Fred Wilpon, Financial Genius

There's an old, apocryphal tale of an advertisement -- as I heard it, in the New York Times classified: "Cadillac For Sale, $1. Cash Only. Just Show Up, 1234 Main Street, Between 10 and 2." A man sees the ad, and thinking it's too good to be true, decides to show up just to hear the back story. When he gets there, a woman is there with the Cadillac in the driveway and a mechanic waiting as well. "It's yours for $1, honestly," she says, "and the mechanic here will vouch for the car's tip-top condition." The man inspects the title, gives the lady a dollar, and finally asks why the bargain.

The mechanic laughs. "Her husband died. Left her with nothing but the house. She's to sell everything, with the proceeds going to his mistress. I bought his Porsche for fifty cents."

Sometimes, a deal looks good -- if you just know the full story.

I don't know the full story behind Fred Wilpon's odd sale of 33% of the Mets. I do know that it's fishy; that the Mets owner is a smart, financially-capable man; and that there is therefore a good explanation for all of this. I'm clearly speculating here, but I can't help but wonder if the sale here is Wilpon being a financial genius.

A year ago -- if not less -- the Wilpons and their spokespeople unequivocally stated that the Mets franchise was financially strong. Over the last few months, we've come to learn otherwise. The team has likely exhausted its lines of credit, requiring an emergency loan from MLB. The Wilpons sought (and found) a buyer for a minority stake. The team, per Fred Wilpon's discussion with Jeffrey Toobin of the New Yorker, is bleeding cash -- set to lose as much as $70MM this year.

Oh, and Fred Wilpon et al are being sued for about a billion dollars.

Fred and co. have decided to fight it out in court. Irving Picard, the lawyer charged with reclaiming unduly earned payments from Bernie Madoff, is alleging that the Wilpons -- being experienced investors (hey, they'rebillionaires!) should have realized what Madoff was up to. If true, argues Picard, that is enough (legally) to consider Wilpon's gains ill-gotten, and therefore subject to clawback. Assuming Picard's legal theory is right, it will be up to a jury to decide of Wilpon should have realized that Madoff was a crook.

Wilpon does not make for a very sympathetic defendant. He's a billionaire; many of Madoff's victims are now penniless. He was a close friend of Madoff; many of Madoff's victims were recruited into the scheme by his close friends. Etc. If this goes to a jury, Fred is likely going to lose, and lose big time. He could very reasonably lose every dime.

Given all of this, it seems like the Wilpons should be trying to sell the Mets -- entirely. A controlling stake in the team is worth more, on a per-share basis, than a non-controlling one. SNY is worth more if it comes with the team than if it comes separately; in fact, it's worth very little if pulled away from the team. If the Wilpons could sell it all, clear $1B after debt repayments, and offer Picard $750MM to go away, they'd end up without the Mets, yes, but also with $250MM and no legal problems. (And all of their other business holdings.) It's not an ideal situation, obviously, but it's better than having a really good shot at going broke.

But again, the Wilpons aren't selling. Anything but, in fact.

* * *

If you're Fred Wilpon's lawyer, you aren't letting so much as sneeze without telling you first. You can't. He's a very visible person and everything that happens going forward could imperil (or benefit) his defense. Sure, things happen. People write emails which they later regret when they come to light in discovery. (As a former practicing attorney myself, I've seen this a few times, but attorney-client privilege prevents me from sharing the otherwise awesome stories.) After Toobin's story hit, someone -- and my apologies, as I can't recall whom -- commented on one of the many Mets sites I read that there is simply no way, no how, that Wilpon didn't talk to his lawyer before his conversation with Toobin. I disagree: things like this happen. But they're rare, and it is certainly likely that Wilpon's lawyer knew about -- or maybe even advised Wilpon in regard to -- the conversation. And speaking to Sports Illustrated as well? There is no way he did not talk to his lawyer before at least one, if not both, of those conversations.

It makes sense, too. Forget the stuff bad mouthing the players. Focus on a few salient points in the SI article:

• The team is "bleeding cash," and may lose $70MM this year. The team is in debt to the tune of $400MM or more.
• He once offered Madoff a stake in the Mets, who turned him down, not wanted to be in the public eye.
• Governor Cuomo is mediating talks between Wilpon and Picard. Wilpon is willing to settle for about $235MM, but "Gov. Cuomo has not been able to at this stage convince them that the 700 [million dollars Picard seeks additionally] is not going to be obtainable."

