Nike Inc (NKE) and NBA star LeBron James have reached an historic agreement. The 11-time All-Star and four-time league MVP agreed to a lifetime contract with the apparel giant, according to sources. Nike has never before struck such a deal.
The specific financials of the deal weren’t disclosed, but ESPN cited “a source close to the deal” as saying it was the largest single-athlete deal in Nike history. That means it’s worth more than Kevin Durant’s monstrous 10-year, $300 million deal the Oklahoma City forward signed last year.
That’s a huge commitment on Nike’s part, and NKE stock owners might justifiably be wondering whether the gargantuan contract is worth it.
Sure, it’s tough to do a cost-benefit without having solid figures, but even a deal worth $500 million — 66% more than Nike’s largest on record — would be risky, but ultimately savvy and necessary.
Here’s why:
Nike Is Playing Defense With LeBron Deal
This deal was necessary because it keeps LeBron away from Under Armour (UA), plain and simple. Yes, it’s unlikely that Under Armour could have realistically vied for Bron-Bron to begin with: King James signed a seven-year, $93 million contract with Nike straight out of high school in 2003, then re-signed for another nine years in 2010, before his contract could even expire.
So LeBron was already on the NKE roster through 2019. But by that time, Under Armour’s resources will likely be much more formidable, and its brand will undoubtedly command more respect within the basketball segment. UA’s basketball shoe biz is just getting started, and reigning MVP Stephen Curry is the flagship signee.
Once not taken seriously, Under Armour’s Curry Two shoes are selling well, and the company even made a serious run at trying to sign Kevin Durant last year.
After NKE’s lifetime deal with LeBron, there are no massively marketable all-time greats left to sign. James Harden signed a 13-year, $200 million deal with Adidas (ADDYY) over the summer. Dwayne Wade belongs to Chinese shoe company Li-Ning, which gave him a large equity stake in the company.
Still, the deal is not without risk. What if LeBron suffers a career-ending injury tomorrow, for instance? What if he, god forbid, gets hit by a bus? Gets arrested or plagued by scandal? Makes another “decision” that irks the nation? Starts eating pizza five times a day? (He has an endorsement deal with Blaze Pizza too, after all.)
Bottom Line for NKE Stock
At the end of the day, major risks do exist, but LeBron is probably the most marketable current athlete on the face of the planet. And with sales of LeBron’s shoes expected to eclipse $400 million this year, he’s already raking in major dough for the company.
A lifetime deal means those already gaudy numbers will likely just continue to shoot higher over time. Consider that the Jordan brand alone accounts for about $2.5 billion in NKE revenue annually nowadays.
And while LeBron James certainly isn’t Michael Jordan, he’s doing a darned good impression.
As of this writing, John Divine did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.
