Fantex tests market, sells 421,000 shares of San Francisco's Vernon Davis

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One professional football player is about to bring a new meaning to “testing the market.”

After a successful reservation period for an initial public offering in shares of San Francisco 49ers tight end Vernon Davis, the tracking stock is scheduled to hit the secondary marketplace Monday, where investors can buy and sell shares of the professional football player.

Fantex, a San Francisco brand-building company founded late last year, has sold 421,000 shares of Mr. Davis to investors seeking a piece of the Pro Bowler’s future earnings. Under the deal, Fantex Holdings will pay Mr. Davis $4 million for a claim to 10 percent of anything he earns related to his football career, starting Monday.

Each share cost $10, and Buck French, Fantex co-founder and CEO, said the company finished a nationwide publicity tour, which included a February stop in Pittsburgh, with more reservations than it had shares available.

The high demand has Mr. French confident that the opening of the Fantex exchange at will be successful.

“I think that as we are able to talk more and more to the public and get the word out, people have been extremely interested in what we’re doing,” Mr. French said.

General Motors was the first company to issue tracking stocks as a way to generate capital by giving investors access to dividends or an income stream without giving them ownership of the company.

The practice has been particularly useful among corporations with diversified business practices. U.S. Steel Corp. was one of the first adopters when, in 1991, it started issuing tracking stocks to allow investors easier access to its lucrative oil portfolio.

Fantex and Mr. Davis have a lot of work to do before they can prove that tracking stocks can work for athletes.

By offering Mr. Davis $4 million in exchange for 10 percent of future earnings, Fantex has valued his future earnings at $40 million. But earning an additional $40 million is not necessarily an easy task, even for a star tight end or a Super Bowl contender.

And Mr. Davis, 30, is closer to the end of his career than the beginning. He is due to receive $9.05 million over the final two years of his current contract, but none of that money is guaranteed in the National Football League.

An injury could end his career in an instant, which is one reason Fantex warned potential investors that this tracking stock is "highly speculative and the securities involve a high degree of risk."

Kenneth Lehn, a finance professor at the University of Pittsburgh’s Katz School of Business, said he is skeptical about the marketplace for athletes’ future earnings.

By giving Mr. Davis $4 million up front, he said Fantex shareholders are essentially de-incentivizing his production. He bases that analysis on a study he conducted on Major League Baseball contracts in the 1980s.

“The biggest problem was once the players received a lot of upfront money, it dulls their incentives, and I think that’s something that Fantex and others are going to have to overcome,” Mr. Lehn said.

“If you lose a little bit of an edge in professional sports, it can set you back a lot,” he said.

His study found a strong correlation between long-term contracts and disability rates in professional baseball.

Fantex could minimize that effect, he said, by keeping upfront payments as small as possible. Since Mr. Davis still owns claim to 90 percent of his future earnings, the Fantex deal might not diminish his motivation, Mr. Lehn said.

Mr. French said the biggest goal of Fantex Holdings is to build Mr. Davis’ brand, and the tracking stock is a mechanism to help that cause. By selling 421,000 shares of a tracking stock directly tied to his success, Fantex has, in essence, created thousands of stakeholders in Mr. Davis’ future.

Though he is a football player, shareholders have claim to any contracts related to Mr. Davis’ football career, which includes coaching salaries, TV contracts and any payments he could receive from capitalizing off his fame. They also could benefit from a future appearance on a show such as “Dancing with the Stars,” which featured former Steelers wide receiver Hines Ward in 2011.

And it still is possible another lucrative NFL contract is in Mr. Davis’ future. Three years ago, he signed a five-year, $37 million contract, which at the time was the most lucrative deal for a tight end in NFL history. Since then, his production has only grown on the field.

Fantex also has arrangements with Houston Texans running back Arian Foster and Buffalo Bills quarterback EJ cq Manuel, but the company has yet to offer shares of those athletes to investors.

In order for the marketplace to succeed, Pitt's Mr. Lehn said, it needs to increase its portfolio. Investing in just one athlete carries a lot of risk. Investing in several can mitigate some of that.

“Undoubtedly, there’s going to be some novelty associated with the first several,” he said. “But to really make a go of it in the long run, there needs to be a portfolio of players, like a mutual fund.”

If the marketplace is successful enough, future athletes could in effect insure themselves with large upfront payments from companies such as Fantex. Young athletes often sign long-term deals with teams before they reach free agency, often forfeiting a chance to maximize profits in the interest of financial security.

A tracking stock marketplace could give athletes another avenue to financial security and help them cushion against career-ending injuries.

Michael Sanserino:, 412-263-1969 and Twitter @msanserino.

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