On the first of this month we wrote about the planned “IPO” of shares in Arian Foster, running back for the Houston Texans. Fantex, Inc. is applying the concept of celebrity bonds to professional athletes and securitizing their potential future earnings.
At that time we expressed concerns about the business model and the ability to quantify risks or conduct due diligence: (a) it’d be analogous to a musician securitizing songs he planned to compose rather than his library of existing proven songs, (b) a professional athlete’s fortunes can turn on a dime, and (c) their “brand” is easily tarnished by revelations about past or current activities.
Last Tuesday brought unfortunate news for Mr. Foster. (Unfortunate but impeccably timed as follow-up to the original story…) He must have season-ending surgery and as a result, Fantex has postponed the IPO.
San Francisco-based Fantex last month filed with the U.S. Securities and Exchange Commission to raise $10.6 million in an initial public offering priced at $10 a share for Foster, who pledged 20 percent of his on- and off-field earnings to the company in exchange for most of the proceeds of the IPO. It was to be the first public offering for a professional athlete.
“After consideration, we have made the decision to postpone the offering for Fantex Arian Foster,” Fantex Chief Executive Buck French said yesterday in a statement. “We feel this is a prudent course of action under the current circumstances… We continue to support Arian and his brand, and we wish him well in his recovery. We will continue to work with him through his recovery and intend to continue with this offering at an appropriate time in the future based on an assessment of these events.”
Writing at Grantland Katie Baker discusses the proposed Arian Foster (Houston Texans, University of Tennessee) IPO and compares entrepreneurs to professional athletes:
When you think about it, many entrepreneurs share a number of similarities with professional athletes (and not just a predilection for hoodies or the phrase “at the end of the day”). A breakout success early in life — say, spending $6.7 million on a stake in eBay that would be valued at $5 billion two years later, or having a 1,600-plus-yard rushing season at age 24 — can be the platform that launches a career. But it can also become, for better or worse, the only thing that defines you. For every hit, there are multiple soul-crushing misses. Hard work and luck have a chicken-and-egg relationship, and the distinction between being the best and just being the best-positioned is often hard to spot.
Her focus on the similarities in career arcs is a bit ‘meta’ but that is an excellent point about luck and elsewhere in the piece she makes more practical comparisons: both have to be nimble and adaptable to their environments, and, like a pro athlete, an entrepreneur is (quoting Randall Stross) “the person who is afflicted by a monomaniacal fever, who cannot not be an entrepreneur.”
San Francisco start-up Fantex is seeking to issue 1,055,000 shares of Arian Foster tracking stock at $10 apiece – with $10 million of the $10.55 raised going to Foster, who, in turn, will owe Fantex 20 percent of his future income (with a few exceptions). They’re trying to apply the concept of Celebrity Bonds to a professional athlete – in this case, a “trailblazer” (their idea of his brand) like Arian Foster.
Celebrity bonds were pioneered in 1997 by David Bowie, who, faced with financial pressures that could have ultimately cost him the rights to his songs, chose to securitize the future cash flows from his catalogue. These “Bowie Bonds” received investment-grade ratings from the bond agencies because they were backed by assets: an “established portfolio of songs that generated mostly reliable, known cash flows.” Other asset-backed securitization had been done, but “not with what was essentially intellectual property.”
A better analogy for Fantex’s deal would be if a musician were to attempt to securitize the songs he planned to compose in the future. Baker again:
That’s because, when you look closer at the company’s SEC filing, you start to realize that at its root this isn’t really about Arian Foster, nor is it a more high-stakes version of fantasy football exactly. Buying a slice of the running back at the $10 IPO price does not give you any more ownership than buying his jersey would. (There are currently no plans, for example, for Foster to meet with investors or appear on quarterly earnings calls, and shareholders won’t have any voting rights.)
What it does get you is one share of a “Fantex Series Arian Foster Convertible Tracking Stock” that theoretically will benefit from his future earnings stream. Except that any actual distributions are at the discretion of Fantex, which will also take a 5 percent cut. If you want to buy or sell shares, you need to do so on Fantex’s proprietary exchange, for a brokerage commission. The stock that you own can be abruptly converted, at any time, into basic company stock. (And, again, at the discretion of Fantex.) I’d love to listen in on the customer service calls on the day that a bunch of fans with cash to burn wake up to find out that they’re now proud minority shareholders of an unlisted Silicon Valley venture capital–backed marketing firm.
Baker also mentions the challenge of conducting due dilly in these circumstances:
We all love Arian Foster, but just like the running back himself, things can turn on a dime. In his 2007 piece about Protrade, Lewis wrote: “Tiger Woods is a prime candidate to launch the new market. But Tiger Woods’ financial future is secure; he’s the sports equivalent of a blue-chip stock.” (He would soon turn into more of a … speculative investment.) The “Risks” section of the SEC filing on Foster makes mention of his recent admission that he received money while at the University of Tennessee as an example of where Fantex’s diligence failed to turn things up.
New evidence from the dismal science confirms what social science has already shown: the love of taxes is the root of unhappiness.
