Like powerful executives and high-performing employees, at least one top-tier athlete who transcends sports is receiving compensation for his product endorsement in the form of stock.
Earlier this week superstar quarterback Tom Brady inked a multiyear deal with apparel maker Under Armour (NYSE:UA) that reportedly includes stock.
It seems likely that equity endorsement deals for transcending figures like Brady will become more common in the sports world because they offer the athlete a wealth-building asset and the sponsor a very loyal new supporter.
“Suddenly we’re on the same page. Our interests are together,” said Robert Boland, a sports business professor at NYU and former agent. “If you do well, I’m going to do well. We’re going to work for each other this way.”
There are other benefits to these types of transactions, including favorable tax treatment for the athletes’ income and a new incentive for players to be on their best off-the-field behavior.
It’s a great example of “taking your brand as an athlete outside the traditional sponsorship realm and managing it more as a business,” said Bill Glenn, executive vice president of Omnicom Group’s (NYSE:OMC) The Marketing Arm. “I don’t think this will be the last deal you see.”
New York Mets third baseman David Wright should be the poster child of equity endorsement deals.
Wright’s decision to forgo cash and accept a stake in VitaminWater maker Glaceau proved to be wildly successful when the Queens company was then scooped up by Coca-Cola (NYSE:KO) for $4.1 billion in 2007. According to the New York Post, the 0.5% ownership stake Wright received in Glaceau was then worth an estimated $20 million.
It’s not clear if other VitaminWater endorsers like Chicago Bears linebacker Brian Urlacher secured equity deals and had a payday like Wright.
Inherent Risks in Equity Deals
Yet anyone who can remember back to the market plunge of 2008 or the “Flash Crash” of 2010 knows equity deals aren’t without risk. Imagine if instead of partnering with VitaminWater, Wright received stock in a deal with now-defunct investment banks Lehman Brothers or Bear Stearns.
Sports agent Ralph Cindrich said, “You have to be smart about the company” you partner with, otherwise “you could be doing it all for nothing.”
Equity endorsement deals aren’t for everyone. After all, not every athlete is prominent enough (or trustworthy enough) to land a deal that includes stock. And not every company has the need to give a chunk of itself away just to bring on another athlete.
UnderArmour did not disclose financial details of its deal with Brady, who has become the Baltimore company’s highest profile athlete.
However, CEO Kevin Plank told Sports Illustrated that it was important to Brady that “equity” was a part of the partnership. It’s not clear what form of equity he took and whether or not he got shares at a discount.
Still, it appears to be a savvy move for both sides.
For Brady, who Forbes says makes about $20 million a year in endorsements and salary, it gives him a growth asset with some serious upside. Under Armour’s stock has surged 88% year-to-date, trouncing Brady’s ex-sponsor Nike’s (NYSE:NKE) 26% gain.
Under Armour, which also recently inked deals with star wide receivers Anquan Boldin and Miles Austin, earlier this month reported a 22% rise in third-quarter sales and upgraded its growth guidance for 2010.
“It was important for me to align with a brand that shares my values and helps me perform at my best,” Brady said in a statement. Brady also reportedly has sponsorship deals with watch maker Movado (NYSE:MOV) and cable giant Comcast (NASDAQ:CMCSA).
Cindrich, who counts Indianapolis Colts center Jeff Saturday as a client, said he loves deals like this because they offer athletes “tremendous tax advantages.”
Since it would be treated as a capital gain, a stock sale for a profit would be taxed at a much lower rate than traditional income. Cindrich also pointed to other options like family limited partnerships, transferring shares and estate planning maneuvers.
Sports agent Bob Baratta said from an athlete’s perspective, it’s all about thinking big.
“These athletes look to hit home runs. Just like the guys on Wall Street,” he said. “It’s transactional versus wealth building.”
A ‘Coup’ For Under Armour?
Under Armour can also be applauded because it lured away a star from a bigger rival (Under Armour’s market cap of $3 billion is dwarfed by Nike’s $40 billion), avoided hefty near-term payouts and landed a very loyal endorser.
“For Under Armour, this is a terrific deal and quite a coup,” said Tim Calkins, a marketing professor at Northwestern. “With a deal like this, Tom Brady has a real interest in seeing the company succeed and I think that’s very powerful.”
It’s also a way for Under Armour to strike back at Nike’s coveted on-field apparel deal with the NFL that is set to begin in 2012. The league had a 10-year deal with Adidas’s Reebok that was worth a reported $300 million.
At the same time, Under Armour has given Brady a new reason to think twice about finding himself in a PR nightmare like the one Tiger Woods landed in last year that lost him his sponsorship deals, including one with Accenture (NYSE:ACN). After all, conduct that reflects poorly on Brady will now reflect poorly on Under Armour and threaten its stock price.
In many ways, offering athletes stock as compensation for their endorsement is a reflection of the evolution of marketing over the past two decades.
“Let’s face it: athletes can now be leveraged in many more ways than they could 20 years ago. With that increased leverage comes an opportunity to make it more lucrative,” said Glenn.