Madoff and the Mets are just part of the problem facing Bud Selig and Major League Baseball.
By Monte Burke and Nathan Vardi
As the U.S. economy and financial markets strengthened last fall, investors across the island of Manhattan breathed a welcome sigh of relief. But a short subway ride away in Queens it was a different story. Inside the offices of the New York Mets at Citi Field—the team’s plush new $800 million stadium—things looked grim.
The Mets had just finished a woeful season, losing more than half of their games and drawing 600,000 fewer fans than the season before. Despite the new ballpark, the team’s revenues had fallen by some 13%, resulting in an estimated $6.2 million in operating losses before interest, taxes, depreciation and amortization. The Mets did not have enough cash left over to meet a mountain of bills, including an upcoming league revenue-sharing payment that small-market teams were counting on. The banks that had once been so willing to lend liberally to the Mets were no longer in the mood to extend more credit.
In the past the team’s owners, Fred Wilpon and Saul Katz, had drawn on the Mets’ 16 accounts at Bernard Madoff’s investment firm when the team needed cash. But those funds disappeared when the Ponzi scheme collapsed. In an act of desperation, the Mets were forced to turn to Major League Baseball Commissioner Allan H. “Bud” Selig, who through the league made an emergency $25 million loan to the Mets, eerily similar to the too-big-to-fail bailouts taxpayers gave Wall Street to keep the banking system afloat.
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It wasn’t the only meltdown Selig faced. Another one of baseball’s marquee franchises, 2,400 miles away to the west, was in deep trouble, too. The Los Angeles Dodgers had become the prized bauble up for grabs in the contentious divorce proceedings between owner Frank McCourt and his wife, Jamie. Court documents revealed that from 2004 to 2009 the McCourts—using the Dodgers and related assets as collateral—had racked up a staggering $459 million in debt, much of which was used personally. FORBES estimates that almost all of the team’s profits were being used to pay down just the interest. As was the case with the Mets, Selig was again asked for help by a desperate team. This time he turned down the cash-starved Dodgers’ attempt to borrow $200 million from their cable broadcaster, Fox.
Coming just one year after the bankruptcy of the Texas Rangers, this latest one-two punch has been deeply unsettling to those with longstanding business ties to the game. “It’s bad for baseball to have this situation where two owners are teetering on the brink,” says sports economist Andrew Zimbalist. One baseball executive with a deep knowledge of both the Mets’ and Dodgers’ finances goes further. “This is a very serious issue,” he says. “These are two of the flagship franchises in all of sports. This situation is going to infect all of baseball.”
It shouldn’t be so. Major League Baseball, at least on the surface, would seem to be flush and full of reasons for optimism. The steroid scandal is an ever-shrinking asterisk, receding into history. At 73 million, attendance in 2010 remained strong, and revenues generated by the league’s 30 teams hit a record $6.1 billion. America’s professional sports behemoth, the NFL, is locked in an ugly, popularity-killing labor battle that can’t help but make baseball look good by contrast.
And yet there is a dark cloud threatening the game. The Mets and the Dodgers, two of the most important franchises in baseball, are in financial turmoil because of the debt-fueled financial recklessness of their owners, left unchecked by the league. The Mets’ mess has already affected the value of the team, which FORBES now estimates at $747 million, down 13% from last year, the biggest drop of any MLB franchise. And while the value of the Dodgers is up from $727 million to $800 million, its debt load is a whopping 54% of its overall worth. Selig, derisively known as “the Steroid Commissioner” for the blind eye he turned toward the artificial bulking up of the players throughout the 1990s and early 2000s, now faces the possibility of becoming known as “the Debt Commissioner” for the ballooning of franchise IOUs under his tenure and for letting teams sidestep league rules on debt limits. The results could impact everything from the revenue-sharing agreements that help float baseball’s small-market teams to player salaries and the upcoming renegotiation of the league’s collective-bargaining agreement with the players’ union.
Major League Baseball disagrees. While Selig did not directly respond to an interview request from FORBES, Robert Manfred Jr., an MLB vice president, claims the league watches the debt of its members closely. “Nobody outside the game knows what was done or not done with respect to any individual club,” Manfred says. Some see the trouble as a blip. “I don’t think baseball will be hurt on a permanent basis,” says John C. Malone, chairman of Liberty Media, which owns the Atlanta Braves. “These teams are ego assets. There are plenty of people out there who would love to own them.”