The original social science, from the December 2009 issue of Science, indicated that states with the highest taxes also have the least happy residents. Residents of high tax states not only have less money to spend on other things that make them happy, they don’t enjoy many benefits in exchange for all their hard-earned tax dollars. Roads, schools, and crime are no better (and in many cases worse) while their state governments borrow even more and spend disproportionately on public employee pensions and entitlement programs. Their needs ignored at the expense of entrenched special interests, taxpayers get unhappy. And then they get out.
From this one might argue causation; high taxes = unhappiness. While we are certainly sympathetic to that point of view, we also have to wonder if it runs vice-versa, or at least cuts both ways: unhappy people like to raise taxes.
We are… happy. And happy to report that’s true for our region as well. NVSE readers already know that the Southeast’s advantages extend well beyond the matter of taxes and include lower public sector debt burdens, stronger job creation, the best climate for entrepreneurs, and a superior overall business climate. (The actual climate happens to be conducive to a great quality of life as well.)
The more recent dismal science is courtesy of The Red-State Path to Prosperity, from Arthur B. Laffer and Stephen Moore in last week’s Wall Street Journal:
Consider the South. We predict that within a decade five or six states in Dixie could entirely eliminate their income taxes. This would mean that the region stretching from Florida through Texas and Louisiana could become a vast state income-tax free zone. Three of these states—Florida, Texas and Tennessee—already impose no income tax. Louisiana and North Carolina… are moving quickly ahead with plans to eliminate theirs. Just to the west, Kansas and Oklahoma are also devising plans to replace their income taxes with more growth-friendly expanded sales taxes and energy extraction taxes…
All the empirical evidence shows that raising a state’s tax burden weakens its tax base. Still, too many blue-state lawmakers believe that a primary purpose of government is to redistribute income from rich to poor, even if those policies make everyone, including the poor, less well off. The obsession with “fairness” puts growth secondary. Meanwhile, in the South, watch for a zero-income-tax domino effect.
Here Mr. Laffer further discusses how blue states are struggling to compete for businesses and workers with the Journal‘s Mary Kissel:
For the eighth consecutive year, Texas has been voted the best state for business by Chief Executive magazine.
The Top 10 looks familiar to us, as it constitutes most of the geography in which we have focused our investment efforts for over twenty years now, and adds to the growing list of evidence that some states understand job creation better than others. The 2012 edition of their annual survey of CEOs includes a feature on What Keeps Texas on Top:
The state is growing its own companies but also is displaying remarkable success in luring investments from other states, particularly California, which once again ranks last in our survey. A raft of small, technology companies have either relocated to Texas or moved key operations there. Bigger California companies, such as Facebook, eBay and PetCo also have recently opened operations in Texas, and major manufacturers from different states, such as General Electric’s transportation unit and Caterpillar have located big new plants in Fort Worth and Victoria, respectively. “Employers from around the nation and all over the world continue to look to Texas as the premier location for business expansion, relocation and job growth thanks to our low taxes, reasonable and predictable regulations, fair legal system and skilled workforce,” Gov. Rick Perry told Chief Executive.
Texas has powerful momentum and it’s difficult to see what could halt it… The sheer diversification in its economy—all the way from wheat farming to semiconductors—suggests that the state could absorb many punches and keep on rolling.
When confronted with the argument that higher taxes = unhappiness, we wonder, even while remaining sympathetic to the point of view, whether or not it runs vice-versa, or at least cuts both ways: unhappy people like to raise taxes.
Another factor in the Southeast’s attractive growth potential – and one clearly related to taxes – is lower state debt burdens. Some state governments, when faced with crushing budget deficits, respond with growth-stalling tax increases on the businesses that operate in their states. (The problem worsens dramatically when one considers many states’ unfunded pension liabilities.)
Two states whose budget woes have garnered recent headlines include Illinois, which pushed through a 45% increase in corporate taxes – apparently triggering an exodus; and California, which is on the verge of running out of money – again.
Some states, like the aforementioned California, respond in other “desperate ways” which further undermine investor confidence and entrepreneurial spirits: accounting gimmicks, delayed payments, issuing IOUs, or even more borrowing. As we’ve written before, only one non-Southeastern state – Nebraska – has a lower debt-to-GDP ratio than FL (5th), GA (4th), TN (2nd), NC (3rd), TX and VA (tied for 6th).
Our region took 9 out of the 10 top spots in Forbes’ list of The Next Big Boom Towns in the U.S. The rankings were done in conjunction with Mark Schill at the Praxis Strategy Group, and are based on job growth, attractive lifestyle, ease of starting a business, and a broad range of demographic factors.
We do love Phoenix, but these are several of the cities we and our entrepreneurs call home.
The Top 10 looks familiar to us, as it constitutes most of the geography in which we have focused our investment efforts for over twenty years now, and adds to the growing list of evidence that some states understand job creation better than others.
In The Library in St.Pete you will find Amity Shlaes’ The Forgotten Man, in which Shlaes recounts how the TVA crowded out Wendell Wilkie’s Commonwealth & Southern, a private-equity-backed company ($400 million as reported in Wilkie’s testimony before a House committee) that was in the process of bringing electricity to the rural South.
