The Mets Are Almost Insolvent. Can Sandy Save the Wilpons?

Last year, FanGraphs named the Mets the 18th "best" team when it came to their financial outlook. I and many others made fun of FanGraphs for this seemingly impossible mistake -- how could a team in New York be that bad off?

But I was wrong. FanGraphs may have been wrong, too: the Mets probably were much much worse than 18th. Other than the bankrupt Dodgers and the basically bankrupt Astros, it's hard to see a team which is worse off financially. After the jump, I detail -- given what limited data we know and/or can speculate about (backed up with lots of links) -- how bad it may in fact be. Can Sandy save the day?

Finances

Before the 2011 season, Forbes estimated that the Mets needed to make $30 million in operational profit in order to meet their debt obligations. A few weeks after the Forbes article hit, we found out about a loan of last resort from MLB -- $25 million -- so the problem was probably worse. But either way, the team did not have enough revenue to meet their needs. If anything, the Mets may have had an operational loss as much as $70 million, again according to Forbes, and alluded to by Sandy Alderson during the Jose Reyes press conference.

To stem this off, the Mets have gotten permission from MLB to take on even more debt -- $140 million of it. That $140 million is really a much higher number, as the team is hoping to bring in up to 10 limited partners at $20 million a piece. While the deal is structured as a purchase of equity (and therefore, it's not debt), investors are given a safety net -- after six years, they can cash out their equity stake with interest, 3% compounded annually. And with the Mets' enterprise value potentially declining, this safety net could be triggered by many of the investors. (We do not know what happens if more than seven want to exercise this right, or if the right is given to more than seven of the investors.)

What will the Mets do with this $200 million? Some of that will go to pay back the emergency loan from MLB -- the team hasn't paid that back yet. We can also assume that about $50 million will go toward covering losses from 2011. That leaves $70 to $130 million left over. Given that Mark Einhorn was looking at a $200 million investment as well, I'm going with the $130 million number.

Going forward, the Mets debt obligations are probably close to the same as they were entering the 2011 season, minus the $25 million owed MLB. So if Forbes was correct then, the Mets again probably have to do $30 in operational profit in order to break even. That's not very likely given that the team probably ran operational losses to the tune of $10-20 million last year. And to make matters worse, the 2012 Mets are going to suck, won't have Reyes to buoy revenue, is cutting ticket prices, and ... you get the picture. On the other hand, the team's payroll is going to be about $20-$30 million less than last year. I estimate that the Mets are going to be about $10-20 million in the red in both 2012 and 2013.

Without a positive cash flow, the Mets need to have some sort of cash reserves, as they have debt service to worry about. The good news about debt is that if you survive long enough, it goes away, as your debt service includes paying down some of the principal. So if the Mets can survive for a few years, getting to break-even is actually reasonable. Setting aside $100 million of the $200 million raised sounds about right -- this gives the Mets six years (note that -- six years -- it's important) to get to break-even or better, including debt service. The rest of the haul -- at this point, $25 million or less -- can be used in a bunch of different ways, but assume that some of it will be put toward paying down the principal that the team owes, and little to none of it will be used to sign free agents.

(A quick aside: I think Reyes was the potential exception, as he can drive revenues.)

But getting to break-even in six years isn't good enough, because six years from now, the Mets have a different, potentially fatal problem. The investors who they are signing up today can ask for their money back -- with interest, totaling nearly $250 million. (This assumes that all $200 million can be treated as debt.) That will happen if the team's enterprise value isn't much higher than it is today, and if the Mets aren't running a profit by then, the enterprise value will similarly suffer. The solution: the Wilpons probably sell the team, or, at least, sell a much larger stake in it perhaps with worse terms.

In the short term, the Mets are functionally insolvent. They're running a serious loss and have cash flow problems, too -- all while drowning under massive debt. When the Dodgers and Rangers had similar problems, Bud Selig forced their sale. When the Mets had the same problem, MLB floated them an emergency loan, pushed for Sandy Alderson to be the new GM (perhaps even forcing the issue), allowed them to take on more debt, and let the emergency loan ride a few months longer.

It sounds a lot like Bud Selig believes that Alderson can save the Wilpons. To do so, Alderson has to work some magic. With very little room for error, he needs to build a team which is respectable on the field but light on the payroll. If he can't, the Wilpons are doomed. Here's how he's doing it -- and what we, as fans, can expect in the future.

The Sandy Plan to Fiscal Bliss

A lot of this is going to be speculation, obviously, but that's what fans do.

We can rest assured, sadly, that 2012-2013 are going to suck, with Johan, Bay, and Wright collectively owed over $50 million in each of the two seasons. Johan's 2014 option won't vest, but what about Jason Bay's? There are two ways to prevent that from happening: trade Bay or bench/release him. The former is hard to do because he's owed so much money; the latter is hard to do because the union would almost certainly file a grievance. So the Mets are spending $1 million or so to make it easier -- they're moving in the fences.

