Monday, November 21, 2011

The Rise and Rise of the Wilpon Baseball Empire

The Rise and Rise of the Wilpon Baseball Empire
Over the last 30 years, Fred Wilpon has gone from regular fan, to minority owner, to half owner, to complete owner of the New York Mets.  And it’s going to take more than a run in with Bernard Madoff to unseat him.

Recently, I was reflecting my Mets and this whole Fred Wilpon - Bernie Madoff mess and it occurred to me how many drastic changes have occurred in such a short period of time.  One day, it's a billion dollar lawsuit; the next, the majority of the lawsuit is thrown out by a judge. One week they are entering into a tentative agreement with hedge-fund millionaire David Einhorn to purchase a stake in the team; the next,that deal is no longer on the table.

When his deal fell through with the Mets, Einhorn had some very interesting comments for the media. "I was very surprised to see that many of the provisions of the deal, that were in place since May, had been changed.  A week ago I thought this deal was in great shape and would be done very soon." (link).  In a statement, Einhorn accused the Mets owners of changing the terms of the deal at the last second, saying that the "extensive nature of changes that were proposed to me at the last minute has made a successful transaction impossible." [1]

It goes without saying that those are some pretty serious allegations from Einhorn.  As fans, we may not know what to make of them, because we don’t know too much about the guy.  Were his comments the sour grapes from a spurned partner?  Or could the Wilpons truly have surprised him with the changes they proposed at the last second?
Before I go further, it bears mentioning that Fred Wilpon is extremely well-regarded, both personally and professionally.  His acumen in baseball and in real estate, his true career, have never been questioned.  His company, Sterling Equities, is considered a star in the industry (excellent business-side writeup here).  As the New Yorker explained in its brilliant article on Wilpon and Madoff earlier this year:
“But Fred is in the very next group, with the Rudins, the Resnicks, and the Zuckers.” Wilpon’s reputation transcends the extent of his holdings. “Everybody likes Fred, there is tremendous respect for Fred, people listen to what he has to say, and I don’t know of anybody who has ever had an open fight with him,” Spinola said. “They’d all like to beat each other out, but I have never heard a negative thing said about Fred Wilpon.” William Rudin, the chief executive of Rudin Management, said, “Fred’s reputation in the real-estate community is top tier. He couldn’t be more of a gentleman.” (New Yorker)
But for me, I am most interested in the Mets, and in learning more about how Fred Wilpon became the powerful figure that he is today.  The following is some of what I’ve learned, from public sources, about some of the more important occurrences in the history of our franchise.

We’ll never get into that board room and hear the conversations between the Wilpon and Einhorn teams, and we’ll never see the actual term sheets that were proposed, but one thing that lends credence to Einhorn’s claims is an examination of how the Wilpons broke into the sports industry and gained their influence.  Fred Wilpon’s ascent to power has been a consistent and inexorable march. 

In fact, the recent saga with David Einhorn is not even close to being the most interesting ownership saga surrounding the Mets in the last decade.

Before blogs were a ubiquitous part of the way we get our sports news – exponentially amplifying the hype and noise and speed with which we get information – the Mets went through a very dramatic ownership drama.  In August of 2002, Fred Wilpon and Nelson Doubleday consummated an agreement whereby Doubleday would sell his share of the Mets to Wilpon and end a bitter, fifteen year relationship as co-owners.  The day the agreement was made public, the Times reported:
Nelson Doubleday and Fred Wilpon ended their public feud over how much the Mets were worth yesterday and agreed to a deal in which Wilpon would purchase Doubleday's half share in the team... The legal dispute between the two men erupted last month when Wilpon filed suit in United States District Court in Islip, N.Y., to force Doubleday to accept the payment terms set out in a $391 million valuation of the Mets. The lawsuit exposed the distrust and acrimony that had simmered between them for years.
Doubleday did not look good at the time.  In the article, Doubleday is referred to as a "blustery scion of publishing wealth" who claimed that Wilpon was "in cahoots" with Major League Baseball.  The article continues on to call Wilpon, the "quieter, self-made real estate developer" who was able to successfully "undermine" Doubleday's arguments.  So long as the New York Times was concerned, there appeared to be a winner in the court of public opinion.