Since the TVA could borrow unlimited funds at low interest, and did not have to turn a profit, C&S eventually had to sell its properties in the Tennessee Valley to the TVA in 1939 for $78.6 million. (Fwiw, those events led to Wilkie’s 1940 presidential run.) 71 years after that transaction comes a new study which explores government spending on economic development and its effects on private investment.
Harvard professors Lauren Cohen, Joshua Coval, and Christopher Malloy look at increases in local earmarks and other federal spending that flow to states after the senator or representative rose to the chairmanship of a powerful congressional committee. The surprising result: as a result of government spending in their states, companies actually retrenched by cutting payroll, R&D, and other expenses.
In Companies Retrench When Government Spends, the authors offer three potential explanations:
Some of the dollars directly supplant private-sector activity—they literally undertake projects the private sector was planning to do on its own. The Tennessee Valley Authority of 1933 is perhaps the most famous example of this.
Other dollars appear to indirectly crowd out private firms by hiring away employees and the like. For instance, our effects are strongest when unemployment is low and capacity utilization is high. But we suspect that a third and potentially quite strong effect is the uncertainty that is created by government involvement.
…Our findings suggest that they should revisit their belief that federal spending can stimulate private economic development. It is important to note that our research ignores all costs associated with paying for the spending such as higher taxes or increased borrowing. From the perspective of the target state, the funds are essentially free, but clearly at the national level someone has to pay for stimulus spending. And in the absence of a positive private-sector response, it seems even more difficult to justify federal spending than otherwise.
The implications of these findings for how best to nurture the growth of entrepreneurial companies are interesting. There will no doubt be private growth companies that benefit from government subsidies in areas such as cleantech and alternative energy, given the magnitude of the dollars being spent. But it would seem government could do far more to encourage sustainable entrepreneurial activity more broadly by insuring that the proper tax incentives are in place for new company formation and then also working to keep the regulatory burdens at a minimum. If government does that consistently over a long period of time, the right incentives plus greater certainty will encourage a surge in new entrepreneurial ventures.
The Chicago Tribune urges Illinois not to become a “New Michigan” or “New California” but instead mimic states such as FL, GA, VA, TN, TX, and NC. In an April 11 op-ed entitled The Illinois Spiral they reference the third edition of Rich States, Poor States (from the American Legislative Exchange Council) in which our region scores very well:
ALEC ranked states’ economic outlook vs. their 10 year (1998-2008) economic performance based on 15 policy variables which influence the overall business climate. The results look vaguely familiar to us, and are another vote of confidence in the Southeast as a preferred region in which to work, live, and invest:
As the Tribune puts it:
Employers tend to be harder-headed in deciding where to invest their money than our lawmakers are in spending other people’s money. The employers see Illinois pols dithering through a crisis, inviting an even more bleak future with their refusal to reform government spending and reduce what it costs to have a payroll in Illinois:
• Nor have you heard Illinois leaders, in their to and fro over an income tax hike, confront a 2009 report by the American Legislative Exchange Council: A decade’s worth of hard data suggests that states with no individual income tax created 89 percent more jobs, and had 32 percent faster personal income growth, than did states with the highest income tax rates. The report also analyzed 15 policy factors that influence a state’s growth prospects — tax burdens, debt service, tort climate, mandated minimum wage, spending limits if any — and ranked Illinois’ economic outlook as an alarming 44th in the U.S.
• Nor have you heard Illinois leaders confront this state’s devastating rank in job creation, 48th, and ask how they can be friendlier to present and potential employers. Illinois — with its overspending, its borrowing and its worst-in-America pension crisis — faces massive obligations that give potential employers pause. Add to this toxic mix Illinois’ high cost of workers compensation and its 49th-in-the-U.S. bond ratings. How surprised, then, are we that since 1990 Illinois has underperformed the U.S. in job growth?
The New York Times confirms another reason for the Southeast’s attractive growth potential and why increasing numbers of entrepreneurs are deciding to build their businesses in the region: lower state debt burdens. As the attached graph shows, the problem worsens dramatically when one considers many states’ unfunded pension liabilities. (Click thumbnail for “top” 25 states for debt-to-GDP, “Overloaded with Debts Unseen”.)
Not only will such debt levels likely lead to growth-stalling tax increases on the businesses that operate in those states, but some of the states are also responding in “desperate ways” which could undermine investor confidence and result in a credit squeeze similar to that currently experienced by Greece (and perhaps someday by other PIGS.)
State Debt Woes Grow Too Big to Camouflage
By MARY WILLIAMS WALSH
California, New York and other states are showing many of the same signs of debt overload that recently took Greece to the brink — budgets that will not balance, accounting that masks debt, the use of derivatives to plug holes, and armies of retired public workers who are counting on benefits that are proving harder and harder to pay.
Complete NYTimes article here
Original American Enterprise Institute white paper here
UPDATE (3/31/10, 3:08PM):
Having had a chance to digest the original white paper, we are even more pleased than before to report that only one state – NE – has a lower debt-to-GDP % than FL (5th), GA (4th), TN (2nd), NC (3rd), TX and VA (tied for 6th).