Fred Wilpon found his financial angel, but he effectively sold the New York Mets in the process.
When Wilpon announced earlier this year that he was only willing to sell a minority interest in the team – a 33% interest in exchange for a $200 million cash infusion – and no portion of the team’s regional sports network, SportsNet New York, few business people believed there would be any takers. No one who was smart enough to have $200 million in spare change lying around would be interested in that kind of a deal, short of being delirious in addition to being rich. Turns out, we were right.
When the announcement was made last week that Wall Street hedge fund manager and long-time Mets fan David Einhorn had agreed to become part of Wilpon’s ownership group, the team put the requisite spin on the deal. In exchange for his $200 million, Einhorn would receive a 33% interest in the Mets along with one of four votes on the board that oversees the team. Control would remain with Wilpon’s family which includes his son, Jeff and brother-in-law, Saul Katz. That was it. No further details were forthcoming from the team.
But those terms didn’t add up. Sure enough, when ESPN leaked the alleged specifics of the deal, they instantly made sense. Einhorn’s investment carried with it the option to purchase up to 60% of the team at the end of three years. If Einhorn exercised his option, Wilpon could elect to refund his investment in full. However, even if Wilpon returned Einhorn’s cash, the latter would retain his 33% interest in the team.
Other than the opportunity cost Einhorn is giving up – what he could do with his money over the next three years - he is effectively doing one of two things: “Loaning” Wilpon $200 million at what amounts to a 33% interest rate, i.e., a one-third stake in the team; or purchasing an option which could lead to a majority interest in the club. Nice terms, if you can get them.
But this was clearly a buyer’s market. Wilpon was desperate for money, recently admitting that the team was “bleeding cash” and would lose at least $70 million this year. In addition, he was facing a double whammy from his financial relationship with former buddy, Bernie Madoff. The trustee in Madoff’s bankruptcy case, Irving Picard, is seeking $300 million in profits Wilpon allegedly earned from investing with ponzi king Bernie, along with an additional $700 million in so-called “claw-back” profits. Wilpon faces the very real prospect of settling the lawsuit for hundreds of millions of dollars at the same time that he can no longer count on the 12% returns he previously received from Madoff, some of which were apparently used to fund the operations of the Mets.
After three decades of Mets ownership, Wilpon desperately wanted to save face by not selling the team outright. The arrangement with Einhorn is effectively an installment sale. If Wilpon can’t fund this year’s estimated losses of $70 million, after previously borrowing $25 million from MLB to fund team operations, it is highly unlikely he will magically come up with $200 million to buy Einhorn out in three years, regardless of how the Picard lawsuit is resolved.
ESPN also reported the deal insulates Einhorn from the Picard lawsuit. It would come as no surprise if Einhorn also shielded himself from team losses. Einhorn is a sophisticated and obviously successful investor. It would be out of character for him to assume liability for losses incurred as a result of decisions made by others, unless funding those losses translated to additional equity in the team.
Terms of the agreement between Einhorn and Wilpon are still being negotiated, and we may never know all the details. But it’s likely that Einhorn also negotiated an option of first refusal should Wilpon attempt to sell the team to a third party in an effort to repay Einhorn’s investment. Such language would effectively make Einhorn the owner in waiting.
Wilpon’s ownership of the Mets will come to an end in three years, perhaps sooner should he be forced to go back to the Einhorn money well. Einhorn’s “investment” is the first step in a process that will lead to majority control of the New York Mets.
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Jordan Kobritz is a staff member of the Business of Sports Network. He is a former attorney, CPA, and Minor League Baseball team owner. He is an Assistant Professor of Sport Management at Eastern New Mexico University and teaches the Business of Sports at the University of Wyoming. He looks forward to your comments and can be contracted, here.
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