But what really happened there?  Does that incident provide context for what happened with Einhorn?  And how much of it can be explained by the extremely close relationship between Fred Wilpon and MLB Commissioner Bud Selig?

Nelson Doubleday was, at one time, the majority owner of the New York Mets.  In 1980, Doubleday & Co. purchased the Mets from owner Joan Payson – and a man named Fred Wilpon was allowed to join as a minority partner owning five-percent (check out the fantastic picture of young Wilpon here.)  The dynamic changed drastically, however, in 1986, when Doubleday sold Doubleday & Co.– the entity which officially owned the Mets -- but wanted to keep the team itself.  When this happened, Fred Wilpon took full advantage.  The New York Observer, in an article published 2000, describes how Wilpon made his move:
“In the beginning, Doubleday Publishing owned 95 percent of the team… But around the same time, Mr. Wilpon was outmaneuvering Mr. Doubleday, parlaying his 5 percent stake into half-ownership. At the time, Mr. Doubleday was selling the publishing company that owned the Mets to the German firm Bertelsmann A.G. But Mr. Wilpon had a right of first refusal in the event of any sale of the team, and his lawyers made it clear he was ready to exercise it. In a settlement, the two men agreed to become equal partners, paying Bertelsmann $81 million for the team. It has been said that Mr. Doubleday never forgave Mr. Wilpon.”
According to the Times, Doubleday was actually entirely “unaware of that clause in the contract” allowing Wilpon to make that power-play, and “resented” Wilpon’s status as an equal ever since.  So while Doubleday intended to keep the team even though Doubleday & Co. was being sold, Wilpon’s “right of first refusal” gave him the power to purchase the team before it could be sold to anyone else.   It certainly appears that Fred Wilpon was wise to negotiate that right for himself and then use it to his advantage.  This will be important later on, as will the fact that the Mets were valued (at least by Bertelsmann and the partners) at over $80 million in 1986.

From that day on, by all accounts, the two men shared a difficult and acrimonious partnership.  The Observer explained in 2000:
About the only thing the Mets co-owners share these days, it seems, is their barely concealed distaste for one another. Since they became equal partners in 1986-in a hostile takeover of sorts by Mr. Wilpon-the two men have been engaged in an on-again, off-again struggle for power over the team, dividing the front office into warring camps and fighting proxy battles over hirings, firings and trades.
By the time that late 2001 rolled around, Wilpon and Doubleday were reportedly closing in on a deal for Wilpon to purchase Doubleday's share of the team.  According to sources, Wilpon had already previously scuttled a deal whereby Doubleday and Wilpon would have sold 80% of the team to Cablevision in a deal valuing the Mets at $500 million [2].  However, Wilpon wanted to retain control of the team and talks continued.
When the possible sale of the team to Cablevision was being negotiated two years ago, the price was said to be $400 million for 80 percent ownership, with Wilpon and Doubleday each retaining a 10 percent share. Two months ago, Forbes magazine valued the Mets at $454 million. The potential deal with Cablevision fell through because Wilpon decided he wanted to retain control of the club and eventually turn it over to his son, Jeff.  Times, June 22, 2001
With no resolution in sight, Doubleday chose to invoke a clause in his contract requiring Fred Wilpon to buy out Doubleday’s half of the team [3].  The price for said buyout would be determined not by the Cablevision offer, or the Forbes valuation, or by the market, but by a neutral arbitrator -- and that, as they say, is where the plot thickens. 

The arbitrator appointed to decide the value of the Mets franchise was a man named Robert Starkey (no relation, as far as I can tell to Richard Starkey, a.k.a Ringo Starr).  Mr. Starkey’s valuation did not please Doubleday:
Doubleday initiated the process that sent the sale to an appraiser, but when that appraiser, Bob Starkey, came back with his supposedly binding decision that the club was worth $391 million, Doubleday was furious. Last month he threatened to sue, suggesting that Major League Baseball and Wilpon had conspired to deflate the value of the club.  (Daily News, July 25, 2002)
Under that appraisal, after team debt was factored in, Doubleday stood to receive only $137.9 million for his entire stake in the team, which was lower than forecasts in the media which expected Doubleday’s take to be around $200 million. When Doubleday balked at the price, Fred Wilpon sued him to compel him sell his share of the team in accordance with the terms of the contract.  I’ll let the New York Times, in an article published at the time, explain:
''Now that the appraisal has been performed, Doubleday, unhappy with the result, seeks to renege on his contractual obligation,'' Wilpon's seven-page complaint contends, ''and has indicated his intention not to abide by the appraisal and not to transfer his interest in the team.'' (NY Times, July 12, 2002)
Doubleday counter-sued, challenging the independence of the appraiser and calling the entire process a "sham."

