1:18 pm Nov. 8, 2011
Ever since the collapse of a deal between Mets owner Fred Wilpon and Greenlight Capital's David Einhorn back in September, it's been clear that there would be negative financial consequences for the team's ownership group. It just wasn't clear what those consequences were going to be.
After all, Einhorn's pact—which called for the hedge-fund manager to pay $200 million to receive a 33 percent stake in the team, with the right to increase that stake to majority ownership in five years for a token amount—was mostly about providing a means for Mets ownership to pay off short-term debts, such as a loan from Major League Baseball and the team's estimated $70 million in 2011 losses.
But a pair of news items from late last week detailed exactly how rocky the short term will be for the New York Mets without David Einhorn's money. Late Friday afternoon, it was reported that the Mets were laying off approximately 10 percent of their staff. And the New York Post's Josh Kosman laid out the terms for minority-ownership stakes being offered by the team in hopes of attracting a replacement for Einhorn's investment.
The first piece of news provides anecdotal insight into why retaining star player Jose Reyes this off-season will be so difficult for the Mets—a team cutting approximately 15 low-paying jobs would seem unlikely to turn around and invest $20 million per season in a shortstop. But it is the second piece of news that provides a fuller picture of just what a tough winter the ownership group of the New York Mets may be in for.
The team is trying to sell minority shares of the team based upon a valuation of $950 million. While that may be high (Forbes had the team at $747 million as of April 2011, and the intervening events since certainly haven't increased that value), let's suppose for a moment that the figure is legit. It would mean that an investment of $20 million would be worth a little more than a two percent share in the team, while $30 million would get a minority owner a little more than three percent.
While shares in a team that lost $50 million in 2010 and $70 million in 2011 (and which can expect a further drop in revenue next year if it doesn't have Jose Reyes to draw fans) may not seem like a great investment, the Mets are offering a sweetener that's the equivalent of a CD—three percent a year annually, now through 2017, paid back on top of the initial investment. The investor also has the option to keep the team stake, but forfeit the three percent annual interest.
If the Mets, who have dropped in value from $912 million in April 2009 to $747 million in April 2011—a nearly 20 percent drop—continue to lose value, that minority stake would be worth significantly less over a six-year run with Wilpon ownership. The chances of receiving that three percent interest, on top of a return of principal, are not good.
The buyer is required to believe that Wilpon and his partners will have money left over to pay interest in 2017, even though they still owe $430 million against the team, with the principal of that loan due in June 2014, and another $450 million against SNY, with the principal of that loan due in June 2015. A judgment or settlement with the trustee for the Bernie Madoff victims Irving Picard, who is suing the Met owners for $386 million, (and potentially far more on appeal), would almost certainly also come in line ahead of any deal made with new minority owners now.
Simply put, the Wilpon group's proposition calls to mind the one offered by Groucho Marx to the ambassador from Sylvania in Duck Soup:
GROUCHO: Now, how about loaning this country 20 million dollars, you old skinflint?
AMBASSADOR: 20 million dollars is a lot of money. I shall have to take it up with my minister of finance.
GROUCHO: Well, in the meantime, could you let me have 12 dollars until payday?
AMBASSADOR: 12 dollars?
GROUCHO: Don't be scared, you'll get it back. I'll give you my personal note for 90 days. If it isn't paid by then, you can...keep the note.
As much as the Mets' owners need someone to take them up on their offer, it's hard to see what anyone would, on anything like the terms they're talking about. While making payroll isn't currently a consideration, since it is the off-season, the Mets have a revenue-sharing payment due to Major League Baseball by the end of November of between $15-20 million, and owe around $26 million in their twice-annual debt payments on Citi Field to the city of New York on December 15.
To date, MLB has been patient and forgiving of the Mets—a loan of $25 million due back at the end of the 2011 season hasn't been paid back yet, but Commissioner Bud Selig continues to support this ownership group publicly, if vaguely. But chances are the city of New York won't be as patient or forgiving, potentially triggering a rush from the other lenders to get what money they can now. Notice who the Kosman piece says Met ownership had to reassure about its minority owner plan—its other lenders.
This head-just-above-water routine will continue for as long as the owners can keep it going. It was the decision to invest so much of their money with Bernie Madoff that put Wilpon and his partners in their current financial predicament; it may end up having been their decision to sabotage the Einhorn deal that drags them under.