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February 13, 2012

Bizball

Mets Shell Game with Money May Stave Off Take-Over

by Maury Brown

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With Sandy Alderson’s foray into Twitter the exception, these are dark times for the Mets. Besieged by Irving Picard (the trustee in the Bernie Madoff case), declines in attendance, and (as a result) a decline in cash flow, the Wilpons and Saul Katz (aka Sterling Equities) are throwing everything but the kitchen sink in front of the door to block a takeover.

Most Mets fans are at the point where they’d like nothing more than to see new ownership take over the club. Such is sports. While Sterling strikes one as part of the “1%” for ownership, they view the Mets in much the same manner that homeowners across the country feel about their home that’s teetering on the edge of repossession. Anything and everything is being done to try and protect it, which means moving around assets, restructuring loans, and bringing in what little fresh money can be found through minority investments.

In the eyes of baseball, the situation is far different from what is happening a coast away with the Dodgers. Sterling is not Frank McCourt. Up until being entangled with the Madoff Ponzi scheme fallout, from MLB’s perspective, the Mets followed the league’s mantra to the letter: invest in your team, maximize your ballpark.  They did both by getting Citi Field built and shoveling money into player payroll.

It’s frequently overlooked, but while owners often get involved with sports properties as a way to stroke their egos, once in, they’re highly competitive. In fact, they can be so competitive that sometimes they’ll bring non-baseball-revenue-related money into play. Sterling was just such a case.

It’s too soon to say whether the Mets willfully turned a blind eye to the returns that Bernie Madoff brought in, although one whistleblower could possibly place that into perspective. What is known is this: the Sterling partners poured a lot of money into the Mets via the Madoff investments, notably for matters such as handling the mountain of deferred compensation money that the Mets had created through back-loaded contracts like as Johan Santana’s six-year, $137.5 million deal that, according to BP colleague Jeff Euston,  has $5 million deferred annually at 1.25 percent compound interest (payable June 30, seven years after the season in which salary was earned). On July 1, 2011, Bobby Bonilla collected his first installment of $1,193,248.20, which is to be paid annually for the next 25 years. Deferred compensation is serious stuff in the eyes of MLB labor. Missing deferred compensation payments is considered a violation of the CBA and got at least one former owner (Tom Hicks) in trouble when the Rangers were on the edge of bankruptcy.

The Mets are in a shell game, but they’re likely to survive through 2012 season… if everything goes Sterling’s way. Here’s a breakdown:

Will it be $386 million or $83.3 million for the Madoff trustee?
Irving Picard, who has been claiming that Sterling either willfully knew or should have known that Madoff was involved in a Ponzi scheme, initially wanted $1 billion in damages that he believes Sterling made (in principle and interest) via Madoff investments. Judge Jed Rakoff threw out all or most of nine of the 11 claims against Sterling, knocking that max figure to $386 million, but the Mets are seeking a summary judgment that would limit the total that Picard could recover to $83.3 million. A conference is scheduled 10 days from now (February 23) to go over the matter.

Loans
This is where it gets interesting. The Mets have several loans out, some more critical than others. While the league isn’t in the business of throwing money away, too much has been made of the $25 million loan from MLB being late. It is owed, yes, but MLB isn’t going to close the doors on owners over it. And while the Mets leveraged SNY to the tune of $450 million and have that coming due in 2015, because the Mets own SNY, it’s seen more as a no-interest loan which could be restructured. More critical is making due on the $40 million “bridge loan” to Bank of America, which seems to be on its way to being covered (see below), and making the bond payments on Citi Field, which have mushroomed from $19 million to $43.7 million in the span of one year after Standard & Poor’s changed the rating of the $695 million in bonds from stable to negative. The Mets have already gone the restructuring route through JPMorgan, plus have the $430 million coupling of Bank of America and Citigroup to deal with. That comes due in June 2 of 2014. None of this should be taken lightly. In the framework of where the Mets are at, the question becomes, “Is the debt so unmanageable as to crush Sterling?” As we’ll see, the answer is “no”… maybe.

Minority Shares: Enough to Float the Boat?
The Mets are putting as much as a $200 million minority interest in the club up for sale, but really, this should be lumped into “loan” as Sterling has provisions in the sale process by which they would purchase the shares back. Going to back to our “shell game” analogy, “Time Warner Cable and Comcast are nearing a plan to finance SNY’s purchase of four shares in the Mets, worth $80 million, said one person with knowledge of the plan who was not authorized to speak publicly,” according to the New York Times.