As an observer reading this in 2011, there should be no surprise that Bud Selig's was an important figure in this deal. Today, Fred Wilpon has been called "Selig's closest friend among the baseball owners," no surprise to anyone who has followed the Mets over the last few years (Daily News, Feb. 5, 2011).  But back in 2002, a potential conflict was not quite so clear. Remember, of course, that Doubleday's complaint is that the valuation provided by the "independent" arbitrator, Richard Starkey, was over $100 million too low.  With that in mind, the Times continues:
Doubleday contends that the appraisal by Starkey, who is under contract to Major League Baseball and has done work for the Minnesota Twins and the Milwaukee Brewers, deflated the Mets' value with faulty methodology.  He has indicated to others that Starkey's independence was suspect because of his ties to Commissioner Bud Selig, the former owner of the Brewers. It was Selig who recommended Starkey for the job.
Interesting, of course, but not conclusive of anything.  However, when viewed in light of the economic climate at the time – and the competing goals of all the people involved – there becomes a much clearer picture.  The New York Post, of all news organizations, may have connected all the dots for us back on August 7, 2002, when they took a look at what the Wilpon v. Doubleday suit could do to Bud Selig and to baseball, which was currently in the midst of a labor dispute.  In their abstract [5] they explain:
If the court rules in favor of Doubleday, [Bud Selig]'s credibility will be shot from coast to coast... Many in baseball shook their heads in disbelief that Doubleday agreed to [MLB mediator Richard] Starkey, knowing his relationship with Selig and knowing that in the year of labor strife, Doubleday was playing with fire...
Why would Selig want the Mets undervalued, besides wanting to cozy up to Wilpon and assuring his support on all labor matters? Well, for one thing, the lower the value of franchises – as established by an “independent” accountant -- the more leverage that the Commissioner’s Office would have in arguing that player salaries need to be suppressed.

It appears that Nelson Doubleday was right about the Mets' valuation being too low.

According to most, the definitive source for franchise valuations in the last twenty years has been the yearly list published by Forbes Magazine.  Each year, Forbes releases a list of Franchise Values, a comprehensive valuation of each team which looks at factors such as location, fan loyalty, and capital investments (ex. stadiums). 

This past year, the Mets were valued at $747 million,a sum which was reduced in light of the Mets struggles both on and off the field in the last two seasons.  The Mets value – even excluding the enormously valuable SNY -- was $912 million back in 2009.  But what does this have to do with Nelson Doubleday?
At first glance, the $391 million valuation that Starkey arrived at for the Mets may not have appeared to have been enormously out of line.    Compared to other baseball franchise sales in the early 2000's, the Mets valuation fit in nicely.
2002: Mets $391 million
2002: Red Sox $700 million (*included 80% stake in NESN)
2002: Marlins $158 million
2002: Expos $120 million (purchased by Major League Baseball)
(source, UPenn Wharton Research)
Add to this the very commonly held notion in the media at the time that baseball was in decline, and with league wide attendance generally stagnant despite the addition of four new franchises (COL, FLA, ARI, TB), and you can see why speculators might not be betting on baseball franchise values. (source)  In light of baseball’s perceived struggled, an outside observer may be able to understand why franchise values were lower than what you might otherwise expect.

Even so, back in 2002, the Mets were valued by Forbes at a healthy $482 million, about a hundred million dollars more than the figure suggested by Starkey.  It is also almost identical to the the figure suggested by Doubleday and allegedly offered by Cablevision to purchase the team.  The Mets had been valued at $249 million in 1999, but appreciated a whopping 29% in one season. (link).  Skewing those numbers even further is that the late 90's were a strange time for these kinds of franchise valuations.  In fact, a look at the top five franchises that year, the New York Yankees, Cleveland Indians, Atlanta Braves, Baltimore Orioles, and Colorado Rockies -- indicates that there was a healthy hysteria about revenue sharing.  If the value Forbes came up with for the Mets was wrong, the odds are that it was too low in light of these concerns. 

