In a week during which both Google and Netflix strike all-time highs, you would think I would pick one of these high fliers for special valuation attention. While I still plan to look at these companies, I am going to spend this week on a quirky valuation problem: valuing tracking stock on the celebrity athlete’s future income. 10 million (thus covering its outlay) from the issuance of just one 1.055 million Arian Foster monitoring shares to the public, and use its share of Mr. Foster’s income to pay dividends to these shareholders.
Fantex intends to use its platform to attract more sports athletes and celebrities into the mix, thus developing a portfolio of tracking shares that can be traded by traders. On August 24 Arian Foster was born, 1986, and it is a operating back again for the Houston Texans. He played university football at the University of Tennessee and was signed as an undrafted free agent by the Texans in 2009 2009. This year 2010, he previously a monster season, leading the NFL in rushing, yards from touchdowns and scrimmage. He continued with impressive performances in 2011 and 2012, as is seen in his career statistics page.
Arian is also obviously a self-promoter (in the best sense of the word) and has dreams beyond the gridiron. He has his own website, where he characterizes himself as an all-pro operating back again, entrepreneur, philosopher and father. To value the claim on Arian Foster’s income, you need to breakdown the money flow claims you have on the income.
Note that while Fantex has a contractual state on 20% of Foster’s future income, investors in the tracking stock don’t have that immediate claim. Instead, they may be influenced by the dividends that Fantex selects to spend from that income. As observed in the number, there are at least two expenditures that Fantex will incur that will make the dividends paid significantly less than the income that they get from Foster.
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The first is that a portion will be set aside to protect the expenditures associated with managing and maintaining the Fantex system. The second is that Fantex views its role as not only a contractual intermediary but also as a brand building business. Effectively, that implies that Fantex can and will use some of the Foster income to market him better (and hopefully increase endorsement income). To value the Foster monitoring stock, we will proceed through three steps.
In the first, we will construct broadly the potential risks encountered by traders in the monitoring stock. In the next, we will value the money flow claim that Fantex is wearing Foster’s contract and endorsement income. In the third, we will evaluate the claim that investors in the Foster tracking stock have on the dividends they receive from Fantex. Working the potential risks through the pipeline, here at the layers of dangers that we see, starting with risks to the earning stream and then shifting to dangers in the intermediary and ending with dangers at the investment level.
The most immediate impact on player earnings comes from the athlete with two big risks to profits: injuries that are profession finishing or a fall off in performance skills, either as a result of age or earlier injuries. A. Player Injuries: If you are laying claim on a specialist athlete’s future income, you face any damage/event risk that impedes his / her capacity to execute on the field. 3.25 million and almost all of his remaining income shall be at risk if he is harmed.
While Foster has been durable through his early years, there are two reasons to get worried. The foremost is that he harm his hamstring this season just, an injury that may keep him out for a portion of the season and may be a harbinger of things to come. The second is that injuries have a tendency to climb as sports athletes age, and especially so for operating backs whose body take significant punishment on the field.
While a player’s current contract may be unaffected by declining performance, there are two reasons why it will nourish through in to the cash flow promises. First, if there are bonus payments, as is the situation with Arian Foster, they will obviously be put at risk, if performance deteriorates. Second, to the level that you are counting on a continuation of profits from a contract renewal (from the current team or another team), future profits will be lower, if the player’s performance deteriorates.
