New Candidate for Worst IPO of All Time Goes to: Arian Foster?

IPO is short for initial public offering. As the name implies, during an IPO a company offers shares of ownership of itself to the general public for the first time. A company typically goes through an IPO to turn some of the equity in the company into liquid cash by selling small parts of the company. The person who buys a share during the IPO, just like at any time, is entitled to a share of all future value created by the company. Essentially the company gets cash it can use immediately and shareholder bets the company will increase in value so his investment grows. If the value of the company increases, then so does the value of the purchaser’s one share. If the value of the company goes down, well, you get the idea.

Historically, a company’s IPO price was determined by how much money they made. That all changed in the 90s when the tech and .com boom started. Companies that weren’t profitable started going public on the promise they would be in the future. This made valuing companies difficult, but investors feared missing the next big thing did it anyways. Going public before being profitable has become the trend since then. Companies like Twitter, who is going public in a few weeks, is currently losing money to the tune of $65M/quarter, but since people expect it to be profitable in the future, the company will have no problem raising the $1B in capital they are seeking.

A great illustration of this new model is what happened to Tesla Motors earlier this year. Tesla was an innovative company making sexy electric cars. The company needed more money for research and development, and decided to file an IPO to generate capital.  In June 2010, the company was still losing money, but the stocked debuted at $17 a share and went up to $23.89 that same day. Three years later, the price was still right around $27 having only climbed about $6 in the time since its IPO, but news came out the company was profitable for the first time. On this news, the stock price shot up and was $182 at time of writing.

Last week it was announced that Arian Foster, 27 year old three time all pro running back of the Houston Texans, was essentially filing for an IPO through sports marketing firm Fantex. Instead of offering shares of a company to the public, Foster is offering a share of his own future earnings. Fantex has acquired the right to 20% of the football player’s future income and plans to sell that 20% stake to investors for $10.55M. $10 will buy one share of the 20% of all Arian Foster’s future earnings owned by Fantex. Fantex is discounting its shares by 5% to underwriters to sell 1.055M shares to the public. Fantex is also taking 5% of all proceeds received from the agreement with Foster. Therefore, (check my math here) If Foster earns $20M in a given year, $200,000 (10%) will go to Fantex in fees, and $3.8M will go to the shareholders. Your one share would be get you about $3.60 which is barely enough for a Pumpkin Spice Latté from Starbucks. 

Arian Foster is a savvy businessman, but this is unchartered territory that Fantex is feeling out.  Buying a share of Foster as an investor means you’re betting his net worth will continue to rise over the course of his life. His current three year contract with the Texans was signed last year and is worth up to $43.5M.  $12M of that was a signing bonus that is not covered under the contract with Fantex and he has already earned more this year. The contract covered under the filing is worth up to $23.5M through 2016. Remember, contracts in the NFL are not guaranteed so if he gets cut or hurt, that number drops to $0.00.

According to the filing, for Fantex to earn money on its investment, Foster must derive 75% of his total income from future NFL playing contracts and endorsements. Foster would have to enter into at least one more multi-year NFL contract with compensation terms that compare to his current contract and generate revenue from endorsement deals in amounts significantly more than what he has now for investors to see a return on their investment.

Foster is an aging running back on a 2-5 team that is starting its third string quarterback, and just lost their defensive captain for the season. Oh and Foster exited last week’s loss against the Kansas City Chiefs prematurely with a hamstring injury. In addition to a knee surgery, Foster has missed games with previous hamstring and calf injuries. What is more, he was diagnosed with an irregular heartbeat at the end of last season. What I’m saying is that his stock is down.

Aging running backs do not get big contracts, even ones that are coming off three consecutive all pro seasons. As was seen all over the NFL this last weekend, all it takes is one play to end a football career and running back is the easiest position on the field to replace. Getting another big contract is an extremely unlikely scenario for an ephemeral and aging running back with a list of injuries.

Regardless if he stays healthy and works hard it’s unlikely Foster gets another big contract, but the thing is, contractually, he doesn’t even have to try and get one. If he doesn’t want to, Foster doesn’t have to work again. As stated in the SEC filing, “Foster has no obligation to take any action to generate brand income…” The dude can take the money generated in the IPO and run like teammate JJ Watt is chasing him up the sideline for an overaggressive celebratory bear hug as long as he plays two more years in the NFL.

Here is a number to consider: 78%. 78% of NFL players are either bankrupt or in significant financial troubles within two years of retirement.  I’m not saying Foster will be one of them, but if he does go broke or experience financial duress, Foster doesn’t have to pay Fantex and therefore shareholders. That’s right, according to the filing, Foster does not have to pay anything to Fantex or his shareholders if it looks like his financial situation is going south.

Fantex describes itself as the, “First registered trading platform that lets you buy and sell stock linked to the value and performance of a pro athlete brand.” According to its website, “Fantex creates a unique brand building platform for athletes to increase the reach and engagement of their brand.” They are interested in creating the most value for their clients, not shareholders. This seems like an interesting version of fantasy football where short term investors can buy stock in an athlete. If you’re saying I can buy stock in say Warren Buffett, I’m interested, but not Arian Foster.

This whole thing is a fascinating concept, but be wary. Unless you’re interested in buying a share of Arian Foster (which also just feels kind of creepy) for sentimental reasons similar to the reason you’d buy a share of the Green Bay Packers (a publically owned team you can buy stock in but get no voting power or rights to future organization value), stay away from this IPO. Keep in mind, Foster agreed to sell 20% of his future income for $10M, meaning he thinks he is getting a better return than people who buy part of his income. He’s betting that 20% of all of his future income will be less than $10M. If he’s not betting on himself and this whole thing is predicated on him working hard and earning more money, why should you?