Of all the companies that have gone through the IPO process this year, the most fascinating one to me is Authentic Brands, which plans to trade on the New York Stock Exchange as AUTH stock.
Authentic Brands was founded in 2010 by Jamie Salter to wring value out of dead celebrities, like Marilyn Monroe and Elvis Presley. The company then moved into live celebrities like Shaquille O’Neal, then into failing store brands like Forever 21.
Authentic has propped up those stores along with Simon Property Group (NYSE:SPG) through an operating company called the Sparc Group. This has kept many stores afloat, including Aeropostale, Brooks Brothers and Eddie Bauer. The newest brand in the stable is sneaker maker Reebok.
Authentic’s S-1 has more pictures than Pinterest (NYSE:PINS), but tells little about the business. The numbers are for 2020, before a host of recent deals. It only identifies direct licensing revenue, $488 million of it in that year. But $211 million of that money, 43%, wound up as net income. This is said to justify a $10 billion enterprise valuation.
A typical deal is one with whiskey distiller Grain and Barrel to put the late Elvis Presley’s name on two new whiskeys. The distiller takes the risk, Authentic books the profit.
Authentic is also in the Shaquille O’Neal business. Since signing with Authentic in 2015, O’Neal has fronted Robert Lynch’s turnaround of Papa John’s International (NASDAQ:PZZA). That stock is up 53% so far in 2021. O’Neal is also a Papa John’s franchisee. This has led him into becoming a franchisee for Krispy Kreme (NASDAQ:DNUT) and privately held Five Guys. Now Shaq and Authentic are launching their own franchise, called Big Chicken.
A lot of money is flowing below the surface through the Sparc Group, the joint venture with Simon. Through Sparc, which is privately held, Simon keeps its malls rented. Authentic manages the brands on the stores. This let Simon report earnings of $618 million, or $1.88 per share for the second quarter.
Since Sparc was formed it has acquired a ton of stores, including Brooks Brothers and JCPenney. To critics like Robin Lewis, this spells trouble. He estimates the group now has almost 1,500 small mall stores, plus 690 JCPenney outlets, which must find retail sales from somewhere. Doing a deal with privately held Klarna will do nothing if someone doesn’t buy now, he writes.
Despite the criticism, Authentic is on the hunt for more deals, thus the IPO. Salter says the company has done 30 brand acquisitions doing over $10 billion in business. It doesn’t manage stores, inventory, or supply chains. It doesn’t design or manufacture products.
The risk is held by partners like Global Brands. But when that company was going under this summer, Authentic simply re-assigned brands like Spyder and Frye to other operators. What might have been a huge problem became a tiny one.
The Bottom Line
I didn’t say I’d buy the Authentic Brands IPO. I just said it was fascinating.
Authentic plans to use the proceeds to pay down nearly $2 billion in debt on its balance sheet and do more deals. The profits from licensing are enormous, and the losses from operations can be placed elsewhere.
It’s a neat trick. It’s certainly the neatest one in retailing, maybe the neatest one in the whole consumer space. Brands can be profitable even if operations aren’t. But if the light goes out at Sparc the blowback is going to be fierce.
Maybe they can sell it all to Shaq.
On the date of publication, Dana Blankenhorn held no positions in companies mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Living With Moore’s Law: Past, Present and Future available at the Amazon Kindle store. Write him at email@example.com or tweet him at @danablankenhorn. He writes a Substack newsletter, Facing the Future, which covers technology, markets, and politics.