Wilpon, of course, supported the Starkey’s number -- but his view of the value of the franchise today is much more bullish.  In the now-infamous article written by Jeffrey Toobin for the New Yorker (the one in which he said Wright was “not a superstar,” among other things), Wilpon had the following to say about the value of his franchise:
Today, as Wilpon negotiates with possible investors, he says it’s clear that the team is worth more than a billion dollars. “There’s one National League franchise in New York,” he said. “Fifty years from now, there’s going to be one National League franchise in New York. That’s a very valuable thing.”  New Yorker, May 30, 2011 
One person who would certainly agree that the Mets are healthy and valuable would be Fred Wilpon’s close friend Bud Selig.  But it doesn’t require too thorough of an examination to appreciate how drastically both men’s characterizations as to the financial health of the franchise has changed over the last decade, even in the face of a nation-wide recession

As mentioned above, back in 2001 when Wilpon and Doubleday were in the midst of their ownership battle, there were some questions about the financial strength of the league.  You may recall that in the winter of 2001, baseball owners voted in favor of contracting two teams from the league.  That decision initiated a firestorm, both in baseball and in politics in general.  Thereafter Selig was entangled in hearings in front of Congress, subpoenaed by Attorneys General, and MLB was the subject of a slew of legal injunctions.
It was Selig’s contention at that time – as baseball’s labor agreement was expiring --  that baseball was broke.  Flat broke.  Selig was specific, too, saying in 2002:
Commissioner Bud Selig recently told the Los Angeles Times that without major changes in Major League Baseball's economic structure, "I would say six to eight [teams] can't exist another year, another year and a half. We're talking about the immediate future. There's a lot of clubs that simply can't survive the status quo."  (Source: ESPN)
It was a number that was absurd in 2002.  It is even more absurd today. 

But not everyone agreed with Selig’s assessment of the league.  Doug Pappas, the chairman of SABR’s Business of Baseball Committee [6] and writer for Baseball Prospectus had this to say in an article published in December of 2001:
According to the commissioner, MLB somehow managed to lose $519 million in 2001 despite record revenues of more than $3.5 billion. This claim was met with derision by virtually all independent observers. They note that franchise values have not fallen, and that even the owners of "failing" teams like the Expos and Marlins won't sell out unless they can remain in baseball with some other team.
Pappas continues, in April of 2002, in outlining the inexplicable gap between Selig’s valuations and the ones developed by Forbes.
Add Forbes to the ever-growing list of those who don't believe MLB's cries of poverty… While MLB claims operating losses of $232 million in 2001, Forbes estimates that the 30 teams turned a collective profit of $76.7 million. That's a difference of more than $10 million per team… All told, the difference between Selig's valuations and Forbes's is about $1.5 billion--$50 million per team, or an additional $600 million of debt which would be allowed if MLB used the Forbes numbers instead of its own arbitrary "values."

This bears repeating: an independent expert analyst, with no stake in the results of its analysis, concluded that MLB's 2001 operating profits were $300 million higher than reported by Commissioner Selig, and that MLB's franchises are worth a collective $1.5 billion more than suggested by the Commissioner's valuation formula.  (Baseball Prospectus, April 3, 2002)
If you are interested in the details, I definitely recommend that you click through and read the archive that Baseball Prospectus’s made public on the topic.  But the point made by Pappas, Forbes, Congress and others at the time is crystal clear – baseball was MUCH healthier than Selig and the rest of the Commissioner’s Office was letting on. 

Perhaps Nelson Doubleday’s claims that baseball conspired with Starkey to “manufacture phantom operating losses” and that the Commissioner’s office was “in cahoots” with Wilpon were not so far off after all.

