Ruh Roh: What All This Means for Mets Fans

How’s this for Mets news.  Per the press release:

As Sterling Equities announced in December, we are engaged in discussions to settle a lawsuit brought against us and other Sterling partners and members of our families by the Trustee in the Madoff bankruptcy. We are not permitted to comment on these confidential negotiations while they are ongoing.

However, to address the air of uncertainty created by this lawsuit, and to provide additional assurance that the New York Mets will continue to have the necessary resources to fully compete and win, we are looking at a number of potential options including the addition of one or more strategic partners. To explore this, we have retained Steve Greenberg, a Managing Director at Allen & Company, as our advisor.

Well, that’s kind of vague. Let’s try to answer the questions someone might have about this — or really, I’m just going to try to answer my own questions by talking to myself. Keep in mind that all of this is tentative, and no one really knows what the hell is going on. That said, fire away:

What the heck is going on?

The Wilpons — the Mets primary owners — are exploring selling a share of the team, about 20 to 25 percent of the club. That’s all that’s been announced. They didn’t mention any prospective buyers, nor did they give much information besides that.

Why are they exploring the “addition of one or more strategic partners”?

Because they could use some money right now. The Wilpons’ Sterling Equities — which owns real estate, the Mets, the Brooklyn Cyclones, and SNY — are being sued by the victims of Bernie Madoff. The Wilpons had invested a lot of money with Madoff, but reportedly got out early and actually managed to walk away with a profit. Go Mets!

Unfortunately for the Wilpons, you’re not allowed to “win” a Ponzi scheme, particularly if you were friends with the guy running it. It doesn’t look good when that happens. They’re probably going to have to give some of that money back to the folks who really got screwed big time. The New York Times says the sum might be as much as $1 billion dollars. Selling a share of the Mets allows the ‘Pons — I’m just guessing that’s what their friends call them — to get some of that money right away in a painless fashion.

But why sell part of the Mets? Why not real estate? The Wilpons have hotels on Boardwalk and Park Place that could be sold back to the bank at half price, and then they could mortgage the unimproved properties. . .

Think of it this way: Let’s say you have a really expensive toy. A lot of people would like to own this sort of toy, but there just aren’t that many toys available. Some kid down the street is willing to buy 25% of your toy; if you sold him that percentage of your toy, you would still own most of the toy — because of that, you still don’t have to share if you don’t want. You can still play with the toy as much as you’d like, and do whatever you want with it. The kid down the street would pay you in order to say he owned part of the toy, and maybe you let him see it occasionally.

That’s basically what the Wilpons are exploring. They want to see if anyone will buy 25% of their toy, while they retain control and continue playing with it. Even if they weren’t in a pickle, it makes sense to sell part of the Mets.

Hey, wait. Why would anyone agree to buy part of a toy they never get to play with?

You can brag to people at dinner parties, and you get to go to all the games for free. If you’re lucky, you also get to be on a billboard with a weird Russian billionaire. It makes sense if you really, really like perks, have a lot of disposable income, and want to up your profile.

From a business perspective, though, it would be a bit of a head-scratcher. The main draw of owning a franchise is that it’s just like playing fantasy baseball, only it’s for-real baseball. Purchasing less than a controlling stake takes away that draw.

Would there be any reason for someone to buy such a small share?

You could also come to an agreement that, if the Wilpons decided to sell the Mets at some point the future, they have to offer the team to you first. Then you win a professional sports team! If you’re not already a famous rapper, that’s probably the only reason to buy a small chunk of a team.

Well, I like perks and Russian billionaires — I think I’d like to own a team. How much would it cost to buy 20% of the Mets?

Forbes valued the team at $858 million in April, down from 2009, and it’s probably dropped again since then. So if you have $171.6 million lying around somewhere, go for it, dude. But keep in mind you’d also be taking on a lot of debt — Forbes estimated the team’s debt as being 82% of their value.

How does a potential sale affect the future of the Mets?

The short term answer is: not a lot. Jason Bay isn’t going to hit 30 home runs because someone else purchases part of the team. The health of Johan Santana’s shoulder is not dependent on the financial security of ownership. Spring Training isn’t going to be canceled in order to save money.

The answer over the long term, however, depends on what happened to ownership. If the Wilpons sell 25% of the team and retain control . . . probably nothing changes. The franchise is still controlled by the same guys, we all forget about this, and then go back to blaming the Wilpons when things go bad and neglecting to mention them when things go well.

On the other hand, someone could potentially make them an offer they couldn’t refuse. Maybe they get blown away and decide to sell. This could work out a couple of ways, some good and some bad.

For example: If, say, Mark Cuban offers $1.5 billion for sole ownership of the team and SNY, that could potentially be awesome for Mets fans. Cuban is into cutting-edge analysis and operates the Mavericks such that he takes a loss in order to keep them competitive. They’re his expensive plaything, and he wants more — he has already attempted to buy the Cubs and the Rangers, and is reportedly desperate to own an MLB team. The issue is that MLB is equally desperate for him to go away.

Also, there’s this:

On the other hand, the Dolans, who have already tried to buy the team in the past, could perhaps offer up $1.5 billion to buy the Mets and SNY. Tragically, this is way more realistic than Cuban buying the team. No. You don’t want that. Nobody wants that.

Is this whole deal related to why they haven’t signed any big free agents this season?

Probably not. The Mets payroll will be up around $135 million or higher this season, which I believe is up from last year, so they’re still spending a lot of money. The problem is that it’s being spent in the wrong places, specifically on large contracts for under-performing players.

