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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

27 comments have been left for this article. (Click to hide comments)

BP Comment Quick Links

Eddie Bajek

I read the whole thing through the eyes of a dieheard Tigers fan and got to the Illitch mention at the end, and it felt like a punch in the gut.

Feb 13, 2012 05:08 AM
rating: 2
 
cdmyers

Likewise. I think a look at the Tiger's finances in the wake of the Fielder deal would be a great follow-up article.

My impression is that the Illich family's finances are much more stable, supported by profitable hockey and pizza franchises instead of loans and shady investments. The real danger is that when Mike Illich passes on to the great owner's box in the sky the next Illich will have less of a commitment to pouring cash from these other businesses into the Tigers. That would make the Fielder contract a bit of an albatross, but would still be much preferable to the slow-motion default that the Mets are going through.

(aforementioned impression is based mostly on this article http://www.crainsdetroit.com/article/20120129/FREE/301299952/in-signing-fielder-ilitch-isnt-stretching-dough)

Feb 13, 2012 07:21 AM
rating: 0
 
BP staff member Maury Brown
BP staff

Bill Shea (who writes for Crane's Detroit and is someone I respect highly) talked with me about the piece on the Tigers. You're correct in that diversification helps divert such a calamity from happening with the Tigers. My comment in the piece is speaking to how well protected some clubs are compared to others. For Sterling, even if not tied to Picard, the $ flowing in from Madoff would have dried up. In other words, with owners having different business interests (and the economy more volitile than 5 or 6 years ago) the chances for hard swings in outside revenues become more pronounced.

Feb 13, 2012 09:34 AM
 
amazin_mess

Been a Mets fan for 30 years and this is the worst I have ever seen them. Because of Fred Wilpon and Saul Katz we are now hostages to nonstop stories about finances, bridge loans, Ponzi schemes, minority shares, revoked press credentials and debt payments.

This is just awful. I am a huge baseball fan that has next to no interest in the coming season. Usually in February I am chomping at the bit for baseball. This year; I don't care. Jose Reyes would have never been let go had Sterling been in better shape.

And almost every Mets fan I know is as apathetic as me. We don't care anymore and we certainly aren't going to any games. The Wilpons aren't even trying to be competitive at this point. Why should the fans care?

Feb 13, 2012 05:33 AM
rating: 5
 
amazin_mess

I can't imagine an owner hated any more than Mets fan hate Fred Wilpon.

Feb 13, 2012 05:40 AM
rating: 4
 
beerchaser42

You need look no further than Frank McCourt. The only difference is that Dodger fans can at least apparently see some light at the end of the tunnel. However, from all accounts it appears that even after collecting on the windfall that a franchise sale would bring him, McCourt still intends to keep his greedy fingers in the till by hanging on to parking lot revenue and/or some other of the numerous pieces that he has chopped the once-proud Dodger franchise into.

Feb 13, 2012 07:40 AM
rating: 4
 
BP staff member Jay Jaffe
BP staff

Speaking as a hater, I'm pretty sure Dodger fans hate McCourt with every bit as much passion.

Feb 13, 2012 07:48 AM
 
BP staff member Maury Brown
BP staff

That would be an emphatic "hell yes"

Feb 13, 2012 09:36 AM
 
Robotey

wow--hard to believe we Met fans could be pining for the return of M Donald Grant!

Feb 13, 2012 07:32 AM
rating: 0
 
mattstupp

At what point does this constitute a sort of soft embezzlement on the part of the Wilpons? The Mets, as a franchise, come with certain bounds in which they should/must be operated. Mets fans invested in their team with the expectation that ownership would use a standard percentage of revenue to re-invest in team payroll. Instead, the Wilpons are siphoning money out of team payroll in order to cover their gambling debts.

If the owner of a large charity raises money for cancer research, the expectation is that he/she will invest the money in areas that are relevant to cancer research. If the owner's 16 year old son takes the family car for a spin, hits a pedestrian, and triggers a lawsuit against the owner, he/she does not have the right to skim money from the charity to cover this. Saying you were "blindsided", regardless of the charge, is irrelevant.

Feb 13, 2012 07:57 AM
rating: 0
 
amazin_mess

It so ridiculous how it skirts the boundaries of legality. But KING BUD'S friendship with Fred keeps him from actually doing anything about it.

Feb 13, 2012 14:20 PM
rating: 0
 
stephenwalters

Excellent summary and analysis, Maury -- as per usual.

Feb 13, 2012 08:08 AM
rating: 3
 
BP staff member Maury Brown
BP staff

Thanks very much. Still very much in a case in flux. Hard making definitive predictions on this one. Erring on the side of Sterling for the moment. "Tenuous" is a mild understatement.

Feb 13, 2012 14:43 PM
 
amazin_mess

I hope the house of cards crumbles and burns.