If you’re not convinced by the above independent appraisals, how about Fred Wilpon’s position that the Mets are a BILLION dollar franchise today?  And don’t just take my word or Fred Wilpon’s word for it – but how about Bud Selig, the same man who tried to convince the world that baseball was bankrupt?
When asked right before Game 7 of the World Series the other night about MLB’s $25 million loan to the Mets, he made some very optimistic comments.  When asked whether he was concerned about the loan – which is now a few days short of being a year old – Selig said that “I do have a lot of concerns but I am happy to say that the Mets aren’t one of them.”[7]

As for the health of baseball in general, Selig said “the game has never been more popular.  There isn’t any doubt about that, any criteria you want to use, it’s more popular than ever.  But it’s impact is great than it’s ever been and there is no question about that.”  [New York Post, October 29, 2011]

According to Forbes, baseball is financially stronger than ever.  In the preface to their most recent list of Most Valuable Teams, they wrote:
Baseball has emerged from the recession with a big bang.  The average MLB franchise is now worth $523 million, an all-time high and 7% more than last year. All of the league’s teams rose in value except for three… Strong attendance and local television ratings boosted the values for [many] teams … [while] 73 million fans showed up at the ballpark last summer, which was the sixth highest total of all-time and down just 0.4% from [the year before].
The only threat, financially, to baseball at the current time seems to be with our very own New York Mets.  In fact, between the problems of the Mets and the Dodgers, baseball’s revenue sharing pool dropped for the first time since the current system was put in place in 2002.  In what should come as no surprise, however, Selig does not view the Mets a “concern”. [8]

So long as Bud Selig is commissioner of baseball, it is appears that the Wilpon family will remain in full control of the Mets for as long as they want to be.  How else can we explain the Mets spurning David Einhorn as a minority investor?  The fact that they get interest-free loans without a maturity date has to help:
Selig approved a $25 million emergency loan to the Mets and has supported the team’s efforts to attract a capital infusion from a minority investor. Wilpon was appointed by Selig to baseball’s executive council and Peter Stamos, a partner of the owner in the Sterling Stamos Capital Management hedge fund, is chairman of the MLB Investment Advisory Board. (Bloomberg)
This is particularly interesting in light of the hard-line Selig has taken with Frank McCourt and the Dodgers, to whom Selig would not even approve a new television deal which may have saved the Dodgers from bankruptcy.  The Wall Street Journal characterized it similarly, opining that Selig “pulled nearly every lever within his power to force” McCourt to sell the organization.

As part of the ongoing Dodger saga, Selig installed a monitor to oversee the team’s operations and, in June, it was reported, he refused to approve a new TV contract that would have given McCourt enough cash to likely keep the franchise.   The Dodgers filed for Chapter 11 protection on June 27, and Frank McCourt agreed in late October to sell the team at auction.  In an article called “Selig Bends Rules to Fit”, Marc Ganis puts it in a nutshell for us: “MLB gave so much power to Selig that some perceive a system with a lot of subjectivity and playing favorites.” (Bloomberg)

As far as our Mets go, the Wilpons must be confident, as the recent news out of Mets camp is that they are seeking a new kind of minority investor.  The Mets have been seeking multiple, smaller, minority investors to purchase chunks of $20 to $30 million to try and replace the $200 million investment that they shunned from Einhorn.  However, the investment comes with significant strings attached:
Mets chief operating officer Jeff Wilpon told Adam Rubin of ESPN New York on Monday that the process of selling minority blocks was “going very well.” However, since there is no path to ownership, this latest development is an indication that potential investors need more incentive than owning a tiny piece of the team for vanity purposes. (Hardball Talk at NBC)
If there NO PATH TO OWNERSHIP from these investments, why would someone invest?  Well, according to reports, the Mets are offering 3% interest.  That’s right, 3% interest (or the option of retaining your 2% to 3% stake[9]).  The Mets, in exchange for a ton of your money, without offering you any ability to grow your ownership stake in the team, will provide you with nothing more than a nominal amount of interest.  For reference, a ten-year municipal bond returns around 2%, tax-free.  Yet the Wilpons believe that someone would prefer to buy what is essentially a bond from an organization whose financial troubles have been front-and-center in the news media for a year.

