of his future income. Shareholders wouldn't have a direct claim on Foster's income or control of his brand: Fantex would. Theoretically the better Foster does, the better his stock would do. Fantex said it anticipated paying a dividend.
Aswath Damodaran, NYU professor of finance, blogged at Musings on Markets that a portion of Fantex's 20% percent claim on Foster's income “will be set aside to cover the expenses associated with managing and maintaining the Fantex platform.” Also, “Fantex views its role as not just a contractual intermediary but also as a brand building organization. Effectively, that implies that Fantex can and will use some of the Foster income to market him better (and hopefully increase endorsement income).”
Using some very rosy assumptions about Foster's career—like that the running back will play until he's 36 years old—Damodaran calculated the present value of 20% of Foster's future cash flows to be $10 million, before expenses and injury risk. Once he factors those in, Damodaran says the value of the Foster claims are $5.07 million. He admits that Mr. Foster is definitely getting the better part of the deal.
San Francisco 49er tight end Vernon Davis was the second player signed by Fantex; he promptly left last week's game with a concussion. Fantex intends to buy 10% of Mr. Davis' future earnings for $4 million. The company will sell shares to investors in a tracking stock linked to the tight end's economic performance, which includes the value of playing contracts, corporate endorsements, and appearance fees.
More bubbly signs
This all sounds newfangled, but it's been done before. In its April 2000 edition, the Elliott Wave Financial Forecast wrote:
“Another indication that a historic extreme has reached its zenith is that in recent months, even individuals have become brands. A number of them, including Dick Clark, Donna Karan, Tommy Hilfiger, Ralph Lauren, Martha Stewart and C. Everett Koop, have become publicly traded companies. All are down substantially from their close on their first day of trading, but the effort literally to buy heroes continues to spread. The latest development is at the venture capital level, where numerous promoters are busily launching Internet investment funds with superstar athletes because 'athletes have tremendous brand presence.'”
A bear market had actually begun a few days before.
John Hussman calls the current market “a textbook pre-crash bubble.” He cites a Schiller P/E above 25, that the median-stock-price-to-revenue ratio is at a record high, and that the market-cap-to-GDP ratio is approaching an all-time high. Margin debt is also at an all-time high of 2.2% of GDP, and the “this time is different” narrative is back.
As crazy as the market is, the folks at Cantor Gaming want to make the investment world even wilder. The Wall Street Journal reported last month: “The company pushed Nevada legislators this year to let investment funds bet on sports. It said this would widen the ways investors such as hedge funds could diversify.”
The bill didn't pass this session. In the future, who knows? If the bull market keeps charging ahead, investors may be able to own shares in their favorite fantasy players, while their mutual funds “invest” in wagers on the games' outcomes.
Makes getting down a bet with the corner bookie look very tame.