But even deep-pocketed owners can get tripped up by leverage, and Major League Baseball has done little to police the problem. MLB has a rule that prohibits teams from operating at debt levels greater than ten times operating income (Ebitda), but it’s enforced arbitrarily and is easy to get around.
In 2009 Thomas Hicks, then the billionaire owner of the Texas Rangers, had accumulated so much debt that he defaulted on $525 million of loans and eventually couldn’t cover the team’s operating costs. With the support of MLB, Hicks was forced to push the team into bankruptcy court and sell the Rangers last year to a group headed by Hall of Fame pitcher Nolan Ryan. In the year leading up to the bankruptcy, FORBES estimates, the team had an effective debt-to-operating-income ratio of 40—four times what baseball allows. Hicks sidestepped MLB’s rules by loading much of the debt onto his holding company, Hicks Sports Group. This practice has been increasingly prevalent among MLB teams, allowing them to hew to the letter of the league’s law while effectively expanding their payrolls and balance sheets at the same time. MLB’s explanation? “I don’t think anyone outside the game is in a position to make a judgment as to how the debt-service rule has been administered,” says Manfred.
That clubby attitude is a serious liability. Malone says baseball does a good job of vetting potential owners. “When we bought the team in 2007, I felt like they did a pretty good proctological exam on us.” But after an owner buys a team? “There is no oversight then,” says Marc Ganis, the sports business consultant who advised the Tribune Co. in the sale of the Chicago Cubs. “You’d never see, say, a divorce rip apart a franchise in the NFL or NBA.”
Moreover, the National Basketball Association and the National Football League are more proactive in fixing franchises that get into trouble. The NBA seamlessly took over the New Orleans Hornets when they teetered on insolvency. In the NFL, ownership bylaws ensure that the league is notified by the debt-holding bank at the first sign an owner is having any trouble meeting loan payments.
Not so in baseball. Insiders attribute the lack of oversight to the laissez-faire culture of MLB executives and the independence and fiscal feistiness of team owners. Others are more cynical and say that as long as you toe the line with Selig, supporting his revenue-sharing plans and labor negotiations, you get what amounts to a free pass when it comes to oversight of your business practices. The Wilpons are well-known friends of Selig. The McCourts have always supported the commissioner’s initiatives. Both got in way over their heads.
The situation with the Mets looks particularly bleak. The emergency $25 million loan from baseball has bought the Mets’ owners time to attempt to raise money by selling an ownership stake in the team. The purpose of the equity financing is to help fund expected operating losses in 2011 and potentially 2012, and pay down the league’s loan and other debt. Crushing payments are looming as early as April on the Mets’ $145 million payroll for the upcoming season and other obligations. The Mets originally wanted to sell only 25% of the team. With $450 million of debt, it seems the Mets would be lucky to get even a modest $75 million for that stake, especially considering the discount often applied in sales of minority holdings. Wilpon and Katz have publicly conceded they may need to sell more than a quarter of the Mets, but they insist on maintaining a controlling share. Bankers are drawing up some creative solutions. Still, the math does not look good.
How did Wilpon and Katz get into this mess? Part of the problem is they had more than $500 million of their assets at Bernard L. Madoff Investment Securities wiped out by the collapse of the Ponzi scheme and now have Irving Picard, the court-appointed trustee of Bernard Madoff’s bogus investment firm, suing them for $1 billion. Another problem is the team handed out rich contracts to players who ended up being expensive disappointments, resulting in higher expenses and lower revenues.
But a big reason the Mets are in this situation is that the team feasted on debt for a decade.
Before Nelson Doubleday exercised an option in 2001 to sell his half of the team to Wilpon and Katz, who already owned the other half, the Mets had $156 million in debt, according to a court-filed valuation analysis. Wilpon had the Mets borrow $137 million to purchase Doubleday’s share in 2002 and increased the team’s debt to some $300 million. At the time Wilpon offered his friend Bernie Madoff the opportunity to invest in the Mets himself, but Madoff declined, says the lawsuit filed by Picard. Two years later, says Picard, Wilpon and Katz used their account balances at Madoff’s investment firm to prove their financial strength and obtain credit facilities to refinance some of the loans they used to purchase Doubleday’s share.