Ultimately, the story of the Wilpon ascent to power as owners of the New York Mets franchise has been a long and twisting one.  With some shrewd negotiation, some legal wrangling, and some significant help from his great friend Bud Selig, Fred Wilpon has taken an investment of a few million dollars and turned it into a billion-dollar empire, all while Nelson Doubleday’s equivalent investment of $40.5 million in 1986 returned him only approximately $150 million over 15 years.  I'm sure one of my great MBA-possessing friends will correct me, but my back-of-the-envelope calculations indicates a yearly return of around $7.3 million per year for Doubleday, and in the neighborhood of $32 million per year for Wilpon.
I know this is long, but if you are interested in some additional reading, it is alleged that the Madoff-Wilpon relationship extended beyond simply the returns on their investments.  According to an interesting article by the New York Times in March of this year (NY Times)it is alleged in the Madoff Lawsuit that Madoff may have actually loaned the Wilpons the money they needed when making large capital investments in the early 2000’s.  Or even if the loans never took place, that a close relationship with a hedge fund such as Madoff’s allowed the Wilpons the leverage they needed to obtain favorable terms on their commercial debt.  It is an interesting additional twist to all that we already know of the scheme's impact.
Not everyone is optimistic about the Wilpons’ fortunes moving forward.  One of my favorite Mets writers, Howard Megdal, outlines some of the hard realities:
[The Mets] 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 [in addition to the Madoff lawsuit] . . . [further], 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. (Capital New York, November 2011).
However, despite all of the above troubles, I wouldn’t bet on the Wilpons ceding control of the franchise any time soon.  They were smart enough to gain control of the Mets in the first place, they have a very good friend in the highest of places, and – if their negotiations with potential investors are any indication – they are confident about their financial situation.  With Fred’s long stated goal being turning over the team to his son, Jeff, I expect that we will not be seeing any wholesale changes for a long time.

Brian Mangan is an attorney who lives in New York.  He is a lifelong Mets fan and a former (and hopefully future) Mets season ticket holder. 

[1]  It's worth noting that Einhorn, though spurned by the Mets, still has baseball on his mind.  Courtesy of the The Wall Street Journal:
"Baseball was clearly still on Mr. Einhorn's mind on Monday, when he joked that he missed watching one of his favorite teams, the Milwaukee Brewers, take on the St. Louis Cardinals for the National League Championship to work on his presentation on "the other kind of brewers," Green Mountain.  "The bulls believe the Green Mountain growth story is still in the early innings," he said, noting investors' confidence in the company's surging revenues."
[2]  Last year, Mr. Doubleday was ready to sell 80 percent of the team to Cablevision for $400 million-a deal that could have shielded his children, who are uninvolved in the Mets’ affairs, from huge estate taxes. But Mr. Wilpon scuttled the deal, out of a concern that, as a minority partner once again, there would be no assurance that he would still run the team.  (New York Observer, October 30, 2000)

[3] Source:  Daily News

[4]  Two of the people who talked about Wilpon's pending purchase said Wilpon was expected to pay Doubleday about $200 million and would give him an additional $25 million if the Mets moved into a new stadium. Times, June 22, 2001 
[5] Full access to the article is not available for free.  Link

[6] Tragically, Mr. Pappas passed away in 2004 at the age of 42.  

[7]  Another of Selig’s contentions is that baseball, aside from being broke, was a broken system because
"During the past decade, Baseball has experienced a terribly disturbing trend. To put it simply, an increasing number of our Clubs have become unable to successfully compete for their respective Division Championships -- thereby making post-season appearances -- let alone post-season success -- an impossibility."  In November 2000, Commissioner Bud Selig solemnly advised Congress, "At the start of spring training, there no longer exists hope and faith for the fans of more than half of our 30 clubs."
(Congressional testimony, 11/21/00)  Unfortunately, that fact is no less true today than when he first stated it. (Chart here)

[8]  There is one entity, aside from MLB itself, over whom no controvery exists as to whether they are succeeding or failing:  Bud Selig.  I did not know this until I looked up the numbers over at Cot’s Contracts, but over the last twenty years that he has been Commissioner, Bud Selig has seen his own personal salary skyrocket.  From a lofty and generous salary of $1 million back in 1993, to an outsized yet perhaps justifiable $2.5 million in 1998, Bud Selig’s salary in the last publicly available season was $17.5 million dollars.  That’s a number that, although absurd on its face, also dwarfs those of the commissioners of other major sports (link:$18-Million.aspx). Baseball is healthy indeed.  (source: Cot's Contracts)

No comments: