Last week,we broke the news that the Mets hired CRG Turnaround Consultants, and there's been a lot of back and forth since -- not the least of which was the team taking to twitter to refute the link between CRG and bankruptcy, or the satirical @CRGMetsPR account that popped up to poke fun at the situation. Since none of us are in the meetings, it's speculation for now, but there's no real-life baseball to talk about anyway.
In that light, Daniel Lewis (who brought us this excellent look into the Mets' finances) and I had a little email conversation. By the end of this email chain, I knew a little bit more about the situation at hand, but also a little more about how my pessimism may be coloring my viewpoint. In fact, Lewis and I sort of outline two different viewpoints on the news, and both seem reasonable.
Do you find yourself squarely in one camp or the other? Or do you vacillate depending on your mood?
Eno Sarris: Let's go into the bankruptcy specter first -- would bankruptcy automatically force the Wilpons to sell?
Daniel Lewis: First off, I want to say that everything I'm saying is speculative. I have no inside information whatsoever.
My guess is that it wouldn't happen automatically. The team could try and reorg under Chapter 11 Bankruptcy, but there are a few problems. Most notably, it's totally unclear how MLB will react. The league has a history of keeping financial details close to the vest, and this would have to change that to some degree. Also, MLB is a creditor of the Mets, and that's not a typical situation for a bankruptcy court to deal with.
CRG is definitely discussing this with the Mets. They're experts here and wouldn't be doing their job otherwise. You know more about CRG than I do -- what other things could CRG do which could help the team?
Eno Sarris: Calling in turnaround consultants doesn't *have* to lead to bankruptcy of course, but I don't know how refining 'budgeting processes' will help the team become more viable -- unless the team is spending too much money or time making the budget itself. Would streamlining budgeting processes and financial reporting save even a million dollars? And if that's all that CRG is doing, it's a bit like calling in an elephant to put out your match.
If CRG came in and made more substantial recommendations -- like, say, to eliminate a minor league team -- then they could help shave some money off the top. But restructuring relationships between debtors and the different Mets' entities -- the team, the park, and the television station -- that could get something done. And that usually comes with the threat of insolvency on the horizon -- or the threat of bankruptcy.
But a team has gone bankrupt before, so don't we have some idea how MLB would react? Force a sale, it seems the past tells us. No?
Daniel Lewis: The Rangers situation isn't analogous -- it happened the opposite way. Tom Hicks was already going to sell the Rangers; the problem was that the creditors to whom the team owed money feared that they'd be left holding the bag. The bankruptcy was just a way for Hicks to force the issue, but the sale would have happened anyway. The Wikipedia entry on it is good.
That's also important when it comes to CRG. CRG came in well after the decision to sell the team came to pass. Their job wasn't to broker a sale or even to keep the team out of bankruptcy -- but rather, to figure out how to work the books in the bankruptcy. So I buy the Mets claim that CRG isn't here to guide the team through a bankruptcy or sale.
What scares me more is that -- well, you said it already. They just hired an elephant to put out a match, right? Which suggests that it's not a match, but rather, a fire -- or that the Wilpons are delusional. I don't know which it is and won't guess. But here are the two theories drawn out.
One, the Mets books simply don't tell an accurate story, which is making it hard to sell equity stakes and raise that $140m to $200m the Wilpons hope to get. So they hire CRG to fix that. Instead of the company being worth $700m with $500m in debt, a restructuring leads to a company worth $1b with $450m in debt. That's a huge difference. This theory, by the way, is consistent with the Mets recent tweet that CRG isn't involved in the sale of equity stakes.
The other theory: the Wilpons have lost their minds. They're convinced that they can survive this -- we know that already -- but they may also think that this is a tiny problem which can be fixed by ironing out minor bugs. (Maybe that's true -- the Mets don't tell us -- but everything we've been told by the press suggests otherwise.) So they bring in a firm to help them figure out how to streamline operations and budgeting.
My fear is that it's the second theory. I think it is very likely. The only reasons CRG is relevant to the conversation is because of the work they did for the Rangers, and the Mets are generally tone deaf to the PR implications of these decisions anyway. Plus, they never thought the work CRG is doing would leak out. (Heck, ESPN, NYT, WSJ, Forbes, etc. all missed it.) And if that's what's happening, it means that the Wilpons aren't on the way out any time soon *and* they're not looking at real fixes. $70m loss requiring a non-repayment of an **emergency** $25m loan *and* a $40m bridge loan? That's a scary scary thing.
But either way:
Why are the Mets protesting so much? They've *never* taken to Twitter to combat rumors. Why now?
Eno Sarris: Well, they combat the rumors on twitter because rumors of bankruptcy scare off minority investors, that's probably why. But even the public numbers are already scaring off the minority investors, so that little bit of twitter work is not going to get much done.
If the Wilpons do indeed think they can make it through all of this without bankruptcy, don't think the Madoff situation is going to go Picard's way, and think that CRG can come in and streamline things in order to make them look better for the minority investors who will float them until 2014, by which time they hope to figure out how to pay the debt coming to term that year... they must be delusional. Or so it seems to this writer from the outside at least.
What I *really* don't get is why a minority investor would want to take part in this dance. Let's say you think they are on their way out, you hold out in order to become part of a majority owner group. Let's say you think the team is losing money, why throw good money after bad? And won't the minority investment push the debt-to-asset ratio further into the danger territory? The Mets already raised the debt ceiling this year, how can they raise more money against their assets now?
Daniel Lewis: Nah, the debt-asset ratio isn't an issue when you're selling equity stakes; they're not debt.
I agree that, given what we know, it's going to be hard to find minority investors. But "given what we know" is a big qualifier. We know basically nothing about those transactions. These could be friend of the Wilpons or guys like me who would take the risk to own a piece of the Mets (if, you know, I had $200m dollars and could afford the $20m risk).
Okay, let's wrap this up -- three takeaways/guesses each. I'll go first:
1) I am going to take the team at their word: CRG isn't there to talk bankruptcy and the team is still going to find their 4-7 or whatever buyers to make $140m or more. But I'm not a cynic and I am a contrarian, so maybe that statement is more about me than them.
2) The Mets decision to take this to Twitter is striking. It's never happened before. It's very very different than the "win a signed Jason Bay ball" stuff they typically do. It's a big strategic change. I hope we see more of it, but I don't expect to.
3) We haven't discussed this yet, but here's the big story no one is talking about: Faith in the Wilpons keeps falling. Dramatically. Will this hit the box office? I think so. A story for another day, perhaps.
Eno Sarris: Okay, I guess I'll just react to your three because I see things a little differently. But I'm a cynic and a contrarian, so I don't know where that leaves us.
1) I must be a cynic because I don't believe CRG is there just for procedural consulting. My source is adamant that bankruptcy is on the table, and that's how turnaround consultants normally work -- they figure out how to turnaround a distressed organization, and if they can't, they recommend sale and or bankruptcy. And I think that in this case, financial distress leads to insolvency leads to bankruptcy leads to a sale because baseball will use their status as a creditor and an industry leader to force a sale.
2) The fact that CRG is in town is therefore a good thing -- maybe if they tell the Wilpons that there's no way out, the Wilpons will actually listen. And I agree with you that faith in the Wilpons is at an all-time low. In some ways it's a shame -- they did do some good with SNY and CitiField is a monument to their time with the team. In other ways, perhaps their departure will be a happy moment. They seemed a little too close to on-the-field operations at times, and this current financial cloud is too thick for optimism about the team's future. There's no reason to really hate them -- it's not likely they were complicit with Madoff from the beginning, in my opinion, and they've done good things for the team -- but it sort of feels like the end of a tumultuous relationship that just can't stay afloat any more. Everyone's tired.
3) I don't share your faith that they can find minority investors (especially with the news that is out there right now), fend off Picard, and also come up with the money that's due in 2014 and 2015. If only one of these things goes the wrong way, they're toast (sorry Jon Heyman, it's not all about Madoff and Picard, there are other issues here too). What this means for the team now is lower payrolls and some lean-and-mean times -- but it might also mean some long-term hope.