Since then the team’s debt has soared by another $150 million, which one person close to the Mets explains was used largely for operating purposes. A portion was added last year when the business empire of the Wilpon and Katz families refinanced some $500 million that had been secured by accounts at Madoff’s firm and had previously been intertwined with the families’ various and unrelated business entities. Wilpon and Katz shifted some of that debt squarely onto the Mets, say two people familiar with the refinancing. In addition, the team is contractually obligated to make about $50 million a year in annual payments connected to the $695 million of tax-exempt bonds issued by New York City to fund the building of Citi Field. If a potential investor thinks about the net present value of those payments as debt, there is no equity value left in the Mets.
It has also put the owners in a cash crunch. But other than unloading part of the team or selling out their new stadium all summer, they lack an apparent lifeline. Wilpon and Katz declined to talk to FORBES, but according to Picard, they’re in a tough bind without Madoff. The way Picard describes it in his lawsuit, over nearly two decades the Mets’ owners withdrew $94 million of other people’s money from the Mets-related accounts at Madoff’s investment firm, often to provide the cash flow needed to run day-to-day operations, covering expenses like payroll and players’ deferred compensation. When ticket sales dropped, the owners would “scrape” from the accounts to meet cash shortages, Picard alleges. Wilpon and Katz have maintained they were innocent victims of the Madoff Ponzi scheme and that their business interests, including the Mets, never depended on Madoff.
Wilpon and Katz think they have a way out. A person close to the team says a dozen or so potential bidders have submitted applications to Major League Baseball for approval to see the Mets’ financials. They are expected to get those numbers before the start of April. The Mets’ owners are banking on the idea that these potential investors will come to see buying a stake in the Mets as a bargain. The marketing pitch is that the team may have drawn only 2.6 million fans last year, but not long ago annual attendance was well above 3 million, and it will be again once the team overcomes its current on-the-field problems. “I have never seen a sports or baseball sale transaction that has generated as much interest as this one,” says Steve Greenberg, the Allen & Co. banker hired by the Mets to sell part of the team. “I guarantee you as I am sitting here that we will be able to sell a piece of the New York Mets for a big chunk of change.”
But if—and it’s a big if—Greenberg is right and the team raises enough to deal with its problems, Wilpon and Katz face a big potential bill from Picard’s suit. Former New York governor Mario Cuomo is trying to broker a deal, but even with their other real estate and investment assets, which are hard to sell, it’s unclear how easily Wilpon and Katz could pay a settlement without involving the Mets or the regional sports network they control.
Across the country in Los Angeles, Dodgers owner Frank McCourt faces an equally messy legal battle. In 1977 he founded the McCourt Co., a Boston-based commercial real estate firm that specialized in parking lots. Two years later he married his college sweetheart, Jamie Luskin. As McCourt’s business thrived, he hungered for a Major League Baseball team. In 2002 McCourt made an unsuccessful bid for the Boston Red Sox. A year later he looked over the Los Angeles Angels of Anaheim. Finally in 2004, when Rupert Murdoch’s Fox Entertainment Group wanted to get rid of the Los Angeles Dodgers, McCourt realized his dream.
He didn’t have to spend much of his own money to do it. The sale price for the ball club and its stadium in Chavez Ravine was $430 million. McCourt borrowed all but $9 million of the purchase price, an unusually large amount of financing. That sum included a $196 million loan from Fox, which used one of McCourt’s South Boston parking lots as collateral. (Fox later sold the lot for $205 million.)
Major League Baseball approved the deal, apparently believing McCourt would eventually work his way out from under the load. And under McCourt the Dodgers have had healthy returns. Last year revenues were an estimated $246 million (net of revenue sharing) and operating income was $32.8 million. FORBES estimates that the Dodgers’ value has nearly doubled to a current $800 million under his ownership. But the debt increased, too, and now stands at 13 times Ebitda, a problem that came to light in late 2009 when Jamie McCourt filed for divorce.
The central issue in the divorce is the Dodgers. Frank contends that the team is solely his. Jamie believes they are a shared asset. The trial is currently on break, and there is no new court date scheduled. It may not be taken up again until early next year, and how it will end is anyone’s guess. But what’s clear from the court documents is that Frank McCourt used the team as collateral to rack up $459 million in debt from 2004 to 2009.