Feb 13, 2012 16:08 PM
rating: 0
 
Dig a Pony

Assuming a 95-100 million dollar payroll this year after all arbitration cases are settled almost 60% of it will be paid to only 3 players...Santana (24) Bay (16) Wright (15), none who have done very much to help the Mets lately. Alderson is in a very tough spot with zero wiggle room so I expect the Met's attendance to drop below 2 million this year unless Lucas Duda turns into Babe Ruth and Jonathan Neise turns into Sandy Koufax. Dark times for us Met fans.

Feb 13, 2012 11:19 AM
rating: 1
 
DDriesen

I would say well below 2M. I'll make Opening Day because I have for all but one year in the past 15 or so, but that will be it for me. Ridiculously disappointed in this ownership and that they screwed Einhorn from entering the mix (not the least of which is because he is a friend). Sad to say, but I am hoping for the worst case scenario described above so that we can rise from the ashes like a phoenix.

Feb 13, 2012 13:04 PM
rating: 0
 
amazin_mess

payroll will be around 92M.

Feb 13, 2012 14:17 PM
rating: 0
 
orlandoca7

Thanks for the article. You've clarified thing!

I recall that Selig stepped in and ordered Wilpon to reduce debt a year or two after Doubleday departed, as the team debt rose quickly as soon as FW became sole owner. I'm just wondering if there is a pattern of financial mismanagement there that goes beyond the whole Maddoff fiasco.

Feb 13, 2012 13:17 PM
rating: 0
 
BarryR

As a Met fan since their inception who now lives in LA, I perceive the hatred as different. Met fans hate the Wilpons because they love owning the Mets more than they, and we, love the Mets. If they sold the team to Mike Repole tomorrow (please, God), we wouldn't hate them at all. They built a nice ballpark, started a TV network, positioned the team for a fine future under an owner with the liquidity to spend what is needed to win. They screwed up their own finances and we are paying for it.
Dodger fans hate McCourt - period. They want to kill the bastard for everything he represents. He and his wife looted the team, charged ridiculous fees for parking, tarted up a beautiful ballpark like it was an aging hooker, cut security to save money, making the place unsafe, and destroyed as much tradition as he could. If he ever shows his face at Dodger Stadium, he'll need bodyguards.

Feb 13, 2012 21:50 PM
rating: 4
 
Nickus

And he'd be the only one there with adequate security.

Feb 13, 2012 23:30 PM
rating: 2
 
hoopster3

I realize this is difficult for Mets fans, and it's clearly an awful situation caused by terrible ownership.

But.

You're talking about a few years when the Mets are hamstrung, followed by a presumed return to the high end of the payroll spectrum and a very reasonable expectation of on-field success. Or to put it another way, who wants to bet on the 2018 Royals versus the 2018 Mets. Clearly, the Mets are the favorite, KCs current young talent notwithstanding.

So, it kinda sucks, 'tis true. I'm not filled with schadenfreude either, though it sounds a bit hollow from the cheap seats here.

Feb 14, 2012 02:10 AM
rating: 1
 
DDriesen

amazin is is right. If the Mets had ownership properly committed to a rebuild they would have dealt Reyes last summer when they knew he was not coming back and invested in, or at tried to land, some of the recent international prospects (Soler, Cespedes, etc.) that could help revive the team. But I do not see (and the article does not point to) some bright light at the end of the tunnel when the Wilpons will be financially viable again and pumping money back into the team. They own a mansion but can't afford the upkeep and taxes so it is falling into disrepair and getting mortgaged to the hilt. Sell the house, Fred.

Lastly, 2018 is 6 years away - how about 2014-5? Very sad to say I would take the Royals, probably for both periods barring ownership change.

Feb 14, 2012 07:38 AM
rating: 0
 
amazin_mess

I can't agree. We have no idea if the Mets will ever spend money again, because if the Wilpons retain ownership they probably won't.

Feb 14, 2012 06:55 AM
rating: 0
 
Robotey

They'll spend it unwisely like a guilty divorced father buying an overpriced bauble for his neglected child in a vain attempt to be a good dad. That's what the Mets owners are to Mets fans right now--see exhibit A - Jason Bay.

Feb 14, 2012 13:35 PM
rating: -1
 
amazin_mess

With that logic, how do you explain Jose Reyes?

Feb 14, 2012 16:54 PM
rating: 0
 
Robotey

Jose is the x box that the kids want for Christmas but the Dad can't actually afford, and demands of the kids "What do you need a new X Box? Didn't I get you that Nintendo for Christmas only two years ago? (Jason Bay)"

Feb 15, 2012 07:20 AM
rating: -1
 
AWBenkert

Selig will never force the Wilpons to sell.

Jews stick together.

Aug 09, 2012 12:10 PM
rating: 0
 
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