Recently, one of the more interesting initial public offerings filed was for a share in the future earnings of Houston Texans running back Arian Foster. The company would allow investors to buy stakes in professional athletes and other notable names. But it may have hit a snag this week.
Here is the story from the New York Times last week describing the deal:
On Thursday, a start-up company announced a new trading exchange for investors to buy and sell interests in professional athletes. Backed by executives from Silicon Valley, Wall Street and the sports world, the company plans to create stocks tied to an athlete’s financial performance.
After considering a number of possibilities for its inaugural initial public offering, the company found a charismatic candidate in Arian Foster, the Pro Bowl running back of the Houston Texans. Investors in the deal will receive stock linked to Mr. Foster’s future earnings, which includes the value of his playing contracts, corporate endorsements and appearance fees.
The company, Fantex Holdings, has grand ambitions beyond a Foster I.P.O. — it hopes to sign up more football players and other athletes, as well as celebrities like pop singers and Hollywood actors.
But if such an investment sounds speculative, that is because it is. In a filing for the Foster deal with securities regulators, Fantex laid out 37 pages of risk factors, including a possible career-ending injury or a performance slump.
Seems like those risk factors are already coming to bear after Sunday’s game when Foster had a disappointing performance and pulled his hamstring. Here’s the Monday story from the New York Times:
Three days later, on Sunday, Mr. Foster had one of the worst outings in his five years in the National Football League. He carried the ball just four times for 11 yards before leaving the Texans game in the first half with a pulled hamstring.
The chance of injury was one of the many risks Fantex disclosed in the Foster I.P.O. Fantex is selling about $10 million worth of stock to pay Mr. Foster for a 20 percent interest in his future income, which includes the value of his playing contracts, corporate endorsements and appearance fees. Shareholders will own interests in a tracking stock whose performance is intended to be linked to Mr. Foster’s future economic success.
Investors have the next couple of weeks to place orders. Unlike a traditional I.P.O., this offering has no road show where the company and its bankers meet with potential investors to promote the deal. Instead, marketing materials are limited to the Fantex Web site and a lengthy prospectus with 37 pages of risk factors detailing what might go wrong with the investment.
Fantex, based in San Francisco, has registered the I.P.O. with the Securities and Exchange Commission, and shares are going to trade on a trading platform operated by Fantex. The Foster offering is the company’s first, but it hopes to issue more for additional football players as well as for other professional athletes and entertainers.
The company is focusing on small investors, with an investment minimum of just $10.
Making its debut with Mr. Foster, especially given the timing of the deal, had some people scratching their heads. Mr. Foster has led all running backs in touchdowns in two of the last three seasons, while racking up well over 1,000 yards each year – stats that placed him firmly in the game’s top tier of players, and made him a favorite in fans’ N.F.L. fantasy leagues.
But coming into this year, there was some uncertainty surrounding Mr. Foster, who had sustained a heavy workload and was showing signs of wear and tear with both calf and back ailments. Running backs historically have a high risk of injury.
The Financial Times pointed out that so-called tracking stocks aren’t new, but have fallen out of favor:
During the go-go days of the nineties, the appetite for technology and telecom stocks was so strong that Wall Street came up with a novel way to give investors exposure to a company’s subsidiary without having to spin it off.
They were called tracking stocks and the fad largely faded away, with rare exceptions today at companies such as John Malone’s Liberty Interactive. At the time, those often came in the form of offerings in ecommerce or wireless units, giving the parent company tax advantages and greater control over its subsidiary.
Tracking stocks have long been criticised for their lack of investor protections, with the shares carrying even fewer rights accorded to most shareholders. For instance, buyers of the Arian Foster shares technically own stakes in Fantex Inc, a subsidiary company of Fantex Holdings, but they have no voting power. In addition to the risk of injury to Mr Foster, as illustrated in Sunday’s game, the offering document also lists 37 pages of risk factors.
While an IPO would likely increase Foster’s brand as investors bet on his ability to pull in more endorsement contracts, it’s still tied to his performance on the field. He’ll need to continue to boost his stats in order to attract investors. This latest outing was just one game, but the timing couldn’t have been worse for those betting on his continued success. But much like fantasy football, losing $10 may be worth the fun of saying you invested on the ground floor.