That said, there are other reasons they haven’t added any big names. This offseason was a player’s market, as evidenced by Carl Crawford and Jayson Werth receiving massive multi-year contracts — there were few, if any, bargains to be had. It also wasn’t a particularly deep class of free agents: the Yankees had a ton of money to spend and didn’t manage to add anyone until they gave Rafael Soriano his “choose your own adventure” contract last week. So this was not a market you wanted to be spending money in anyway.

What about the future? Are the Mets going to reduce payroll because of this? Is Michael Lewis going to turn this story into a sequel, where Sandy Alderson and his friends meet up again in “Moneyball II: The Search for More Money”?

I wouldn’t expect it. In that same Forbes article, it was estimated that the Mets have operated in the black each of the past four years, after netting a loss from 2004-2006. So the team is still making money, supposedly — about $25 million a year. I have no idea what happens to that money, if it gets pocketed or invested in the team elsewhere, or if Forbes even got the numbers right. Either way, remember that the Mets play in New York City, SNY is growing, and Citi Field has some really expensive seats and a really expensive naming rights deal. It would appear that the team itself is financially stable. If they wanted to add payroll for something worthwhile, I bet they could.

Is this going to make ticket prices more expensive?

No. If anyone in the organization has taken Econ 101 — though sometimes I feel that may not be a safe assumption — ticket prices are already as high as they can be. Think about it: If the Mets could charge more for tickets and thus make a larger profit, they would already be doing that regardless of ownership’s financial situation or how much money Oliver Perez is making. Similarly, if they could charge less, sell more tickets, and make a larger profit that way, they’d being doing that instead. Ticket prices are set by the demand for tickets, which has nothing to do with how much money ownership needs and everything to do with how badly you want to watch the Mets play.

So don’t worry: Your tickets are already as expensive as they can realistically be, and always will be.

How can I blame this on Carlos Beltran?

What? No. Stop it.

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6 Comments

Filed under Mets, Words

6 responses to “Ruh Roh: What All This Means for Mets Fans

  1. Patrick,

    I think there’s a pretty important error at the end of that post, where you refer to Economics 101.

    “If anyone in the organization has taken Econ 101 — though sometimes I feel that may not be a safe assumption — ticket prices are already as high as they can be. Think about it: If the Mets could charge more for tickets and thus make a larger profit, they would already be doing that …”

    This paragraph assumes — as does Econ 101, btw — that ownership has perfect information about the desires and assets of all potential Mets ticket holders. The market clearing situation you describe happens *only* in a perfect information universe. In reality, ticket prices will fluctuate based on the Wilpons/Mets’ *perceptions* of potential ticket holders assets/desires, and their willingness to bear the downside risk of any shift in prices.

    Economic distress may significantly reduce their fear of downside risk, so if they believe that raising prices will raise more money for the team, but aren’t sure of that, they may be more likely to disregard fears that the plan will backfire. (This paragraph is speculation, obviously.)

    Clearly, however, Carlos Beltran is at fault for our living in a universe of imperfect information, and should be released along with Ollie and Castillo. QED.

    • Patrick Flood

      Okay, I see that. The Wilpons could raise prices in an attempt to make money, out of a desperation of sorts. So, yes, ticket prices could go up as a result of this. Makes sense.

  2. But for the owners, Fred Wilpon and Saul Katz, it is not the first time they have had their names and personal fortunes roughed up in a Ponzi scheme. An investment firm started by the two men had to pay back nearly $13 million two years ago when a hedge fund run by the scion of a wealthy New Orleans family collapsed in what was then regarded as one of Wall Street’s more brazen frauds.

    The Madoff scheme is the one that’s going to cost them the team.As Texas owner Tom Hicks found out.

  3. I’m wondering where the New York Times is getting its information that the ‘Ponzis could be on the hook for a billion. Two parties who have already been sued (or threatened, in one case) settled for just the amounts of their profits, letting them walk away even. Why does the Times think Sterling will get hit a lot harder than that?

    Just my opinion, but I’m think these ‘Ponzis also failed Finance 101. It’s looking to me like they didn’t set aside any money for a possible settlement at the time the $58 million figure was first floated over a year ago (which would’ve been basic common sense, in addition to following ‘the book’ on potential liabilities). As a result they’re now having to scramble to come up with the cash. Since their non-Mets assets are primarily real estate, and since that’s still a down market, and since projections are the market will continue to be down for at least another year, their choices are coming down to: Selling some real estate at a loss; trying to find someone to loan them money against properties that may be under water; selling some Mets at a profit; or short-term borrowing against the value of the above water assets (Mets, SNY, Citifield).

    Based on the interview I read, they seem to be hoping for that last option, but hedging by looking into the third.

    All just speculation, of course. Wasn’t it considerate of them to address this ‘air of uncertainty’?

  4. Patrick:
    If the the team is worth about $800 mil and is leveraged about 80% would that not make a 25% equity stake worth only $40 mil? The number of of $200 million that has been bandied about would only apply if the team had no debt, right?

    BTW, while we are all guessing here:

    I think someone sharp comes along – not a celebrity looking soley for a vanity project – but someone who wants the vanity and the solid deal. he/she gives $40-50 mil for 25% and rights of first refusal on any other sale.

    When the Wilpons are backed into a corner they will have to go the expedient route of selling another chunk to said investor.

    So my prediction – for what it is worth – sole owners to majority owners to minority/no ownership stake for Wilpons.

    • Patrick Flood

      I assume the Wilpons are looking for a $200 million figure for the 25% of the team, as $40-50 million could be had by reducing the payroll to $100 million for a year or two, which wouldn’t require any selling of the team.

      I agree with your second point. The way the sale of the Texas Rangers went might be a good indicator for what to expect. It might not even go piece by piece — everyone now knows ownership is in trouble, so any prospective buyers might just have to wait them and the price out. If things go south in the Madoff suit, any offers for the team might suddenly look way more attractive.

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