Wilpon is setting up the dominoes. Each one leads the reader slowly down the path that Wilpon was left in the dark. He offered a con man a share of his prized possession? Because he didn't know better. The team is bleeding cash and has massive debt? Because he's good at making money, but not managing it. And it's not even controversial. Even the Governor of the State of New York agrees.

And to make it even clearer, let's add in an act of financial desperation: selling one-third of the team for $200MM with, perhaps, the strangest contract term ever included in a team sale. If, within three years, the new minority owner Dennis Einhorn wishes to purchase a stake totalling 60% of the team, he can -- unless the Wilpons pay back his $200MM. And if they do, he gets to keep this one-third ownership of the team.

Read that again, because it's lunacy. Complete and utter lunacy. The Wilpons are literally giving up hundreds of millions of dollars.

Kind of. Fred Wilpon also makes out like a bandit here -- if you look at him as the widow of the man who left everything to his mistress.

First, the deal suggests that Wilpon really isn't all that great of an investor. Put on the opposite side of the table as finance professional Einhorn, he comes out looking like the unsophisticated pollyanna he claims he was in his dealings with Madoff. It's a great point in his defense: a man who trusts his partners and advisors, and doesn't really know much about high finance.

Don't buy it? Too conspiratorial and underhanded? Fine; I admit it is at best cynical and speculative. But it may not matter, because the deal does something even better for Wilpon: it allows him to make it unreasonable for Picard to force him to sell the Mets and SNY.

* * *

Let's assume that Wilpon was telling the truth when he said that he wanted the Mets to stay in his family for generations.

That statement comes with an implication: the value of the franchise is not all that important to him. The team's value is illiquid -- you can borrow against it, yes, but you can't withdraw $1 million from a $1 billion business like it's a bank account. And if you aren't going to sell the team for generations, the actual value isn't all that important. Nice to have, sure. But given the option of owning the team at a lower valuation or having the cash (having sold the team) at a higher one, Wilpon's preference is clearly the former.

The deal, again, with Einhorn:

• The Wilpons get $200MM in cash.
• Einhorn gets one-third of the Mets and first right of refusal if the Wilpons sell a controlling interest to others.
• The Wilpons maintain control of the team.
• Einhorn does not get any interest in SNY.
• Einhorn gets an option to buy up to 60% of the team (a controlling stake) in 2014 unless the Wilpons return his $200MM beforehand, in which case, Einhorn gets his money back but retains is one-third interest.

Picard aside, the deal helps Wilpon with his short-term problems with the team's finances. As reported by SI, $25 million goes to MLB in repayment of that emergency loan; $100 million goes toward operating expenses; and $75 million goes to paying down the team's $427 million debt. In other words, it's not being set aside to help pay off Picard, and it won't be easily recouped in case of later settlement or verdict.

The deal does a few other things, too. First, it makes it almost impossible for the Wilpons to sell a controlling interest in the team. Let's say someone -- Jane Doe -- comes along and offers Fred Wilpon $700MM for the remaining two-thirds. Doe would also have to give Einhorn an additional $200MM, and she'd be stuck with Einhorn as a limited partner. A terrible deal, to say the least, and one that is at best unlikely. Realistically, Wilpon could only sell another 30-33% of the team -- another minority, non-controlling stake -- which, given the terms of Einhorn's deal, would probably only fetch about $150MM.

And then there is SNY. I can't speak to the value of SNY, but Einhorn's option effectively kills it. If Wilpon sells his share of SNY to John Q. Smith, Smith buys it with the risk that Einhorn -- when he buys the team outright in 2014 -- decides to end the Mets' deal with SNY at the first possible opportunity. In short, SNY's value only holds strong if the Mets owner also owns a sizable stake in SNY. Einhorn owns none of SNY. At best, Wilpon can only sell a minority interest in the network, and even then, it's a hard sale to make until 2014.

* * *

Back to Picard. Fred Wilpon has just massively hammered his net worth, but his position in life -- controlling owner of the Mets and SNY -- has remained almost entirely unchanged. The victims of Madoff are still uncompensated. They run the gamut in financial status, but in most cases, they want their money back now, not three years from now.

Waiting around until 2014 isn't an option, but that's how Wilpon set it up. (And even if it were an option, 2014 comes with no guarantees that Picard will win and/or that the Wilpons will be financially able to afford to pay off a verdict.) Settle now for $200-$300MM, probably payable over a couple of years. (Guess where Ollie Perez and Luis Castillo's salaries are going when they come off the books.) Or... well, who knows what's left over.

It's genius.

Like selling that Caddy for $1.