Commentary

Firestorm threatens to engulf Mets

Financial calamity goes beyond Madoff; jeopardizes Wilpons' hold on the team

Updated: January 27, 2012, 1:27 PM ET
By Adam Rubin | ESPNNewYork.com

One week after swindler Bernard Madoff's arrest for fraud on an epic scale, Jeff Wilpon insisted the massive Ponzi scheme's collapse would have no impact on his family's most treasured possession -- the New York Mets.

"The individual partners lost some money at Madoff, but it doesn't affect the Mets," Wilpon, the team's chief operating officer, maintained in December 2008. "It doesn't affect the Citi Field project. It doesn't affect [regional sports network] SNY or any of our operating businesses.

"How is that possible? We have other money. Just because you guys don't know how much money we have, we have other money and other funds outside of this. It's called diversification."

[+] EnlargeJose Reyes
Jim McIsaac/Getty ImagesReyes' price was too high for the Mets, so the NL batting champ took his talents to South Beach.

Those words now seem hollow, as the impact of their financial woes plays out and the chorus wondering whether the Wilpon family can retain ownership of the Mets grows louder. Thirty-seven months after Madoff's arrest, 75-year-old principal owner Fred Wilpon, his son, Jeff, and brother-in-law, Saul Katz, find themselves fighting to retain the ballclub, which the family has owned at least in part since 1980.

Even though the Wilpons are viewed as net winners in Madoff's Ponzi scheme -- meaning they withdrew more than they invested -- the Wilpons nonetheless believed they had $500 million in accounts with Madoff when he was arrested. That once-presumed wealth now is gone, leaving them with a huge void in their reserves and an inability to ride out current losses and overcome massive debt while maintaining a large-market payroll.

"It seems like it might take a perfect storm of lucky events to have it be salvageable in that the Wilpons are able to retain ownership," said Dr. Joel Maxcy, an associate professor and member of Temple University's Sport Industry Research Center. "… Certainly the Mets are a valuable asset and would continue to be. They have everything going for them in terms of market and stadium and television. But the debt associated with the team makes it a really precarious situation."

Several financial minefields loom, most immediately a $386 million civil suit brought by the trustee trying to recover funds to distribute to net losers in Madoff's Ponzi scheme. The trial is scheduled for U.S. District Court in lower Manhattan on March 19.

Mets officials insist the imminent addition of four to seven minority investors buying 4 percent shares for $20 million apiece, which they maintain will close within weeks -- plus shares already purchased by Jeff Wilpon and Katz -- will put the team on a path toward financial stability. Yet much of that money will immediately go toward repaying a $40 million emergency loan from Bank of America and a $25 million emergency loan from Major League Baseball, while several other sizable obligations remain. The goal is to eventually raise about $200 million via minority investors.

The latest revelation underscoring the organization's grim financial condition came Jan. 5 when the Mets acknowledged hiring CRG Partners -- consultants who help distressed companies. The firm shepherded the Texas Rangers through their bankruptcy process two years ago, resulting in an ownership change.

"Given the expertise of CRG, I find it hard to believe they weren't brought in for their restructuring capabilities," said attorney Howard Seife, global chair of the bankruptcy and restructuring practice at New York-based Chadbourne & Parke.

[+] EnlargeDavid Einhorn
Paul Bereswill/Getty ImagesFred Wilpon (right, with Sandy Alderson), decided David Einhorn (in cap) wanted to own the team.

Seife, who represented creditors in the 2009 bankruptcy proceeding involving the Tribune Company that resulted in the sale of the Chicago Cubs, added: "Given the state of the baseball team and the decline in attendance and across the board in revenue, it's kind of hard to see how they can support this debt structure. I mean, I don't see how they can meet the bond debt in 2012. Just to meet that last year, they had to borrow from Bank of America on the bridge [loan]. They had the emergency loan from Major League Baseball. Things are only going to be worse in 2012 because revenues are declining, because they're going to be selling, at least in my mind, fewer tickets.

"Even though they projected a 10 percent uptick [in attendance], that's hard to believe when the team is going to be much less interesting. Jose Reyes is gone. It's going to be tough putting people in the seats. I think they have a financial crisis. I don't see how they meet their next bond payment in the middle of the year."

Seife acknowledged that with $20 million investment infusions from multiple sources, combined with the team's apparent $53 million payroll slashing: "I guess they could squeak by another year. But we certainly haven't seen any evidence of people snapping up those 4 percent stakes. If they can deliver that, maybe that will be able to carry them through [2012]. But if that were true, I don't know why they would be hiring CRG."

The Mets dispute any inference that their association with CRG means bankruptcy or a full sale is looming. Organization insiders suggest only 10 percent of CRG's business relates to bankruptcies. (Seife said that may be true because many restructurings do not require a formal courtroom bankruptcy proceeding.) The Mets maintain the firm that worked with the Rangers was chosen because it now has specific expertise in the peculiarities of baseball accounting.

"To be clear: CRG's services aren't bankruptcy-related," the Mets recently tweeted to the team's 60,000 followers. "There are no bankruptcy services being provided by anyone. They review and analyze financial statements, projections, budgets and forecasts."

Team executives declined formal interview requests from ESPNNewYork.com.

Said bankruptcy attorney Doug Furth of Manhattan-based Golenbock Eiseman Assor Bell & Peskoe LLP: "I have no question in my mind that they're doing a lot of different things -- some of which may not relate to bankruptcy. I'm sure the Mets are hoping a $200 million minority equity infusion works, because it sounds like that would more than get them through this year and give them a chance to get their revenues headed in the right direction. But I can't imagine that anybody in their position would not be doing bankruptcy prep. It's just counterintuitive that you wouldn't be doing downside planning. I don't think you can tell by what's public how close that really is. But they would be silly not to do it."

