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Volume 21 No. 47
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NFL, MLB, NFLPA buy equity stakes in Fanatics

The NFL, NFL Players Association and Major League Baseball have all purchased equity stakes in Fanatics, America’s biggest online sports retailer, which has grown to become one of the largest licensees of each league.

At its meeting in late March, NFL ownership by a vote of 32-0 authorized the purchase of a 3 percent equity stake in Fanatics for $95 million, NFL sources familiar with the deal said.

A 3 percent stake at $95 million would give Fanatics an evaluation of $3.17 billion, more than twice its revenue and easily making it the biggest “pure play” in sports licensing. An interesting comparison: Rival sports retailer Dick’s Sporting Goods has a market cap of $5.8 billion and revenue of $7.2 billion.

At the recent owners meeting in Arizona, Kevin LaForce, NFL senior vice president of corporate development and a former investment banker, made what was called a “persuasive and compelling” argument in favor of the Fanatics investment. Another reason NFL owners OK’d the deal, though, was that they were told in the presentation that MLB had already made its own Fanatics investment — $50 million for around half the amount of equity eventually purchased by the NFL. Sources said the NFLPA also has invested $5 million in Fanatics, receiving less than a 1 percent stake.

“There’s a lot of upside for Fanatics,” an NFL ownership source said. “I could see them growing anywhere from eight to 10X. It just made sense from an investment standpoint.”

Chairman Michael Rubin handled the deal from the Fanatics side. LaForce; Brian Rolapp, NFL chief media and business officer; and Commissioner Roger Goodell were involved on the NFL side. The deal went through the NFL’s finance and business venture committees before being approved by the full ownership.

Neither Fanatics nor any of the leagues involved would comment.

“If you’re looking to add billions of dollars in revenue, like the NFL is, you probably have to make some investments to get there,” said Frank Vuono, former NFL consumer products chief and now a partner at 16W Marketing. “It’s a smart model for Fanatics, so of course you wonder who else will adopt it. … Still, when companies like Starter went public 20 years ago based on their success with the NFL license, we talked about the same kinds of models.”

IPO rumors have been swirling around Fanatics for some time, but in a February SportsBusiness Journal interview, Rubin, still the largest shareholder at around 70 percent, said that was years away.

That the NFL and MLB would purchase equity stakes can only be seen as an emphatic endorsement of the business model that has helped the privately held Fanatics quintuple revenue since 2010, reaching $1.4 billion in 2016. As the internet grew, Fanatics established itself as the licensed-product e-commerce provider for nearly every major U.S. pro sports league, along with more than 200 pro and college teams. More recently it has adopted a vertical model, manufacturing licensed goods and buying VF Corp.’s licensed sports business and manufacturing capabilities, while turning itself into an industry power by amassing some of the most valuable rights in sports licensing, including NBA, MLB and NHL replica jersey rights.

Fanatics also operates brick-and-mortar event retail for several properties, including NASCAR and the Kentucky Derby, along with International Speedway Corp.’s motorsports tracks.

“Fanatics is the most disruptive force in licensing for a long time,” said Kit Walsh, co-founder of Fermata Partners, the CAA-owned licensing agency whose clients include Notre Dame, Arsenal FC and the PGA Tour. “No one in the licensing business knows what the new model for sports licensing is going to be, but we all know Michael Rubin is inventing it.”

Across the industry, licensing sources noted the extraordinary nature of the NFL and MLB purchasing equity in a business partner. The most recent notable exception was the millions invested by 32 Equity, the entity that oversees the NFL’s private equity efforts, into the On Location Experiences hospitality venture, now jointly owned by the league’s VC fund, RedBird Capital Partners, Bruin Sports Capital and Jon Bon Jovi.

“I’d classify any league writing a check, especially one this large, as an out-of-body experience, especially for the NFL,” said an industry source familiar with the deal.

These recent equity investments in Fanatics are indicative of a new rationale by leagues regarding their business partners, especially those, like Fanatics, identified as companies with rapid growth potential. The NFL, in particular, watched as its massive popularity helped businesses like ESPN, DirecTV and Electronic Arts grow exponentially. As those companies mushroomed, leagues did not share in that growth, other than extracting increasingly larger rights fees.

“This will allow the right teamwork to go forward, the right collaboration,” the NFL ownership source said. “Fanatics is one of the only companies investing in technology within their space, so they have great room to grow.

“They’re making a sleepy industry tech-forward and that’s what makes them so appealing.”

The leagues’ moves toward equity arrangements follow a period in which more individual athletes have been seeking equity arrangements within their endorsement deals, like LeBron James, who reportedly cashed a $30 million check after Apple acquired Beats in 2014.

“The thinking now is that rights fees alone won’t cut it,” said a source with knowledge of the NFL deal. “Now there needs to be an equity upside.”

Left unanswered are several essential issues surrounding the union and league investments in Fanatics, including their impact on rival licensees; what, if any, extensions or additional rights Fanatics received as part of the investments; and whether other sports properties will follow with their own Fanatics equity investments.

There’s also the intriguing question of what sorts of other sports property business partners would have enough potential to attract equity investments from leagues. One source suggested that whichever company is eventually identified as the “Amazon of legalized sports betting” is a likely target.

MLB, the NFL and NFLPA join other Fanatics equity holders, including Temasek Holdings, VC firms Andreessen Horowitz and Insight Venture Partners, private equity firm Silver Lake Partners and Chinese e-commerce giant Alibaba.