Explaining the whopping $10 billion valuation for Fanatics’ nascent trading card business

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Anjali Sundaram | CNBC

Sports merchandise company Fanatics sent a shockwave through Wall Street this week after it revealed its trading card business is valued at more than $10 billion in the course of raising new capital.

Fanatics raised a $350 million round one month after capturing licensing rights for top sports leagues, including Major League Baseball and the National Football League. The e-commerce giant separated its trading card company from its merchandise business in last August. Rubin lured leagues and player unions into leaving current partners by offering equity in the new business.

“The trading card companies are good manufacturers, but they didn’t have a vision for building much more of a direct-to-consumer model and then bringing all the pieces together to create a great collector’s experience,” Fanatics chairman Michael Rubin said Thursday on CNBC’s “Squawk Box.” “It’s what we did in the merchandising category with our Fanatics commerce business — and now doing it with trading cards.”

Calculating Fanatics’ $10 billion valuation

Some on Wall Street remain perplexed at the value of Fanatics’ trading card company, especially since the licensing rights don’t transfer for another few years, but sports attorney Irwin Kishner said it’s possible to “articulate pretty good reasons as to how they got there.”

Traditional valuation metrics include discounted cash flows, comparable companies in a sector, EBITDA, and cost of assets, Kishner said. However, these combined metrics may not be the only ones that apply in Fanatics’ case.

“You’re looking at what the projected cash flows can be for each of their business segments, and that’s what you’re valuing this business on,” said Kishner, the co-chair of the sports law firm Herrick, Feinstein, which has worked on mergers and acquisitions and represented teams including the New York Yankees.

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

Fanatics’ hiring of executives like former IAC chief financial officer Glenn Schiffman should also be factored in, Kishner said. And Rubin has built equity with the way he’s positioned Fanatics for the future, including starting an NFT company called Candy Digital.  

“A lot of what you’re betting on is management,” Kishner said.

Fanatics’ plan for the physical trading card space is to expand it by opening the market to leverage it more via direct-to-consumer offerings. For example, should collectors purchase a trading card, they’ll be able to insure the asset, grade, store and even put them on a marketplace to sell or trade all through Fanatics. The company would likely collect transaction fees.

Rubin also mentioned that traditional trading card manufacturers “will make close to $1 billion EBITDA this year on a combined basis.” He added the trading card sector is a “highly profitable business” with a “massive opportunity.”

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

Not everybody agrees with Rubin’s assessment. When discussing the matter, a Wall Street CEO labeled Fanatics trading card agreements as a futures contract since the company can’t produce the collectibles yet. The executive spoke to CNBC on the condition of remaining anonymous to speak freely about another company’s affairs.

“I understand that statement because they haven’t fully executed yet on their potential — yet,” said Kishner when asked if he agreed with the label. “But the way they got the baseball contract, the way they’ve been picking up various management talent from around various companies, and positioned themselves as a technology company — you’re talking about bringing together under one roof NFTs, paper trading cards, and blockchain technology. So, there’s a lot here.

“You’re buying an asset that you anticipate will grow higher because of market forces and the way you position that asset,” he added.

Topps trading cards are arranged for a photograph in Richmond, Virginia.
Jay Paul | Bloomberg | Getty Images

What will Fanatics buy next?

Over the last year, when Fanatics has secured new capital, it’s usually sought an acquisition.

For example, the company purchased licensed sports merchandise manufacturer WinCraft using money from a $350 million Series E funding round in August 2020. And in 2017, it bought VF Corp’s licensed sports group for roughly $225 million. That deal included the Majestic Athletic brand, and it came right after Fanatics took Majestic’s MLB apparel rights.

Fanatics isn’t expected to start its trading card business from scratch and will likely seek to buy an existing company in the space like Upper Deck.

Asked about this on Thursday, Rubin responded: “It’s possible that we’ll buy one of the trading card companies because they are good companies.”

Expect more moves from Fanatics in the coming months as the company expands before seeking an IPO.

Kishner said Fanatics’ business plans resemble investing in real estate, adding it “seems high now, but 10 years from this date, you’d wish you bought it.”

“They’ve aligned themselves with various leagues, took the Topps business plan and made it their own,” Kishner added. “This company is going to be a disruptor.”

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