Explaining Fanatics’ Huge $ 10 Billion Valuation

Sports goods company Fanatics surprised Wall Street this week after revealing that its trading card business was valued at more than $ 10 billion as part of the new capital raise.

Fanatics raised $ 350 million a month after securing the licensing rights for top sports leagues, including Major League Baseball and National Football League. The e-commerce giant separated its trading card company from its merchandise business last August. Rubin urged leagues and player unions to leave their current partners by offering equity capital in the new venture.

“The collectible card companies are good manufacturers, but their vision was not to build much more of a direct-to-consumer model and then put all the pieces together to create a great collector experience,” said Thursday. Fanatics President Michael Rubin. on CNBC’s “Squawk Box”. “That’s what we’ve done in the merchandising category with our Fanatics trading company – and now with collectible cards. “

Some on Wall Street remain perplexed as to the value of Fanatics’ collectible card company, especially since the license rights don’t transfer for a few years, but sports attorney Irwin Kishner said he was possible “to articulate very good reasons to explain how they got there. . “

Traditional valuation metrics include discounted cash flow, comparable companies within an industry, EBITDA, and cost of assets, Kishner said. However, these combined metrics may not be the only ones that apply in the case of Fanatics.

“You look at what the projected cash flows can be for each of their lines of business, and that’s what you value this company on,” said Kishner, co-chairman of sports law firm Herrick, Feinstein, who has aa worked on mergers and acquisitions and represented teams including the New York Yankees.

Discussing Fanatics’ rating on condition of remaining anonymous due to privacy concerns, a sports banker taken into account that Topps ‘valuation was around $ 1 billion before Fanatics robbed its star client in MLB and crushed Topps’ plans for a SPAC merger. Bloomberg also reported that Panini was worth around $ 3 billion. Taking those valuations and applying them to Fanatics’ card business – they have rights to the MLB, NFL, and the National Basketball Association – leads to a valuation of $ 10 billion.

Hiring by fanatics of executives like former IAC CFO Glenn Schiffman should also be considered, Kishner said. And Rubin built equity with the way he positioned Fanatics for the future, including creating an NFT company called Candy Digital.

“A big part of what you bet on is management,” Kishner said.

Fanatics’ plan for the physical trading card space is to expand it by opening up the market to take more advantage of it through direct-to-consumer offers. For example, if collectors buy a collectible card, they will be able to insure the asset, classify it, store it, and even put it on a market for sale or trade through Fanatics. The company would likely charge transaction fees.

Rubin also mentioned that traditional collectible card makers “will achieve nearly $ 1 billion in EBITDA this year on a combined basis.” He added that the collectible card business is a “very profitable business” with a “huge opportunity”.

“This hobby has so many people in the middle and perfectly configured to have an integrated direct-to-consumer experience,” Rubin said.

Not everyone agrees with Rubin’s assessment. Discussing the matter, a Wall Street CEO called the Fanatics collectible card deals a futures contract because the company cannot yet produce the collectibles. The executive spoke to CNBC on condition of remaining anonymous to speak freely about the affairs of another company.

“I understand that statement because they haven’t fully realized their potential yet – yet,” Kishner said when asked if he was okay with the label. “But the way they got the baseball contract, the way they recruited various management talent from various companies and positioned themselves as a tech company – you talk about bringing NFTs, collectible cards together under one roof. paper, and blockchain technology, so there’s a lot of it here.

“You are buying an asset that you think will grow due to market forces and the way you position that asset,” he added.

Over the past year, when Fanatics has secured new capital, it has generally looked for an acquisition.

For example, the company bought the licensed sporting goods maker WinCraft using money from a $ 350 million Series E fundraising round in August 2020. And in 2017, it bought the sports group licensed from VF Corp for approximately $ 225 million. This deal included the Majestic Athletic brand, and it came just after Fanatics took over the rights to Majestic in MLB apparel.

Fanatics is not expected to start its trading card business from scratch and will likely look to buy an existing company in the space like Upper Deck.

Asked about it on Thursday, Rubin replied, “We may buy one of the collectible card companies because they are good companies.”

Expect more Fanatics moves in the coming months as the company grows before looking for an IPO.

Kishner said Fanatics’ business plans look like an investment in real estate, adding that it “looks high now, but 10 years from that date you would want to buy it.”

“They lined up with different leagues, took Topps’ business plan and made it theirs,” Kishner added. “This business is going to be a disruptor.”