With that, the Mets’ broadcast partner, SNY (which they own 70 percent of) would control 16 percent of the Mets. Hedge-fund magnate Stephen Cohen is also purchasing a stake. Cohen is an interesting addition, as he was originally in line to purchase the full $200 million minority interest but backed out. Cohen was part of an insider trading investigation but appears to have been cleared, so much so that he is also involved in an attempt to purchase the Dodgers. If he were to find success in that endeavor, he would have to sell his minority interest in the Mets. All told, there are 10 shares of the Mets which, according to the term-sheet, have to be held for three years before Sterling can buy them back. If (and as of publication, it appears that the sales will be completed) the $200 million arrives, it will allow the Mets to cover their debts, which include the bridge loan to Bank of Americaa, the bond payment, MLB’s $25 million loan, and their deferred compensation payments. That, of course, is predicated on how much Sterling will be on the hook for with the Madoff victims.

Attendance, Player Payroll Will Be Critical
On top of the restructuring going on with the Mets, gate revenues will be critical. While $200 million helps with the debt, there is still player payroll and other bills to be met. Sandy Alderson has gone into cost-cutting mode, and with it, Opening Day 2012 will see a $91-90 million (37 percent) reduction from 2011, when the Mets ranked seventh in the league in terms of player payroll. The gate, something that the Mets used to thrive on, has dried up in recent years.  Citi Field drew 2,378,549 fans in 2011, down from 2,559,738 in 2010 and 3,154,270 in 2009. Over that time, attendance has declined 25 percent. It won’t be good, but the Mets do have some wiggle room if paid attendance continues to free-fall. If the Mets see attendance tanking by the All-Star break, they could—repeat could—move the likes of David Wright to free up additional player payroll. Remember, the Mets actually saw end-of-year player payroll go up last year; the team ranked fifth in the league at $142,244,744, up 11.51 percent from the year prior when they were at $127,560,042 (see the league EOY payrolls for 2011). Cost cutting is bound to continue.

Will Selig Push Sterling Out?
Let’s play doomsday. What happens if the courts rule for Picard, attendance tanks, and other factors combine so that somehow, someway, Sterling doesn’t pay the bills? Would Bud Selig push them out? No, but that doesn’t mean that he would stop someone else from doing so. In this scenario the banks, not Selig, would do the pushing. Selig would say there was nothing more that he and the league could do and step aside.

The Mets: A Cautionary Tale for All Owners
Winning is a strong elixir. Winning a World Series is stronger still, an addiction greater than any drug out there for (most) of the 30 owners. If the Sterling situation proves of one thing, it’s that being blindsided by the unforeseen (or, possibly, ignoring it) can have dire consequences. Many fans believe that owners are in the game to do nothing more than make a profit and, make no bones about it, they often do. But if an owner is in a position where they see a way to make a competitive run into the postseason, they’ll oftentimes pull in outside revenues from other holdings or take loans to try and make it happen.

Sterling’s failing is that they invested poorly in contract construction, and when headwinds hit, here they sit. Is it not entirely out of the question to say that a similar calamity to could befall Mike Illitch (with the Prince Fielder deal) or any of the clubs out of compliance with MLB’s debt service rules (the Phillies, for example)? Fans need to take a closer look at what their team owners are really about. There is a constant tug of war that goes on between “my team isn’t spending competitively in the free agency market” and “my team is spending inefficiently in the free agency space.” In the midst of all this, the idea that owners are spending—albeit to a detriment, at times—gets lost. Do you want an owner that is willing to not only spend, but to go into debt to try and bring you a championship? Or are you looking for one that shuttles it aside? The Mets were asked to comment for this article in terms of what the long-term restructure strategy is but declined.

In some other universe, I envision the Wilpons and Saul Katz sitting on the porch of their home, shotguns in hand, saying, “From our cold, dead fingers.” It’s an extreme view, but the reality is, they’re going to move the deck chairs around to try and keep ownership of the Mets. The question is, “Are they rearranging deck chairs on the Titanic?” At least for the time being, the answer appears to be “no”. For the current Mets ownership group, 2012 appears to be make or break.

Maury Brown is an author of Baseball Prospectus. 
Click here to see Maury's other articles. You can contact Maury by clicking here

Related Content:  Sterling Partners,  Mets

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