SAN FRANCISCO - Professional athletes frequently get traded to other teams, but San Francisco 49ers tight end Vernon Davis is about to be the first ever to be traded like a stock.
Davis, an eight-year veteran, is serving as the litmus test for a risky concept: Whether sports stars should be treated like public companies, whose moneymaking potential can be bought and sold on an exchange by investors. San Francisco-based Fantex Inc. plans to operate the exchange and will orchestrate Davis' initial public offering of stock after getting approval from the Securities and Exchange Commission.
The deal requires Fantex to pay Davis $4 million in exchange for 10 percent of his future earnings, including some off-field income. To cover Davis' fee, Fantex seeks to sell 421,100 shares of stock at $10 each. The company hopes to complete the IPO in the next few weeks.
Davis, 30, will need to make more than $40 million just to deliver a small return on Fantex's investment in him.
Fantex is counting on him to earn most of that money after his current contract with the 49ers expires in 2015. By then, Davis will be at an age when it might be difficult for him to land another big payday, although there are precedents for it. That means the deal could prove to be more profitable for Davis than the investors who buy the Fantex stock tracking his performance.
IPO expert Francis Gaskins is advising investors to stay on the sidelines. Fantex's concept "just sounds like something that P.T. Barnum would try to sell," says Gaskins, president of IPOdesktop.com. "I don't think it's going to work out."
Fantex CEO Buck French has been trying to overcome skepticism at pre-IPO meetings that began in early February.
"We are successful businessman and we are putting together a transaction we believe in," French says.
Fantex will cover its expenses by taking a small cut of the revenue generated by Davis. Investors who own the Davis tracking stock could profit from a combination of the player's earnings and gains in the value of their shares.
The income will come from Davis' career football earnings dating back to last October, as well as any money he makes from off-the-field endorsements or other jobs, such as sports broadcasting, that he gets during the rest of his life. The deal covers only earnings tied to his success as an athlete.
The Fantex IPO is part of "a land rush to see who can come up with the next clever concept to bring fans closer to the game," says sports agent Leigh Steinberg, who has represented hundreds of NFL players. "It's a manifestation of the different ancillary revenue flows that players, speculators and investors can engage in, all of which is created by the love of sports."
Fantex is focusing on players in a lower-income bracket. Besides Davis, the company also has lined up IPOs tied to Houston Texans running back Arian Foster and Buffalo Bills quarterback EJ Manuel. None has a contract that will pay more than $6.5 million next year. Fantex hopes to eventually sign similar deals with other athletes outside of football.
Athletes who sign deals with Fantex get a guaranteed payment upfront and promises of help managing their personal brands for years. Some of the guidance may be provided by NFL Hall of Fame quarterback John Elway, a director on Fantex's holding company, and retired golf legend Jack Nicklaus, who is a Fantex adviser.
Davis isn't discussing his reasons for participating in the IPO yet because of regulations discouraging public comments that could sway investors considering whether to buy newly issued stock. NFL spokesman Brian McCarthy declined to comment.
Fantex set out to test its concept last October with an IPO selling a stock tracking Foster, a top running back for the Texans. The IPO was indefinitely postponed in November after Foster got hurt and underwent season-ending surgery on his back.
Davis has never had to sit out an entire season. After analyzing the longevity of 212 other tight ends from 1990 through 2010, Fantex concluded Davis should be able to play for nearly 14 years.
Davis ranks among the NFL's top tight ends, although he isn't widely considered to be the best player at his position.
But he has been winning more acclaim as his career progresses.
Fantex's projections for Davis call for his next NFL contract to be worth at least $33 million. French believes that goal is within reach.
The IPO documents also paint a rosy picture of Davis as a pitchman. Fantex estimates his endorsement income during the remainder of his career could approach $9 million, even though he only has deals totaling $413,000 during the next two seasons, according to the IPO filing.