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Saturday, January 29, 2011

Bankruptcy Looms For Mets, Wilpon


The attempt by the court-appointed receiver in the massive Bernard Madoff Ponzi scheme fraud, Irving Picard, to seek as much as $1 billion from the owners of the New York Mets (the Wilpon family), according to a New York Times report, has forced the Wilpons to seek minority owners for a 25 percent stake in the club.

Other reports and the ballclub's clear unwillingness to make material, monetary expenditures strongly suggest the franchise may already be insolvent.  In fact, Crime, Politics and Policy predicts that the New York Mets will soon be forced into bankruptcy.

(UPDATE:  Potential investors -- perhaps seeking publicity -- have already stepped forward within a day of the report.) 

This excellent article by the New York Post's Josh Kosman illustrates that both the Mets franchise and its affiliated SNY cable network are heaviily debt-ridden and, in at least one recent season, the Mets have actually lost money despite excellent attendance and a new ballpark, Citi Field. 

As Crime, Politics and Policy  reported back in October 2009 (with a hat tip to Bloomberg News in that earlier report), Picard estimated the Mets (through Mets LP) to have made an actual profit of about $47 million (measured as the excess of distributions over investments).  Picard now seeks not only the return of that real -- and entirely illicit -- profit (now the amount is estimated at $300 million, from about 100 entities connected to Fred Wilpon, his brother-in-law Saul Katz and other family members), but also additional monies.  (Many entities are commonly named in ways which hide the identification of the owners, and there is nothing nefarious or illicit about this practice.)

One of the principles Picard is following -- and which is customary for receivers seeking to recoup assets to distribute to crime victims -- is that all investors should be treated equally.  This means that if an investor lost money, but did not lose as much of his investment, proportionately, as the average investor/victim, the "lesser of a victim" ends up being subject to a "clawback."  If the average investor/victim lost, say, 80% of his investment and a particular investor/victim lost only 20% of his investment, the particular investor is on the hook.  This results in bonafide victims being sued for additional monies, but this is necessary to ensure absolute fairness.

Moving back to the Mets' financial condition:  Reading between the lines, one may surmise -- and I fully expect -- that the Mets' owners (the family of Fred Wilpon) have had to burden the franchise with debt in order to take out cash. In essence, this is like a leveraged buyout or "cash out" home equity loan (remember those?); in either case, a healthy asset is saddled with debt in order to make cash distributions.Many of these scenarios have ended badly in the past. Many people lost their homes -- and many others are still in a distressed situation -- for no other reason than having incurred too much debt relative to their ability to service the debt (i.e., make the payments of principal and interest).
Many perfectly healthy businesses have gone into bankruptcy, despite being profitable on an operating basis (that is, before accounting for the debt used to either buy the business or make cash payments -- that is, to siphon out cash -- to investors or lenders).

Addressing the issue of prospective investors/purchasers:  I cannot see how an investor agrees to Fred Wilpon's stated terms of a silent, maximum 25% partner.  Why be a silent partner, without control, and allow a man who was either duped by -- or criminally complicit with -- Madoff to exercise business judgment over your money?

I predict the only capital infusions in the near-future will be by investors who care more about ego and publicity for themselves.  Serious investors will wait until raw desperation creeps in.  Perhaps a baseball season with sub-2 million attendance, in a new ballpark where the bloom is already off the rose and which makes Mets fans wistful for Shea Stadium, will hasten the process.  A serious investor will strike when the value is lowest, and will purchase of a controlling stake (50%) or negotiate (and get)acquisition terms whereby management control will be part of the deal despite a capital investment for a distinct minority stake.  
Baseball fans -- that is, Mets fans -- generally have little regard for the baseball management acumen of the Mets' current ownership.  Many Mets fans seem to realize that the future health of the franchise, and its return to sustained on-field excellence, may depend on an ownership change.  Perversely, this segment of Mets Country will now be rooting for the Mets to do as poorly as possible in 2011 and thereafter, until there is an ownership change.

Eric Dixon is a New York lawyer (who formerly handled major corporate acquisitions and now handles investigative matters including cases of fraud and malfeasance) and a lifelong Mets fan.  Mr. Dixon can be reached for comment or consultation on this and other legal, strategic, business and political matters at edixon@NYBusinessCounsel.com and 917-696-2442.






3 comments:

  1. I cannot see how an investor agrees to Fred Wilpon's stated terms of a silent, maximum 25% partner.
    Bankruptcy

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  2. Each of these types of debt has different results if you don’t pay so each type needs different a strategy.
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  3. But, this little investment could save you hundreds or thousands of dollars- not to mention countless hours of stress and anxiety wondering what might happen.
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    ReplyDelete