Yes, this is overly conspiratorial on my behalf, but there are few other explanations (especially when you factor in David Wright's struggles). A company choking from lack of cash decides to renovate the kitchen? Nonsense. The Mets see the fence change as an investment, and the most likely vehicles for that investment are Bay and Wright. It would make no sense to trade Bay now, before you see if the investment in the fence yields dividends -- as you'd just be taking back similarly bad contracts.

And really, the fence change almost guaranteed to help the problem. If Bay rebounds to meet his worth, the team can trade him, along with a handsome pile of bills probably, but he's at least marketable. If Bay continues to struggle, benching him or releasing him is easy to justify.

So let's fast forward to the pre-2014 off-season. Bay and Santana are off the books, as is Mike Pelfrey, but a good amount of that is going to be eaten up by the ten or so arbitration-eligibles we have out there. There won't be too many holes to fill, as the Mejia/Familia/Harvey/Wheeler generation should be able to pick up for Santana, Pelf, and perhaps RA Dickey, while Duda/Kirk/F-Mart (??) may be our outfield. Or whatever, there's room -- if Wright doesn't come back.

With Wright's defense going from above average to disastrous and his bat not where it was in 2008 and prior, his value is certainly questionable going forward. If he were a free agent today, he'd still probably fetch a contract similar to Reyes' -- maybe a $1m less a year and maybe only for 5 years, but $85m over five seems about right.

And the fences will make or break that. If Wright thrives, do the Mets trade him? If he struggles, do the Mets just let him go? Again, the team, financially, isn't in the position to make a long-term mistake here, but this one is more questionable -- can the team afford to trade Wright if it hopes to maintain its current revenue stream? I have no answers and can see either happening. But certainly, moving in the fences is in part designed to see if Wright will find a spark.

As I argued a few days ago, though, I think Wright is a goner. In 2013, his seasonal age will be 30 -- which means a $85/5 contract pays him at least $17 million to be a bad defensive third baseman at age 35. If his offensive production doesn't rebound from the fence move, there's no way you can do that. And if it does, maybe his price goes up? I really don't know.

But more to the point: I don't think Alderson is thinking about being all that competitive in 2014. The next year seems more likely. Why?

1) The only player who is arb eligible in 2014 and not under team control in 2015 is Manny Acosta. Basically, the same core group will be intact.

2) The value and role of the four Young Guns 2.0, Captain Kirk, Reese Havens and potentially others will be established. All six of those players will be 0-3s or Arb 1s, so if they're able to contribute fully, the budget will be in a good place.

3) Any prospects acquired over the next year or two may be able to further contribute.

This last point is especially important because of yesterday's acquisitions. Both Ramon Ramirez and Jon Rauch are free agents after 2012, and given the interest in Izzy and Brydak at this past year's deadline, both of them will likely be sought-after come July. Rinse repeat on Torres and Frank Francisco in 2013. And yeah, David Wright too.

It makes a lot of sense. The Mets cut costs for three years, hoping to get their debt service under control, while simultaneously setting the stage for a team comprised mostly of cost-controlled, above-average players. In 2015 -- a year after David Wright hits free agency, unfortunately -- the team can sprinkle in free agents and trade targets to fill out a solid roster able to compete with the aging Phillies, the who-knows Marlins, the typically-good Braves, and the Strasburg Nationals. Good things can happen and the Mets can finally make money again.

Back to Finances

Three years of being hyper-cost conscious is going to suck, of course -- with or without Wright. But it really has to be three years -- not two -- because the Mets financial situation is too weak to risk failure. And failure has a simple definition: not making the playoffs at least once by 2017. If they don't make it back to October by then, the enterprise value will continue to fall; revenue will as well; and ...

You know how the team is selling $200 million of equity?

If the Mets aren't making money by the end of 2017, that equity isn't going to be worth what investors paid for it. Instead, they'll want their $200 million back -- plus that 3% interest. That's $250 million of additional debt the Mets will have on the books, and, oh yea, the Wilpon's ability to raise more money will be seriously limited by the depressed franchise value and the disastrous decade (decade!) the Mets had just gone through.

In order to avoid that fate, Alderson needs to do two things, simultaneously, which in many cases are in conflict:

1) Cut payroll and

2) Build a winner.

If he can't, the Wipons are doomed to sell the team -- not now, but six years from now. That's their timetable, and they know it. For us fans, it's a terrible fate, because there is no short, easy, nor guaranteed way to get there. But for the worst of all reasons, we should be rooting for the Wilpons here.

Because if Sandy can't save them, it's going to be a long, long decade for us Mets fans.