It is indisputable the Mets have major financial issues. Among those:

• General manager Sandy Alderson acknowledged the organization lost $70 million in 2011.

Bernard Madoff
AP Photo/David KarpShould the Wilpons have known Madoff was a fraud?

• Credit-rating agency Standard & Poor's, expecting that revenues at Citi Field will continue to slide, on Dec. 28 lowered its outlook on the bonds used to finance the stadium from "stable" to "negative." That has no practical effect on the Mets since the interest payments on the bonds are fixed, now at about $50 million annually. It only affects the price of the bonds to traders on the secondary market, which is largely immaterial to the team. Still, the underlying figures cited to justify the revised outlook are alarming.

S&P credit analyst Jodi Hecht reported stadium revenue tumbled 12 percent last season compared with the previous year. The revenue from certain seats pledged to pay off the Citi Field bonds -- mostly those situated in the infield, which account for 41 percent of overall stadium revenue -- fell 22 percent. Merchandise, as well as food and beverage sales, each plummeted by more than 20 percent. Advertising revenue slipped 4 percent -- even with a fixed, $25 million annual payment from Citibank for stadium naming rights included in that calculation, and committed for another 17 seasons. Suite revenue fell 6 percent, with about one-third up for renewal this offseason. Hecht projected a further 10 percent drop in stadium revenue in 2012.

• Home attendance, which peaked in the final year at Shea Stadium in 2008 at 4.0 million, only figures to worsen during the upcoming season. After drawing 2.3 million last year, a 27 percent decline from the inaugural season at the stadium two years earlier, the Mets appear headed for their fourth straight losing season as fan enthusiasm nears rock bottom. One suite holder told ESPNNewYork.com: "I want to sell our 'luxury suite,' but I can't even give tickets away." Doubly troubling is that the lower volume of ticket sales coincides with ticket-price reductions for a third straight season, meaning the seats that are sold are commanding lower prices and serving as a further drag on revenue.

• The organization last month acknowledged requiring the $40 million short-term loan from Bank of America on top of its existing debt just to limp into 2012. Major League Baseball looked the other way because the loan was portrayed as a temporary bridge until transactions with the incoming minority investors could close and stabilizing cash is infused into the organization.

Now, a decade after buying out Nelson Doubleday, who owned the other 50 percent of the franchise, the Wilpons' financial crunch requires them to sell minority shares of the team to raise cash.

[+] EnlargeMets Fans
Brian J. Myers/US PresswireThis guy may be tripping over his beard before the Mets return to contention.

The Wilpons, whose primary wealth was derived from real estate, announced last May that hedge-fund guru David Einhorn had been selected to purchase one-third of the team for $200 million. That deal fizzled in September as it became clear that Einhorn's motivation was to watch the Wilpons' finances further crumble, offering him a clear route to majority ownership.

The Mets' Plan B now involves selling $20 million shares of the team -- with an enticement to prospective buyers of being able to cash out in six years at 3 percent annual interest, in essence structuring the investments as certificates of deposit that mature in 2018 if the buyer chooses. (Other minority ownership perks include access to Mr. Met and business cards that read "owner.")

Meanwhile, belt-tightening has contributed to layoffs. The team acknowledged a 10 percent reduction in baseball operations staff late last year. The Mets' Pacific Rim scout is among those out of work. One minor league team has been abolished. Even a 61-year-old employee with cerebral palsy who worked at the team's Port St. Lucie, Fla., minor league complex and who earned only $3,000 last year was axed, according to organization sources. A Mets official insisted the dismissal was merely part of the sound business practice any operation would undertake in streamlining expenses -- not an indication of financial distress. The person argued that citing that layoff is unfairly designed to fit a narrative about the Mets' financial woes. As for the elimination of the Mets' Gulf Coast League minor league team, the organization noted that it still has more affiliates than most major league clubs.

Can the Wilpons hold on?

It is clear the family is highly motivated to retain the franchise rather than walking away with the several hundred million dollars that would be theirs from a sale after paying off debt. (The troubled Los Angeles Dodgers are expected to sell for more than $1 billion, demonstrating just how much a major-market team is worth.)

Running National League baseball in New York is the family's identity. Jeff Wilpon has often stated that his goal is for the Mets to remain operated by his family for at least another generation beyond him, with his school-age children eventually growing into prominent roles.

Major League Baseball, which has been a staunch ally under commissioner Bud Selig and shown extreme patience in dealing with the Wilpons, has retained a law firm specializing in bankruptcies as an adviser regarding the Mets, suggesting at least some uncertainty.

One potential knockout blow may be looming. The civil jury trial against the Wilpon family brought by the trustee trying to recover funds for net losers in Madoff's Ponzi scheme is scheduled to begin only 17 days before Opening Day. Presently at stake is $386 million. An appeals court one day could restore the maximum liability to $1 billion, although only after the original trial.

"How could anybody deny that it's been a challenging time?" Fred Wilpon told reporters at this month's quarterly owners meetings in Paradise Valley, Ariz. "But I came from nothing. I meet the challenges. So does Saul [Katz] and Jeff [Wilpon] and our whole family.

"We're meeting the challenges, and I think we'll be fine."

Adam Rubin has covered the Mets since 2003. He's a graduate of Mepham High School on Long Island and the Wharton School of the University of Pennsylvania. He joined ESPNNewYork after spending 10 years at the New York Daily News.
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