Over that period McCourt took $108 million of the money in personal distributions and funneled it into the couple’s real estate purchases. It also “supported the couple’s very expensive lifestyle,” says David Boies, the superlawyer representing Jamie. The McCourts bought eight houses across the country, including a $28 million Malibu mansion. (A house in Cabo San Lucas was sold last year.) In 2006 McCourt turned two of the stadium’s parking lots into a separate company, then took a $60 million loan against it. He used $12 million of that on the team and took the rest of the money, court documents say. According to Raman Sain, a principal at accounting firm Holthouse Carlin & Van Trigt, who studied the McCourt’s legal documents on behalf of the Los Angeles Times, Frank McCourt borrowed $23 million against the team in 2008 and $8.5 million in 2009.
Steve Sugerman, Frank McCourt’s spokesman, insists that the team is not financially desperate and is in no danger of falling into bankruptcy. But according to Sain, in 2009 every dollar in free cash the Dodgers earned “was used to make payments on the interest on the debt,” not the principal. (The Dodgers dispute this.) It doesn’t help that many of the Dodgers’ deferred player salaries, like the $20 million still owed to former outfielder Manny Ramirez, are coming due. One way for the team to dig itself out of the hole is by renegotiating its cable television rights, currently owned by Fox, which pays them over $30 million a year, and are due to expire in 2013. The NBA’s Los Angeles Lakers recently landed a reported 20-year, $3 billion agreement with Time Warner Cable. The Dodgers could expect at least that much in a similar deal. But the McCourts’ divorce proceedings have left the team’s leadership in limbo.
The McCourts’ financial statements since 2009 have not been publicly available. Boies says the team has added “tens of millions of dollars” in debt since then, but not, apparently, as much as Frank McCourt would have liked. Though the Dodgers say they have paid back all debt accrued since 2009, in the last two years the team has been turned down for loans from Citibank and the founder of the TV infomercial company Guthy-Renker. A possible business venture with Chinese investors, which would have added some cash to the larder, fell through. Last year the Dodgers took an undisclosed cash advance from cable partner Fox. And in February the Dodgers requested a $200 million loan from Fox—using the team’s next four years of cable rights as collateral. Selig did not approve it.
These financial follies have chilled spring training, normally baseball’s most optimistic season. With opening day around the corner, one beaming executive in baseball was thrilled to discuss the league’s robust popularity, its record revenues and the increase in franchise values. But mention the Mets and the Dodgers and his voice becomes strained. “These are two teams that are hurting for money and have no place to go,” he says. “It says something about the entire league that they got to this place to begin with.”
He’s hardly alone in his concerns. In numerous interviews with sports bankers and baseball insiders for this article and in preparing FORBES’ annual valuation of baseball franchises, worries over the consequences of debt in the league continually cropped up.
The Mets, historically a rich franchise, will likely face a further financial slide this year, and the revenue-sharing checks the team cuts to its small-market brethren will shrink—the difference between a good left fielder and a poor one for a team like the Pittsburgh Pirates. The debt troubles could also make it more expensive for teams to borrow, dragging on the value of the entire league. At the very least lenders are likely to start demanding to be paid a little extra, now that some banks have been stuck holding on to Mets debt because of baseball’s restrictions on who can purchase it. “We are a pretty stupid industry, but eventually we will realize this paper should be yielding up by a couple hundred basis points,” says one banker.
MLB has indicated it may finally be ready to address some debt issues, but regulating owners is tricky. So far Selig seems unwilling to challenge owners who may resent any meddling in their finances.
Meanwhile, the Arizona Diamondbacks and the San Diego Padres have already drastically reduced player payroll in order to help pay down what they owe creditors, a trend that could very well gain momentum and compromise league competitiveness. The Mets are unlikely to replace much of the $60 million in salaries that comes off its books after 2011, people familiar with the team’s plans say. The Dodgers’ payroll slipped to twelfth in the league last year, behind the small-market Minnesota Twins. (The Dodgers are expected to increase payroll $15 million this year.) The Chicago Cubs are operating with $583 million of debt while the Detroit Tigers have $210 million—debt-to-value ratios in excess of 50%.
Perhaps most important, financial problems with franchises in the league’s two biggest markets threaten to derail the renegotiation of the collective-bargaining agreement between MLB and its players’ union, which expires on Dec. 11. Talks have already begun. What looked like smooth sailing for baseball’s CBA may hit some dodgy currents on the major issues of revenue sharing, debt service and deferred player compensation.
“The great virtue of owning a big-market team is its tremendous asset value,” says Boies, who has received an education in sports finance while handling the McCourt case. “But this becomes a disadvantage if an owner is not disciplined and draws on the asset as if it’s inexhaustible. The asset is large, but it is not inexhaustible.” The same could be said for all of baseball.