Recent reports claim a majority ownership stake in the New York Mets is being sold, with the valuation of the team being set at an eye-opening $2.6 billion. Clearly, professional sports IS “big business”[1].  This news is being greeted by the long-suffering Mets fans with enthusiasm[2]. What can a student of advanced accounting learn from this potential sale?

A traditional advanced accounting course capably explains the debits and credits of the transaction.  The reasons how and why the transaction is being structured as it is are often not discussed. Knowing why a potential transaction is shaped might shed some light on the future operations of the Mets.  

The reported purchaser is Steven Cohen, the chairman and CEO of the hedge-fund Point72 Asset Management. Mr. Cohen’s personal net worth has been estimated at. $13 billion. The current owners are members of the Wilpon family.  Fred Wilpon is 83 years old and his personal finances have been rumored to be negatively impacted by the Bernie Madoff scandal. Fans have long complained the Wilpon family does not spend enough money[3] to build a championship team and has misspent on bad payroll decisions.

 Let’s see the deal is being structured:

  1. Mr. Cohen, or the hedge-fund he runs will end up with 80% ownership of the Mets.  Why is 80% such a magic number?  A potential parent corporation can then include the Mets in a consolidated federal income tax return. There may be tax attributes the other members of the new tax group have that can be utilized by the Mets or use the Met’ income to utilize the tax attributes of the consolidated group. 
  2. Why only 80% ownership? Even if you are worth $13 billion dollars, a $2.6 billion dollar price is still a pretty substantial chunk of change. Since it takes only a 50% ownership stake to control a company, hedge funds can conserve their cash and mitigate risks by taking on a non-controlling interest.  Additionally, many baseball team owners take great pride in owning part a franchise and may be reluctant to sell their entire ownership of the team[4].
  3. The current ownership and management will continue to run the team for five years. Providing a long- term contract to the incumbent management is one way to get tax benefits for the acquisition price.  The current management are the majority owners of the Mets. The salary will be tax deductible to the consolidated group.  This makes sense for the possible purchaser of the Mets as Mr. Cohen may not have a management team in place and may have been an inducement for the sale.  Secondly, having an employment contract does not mean you will in fact remain as management for the entire five years.[5]  The reason for this will become apparent with the next point.
  4. Hedge funds have a large expected return for their investment. It is a function of risk and return. Many hedge fund investments fail, so successful investments need to cover these losses. If the current management does not perform up to these expectations a change in management may occur prior to the end of the five-year contract.
  5. Mets’ fans expecting a new spending spree for players may be disappointed. Since hedge funds need a high rate of return, the current “Moneyball”[6] management strategy of the Mets may continue. management policy, since there will be carryover management. Mets’ fans hope new management will infuse additional funds into the team as part of a new business strategy. Time will tell.
  6. Baseball teams are often acquired as an example of conspicuous consumption. The price tag of the Mets suggests this is not the case though.
  7. The current management owns several of the Mets minor league teams and will continue to be minority owners.  Continued good relations with current management may be necessary for smooth “total” franchise management.

In today’s economy, knowing how to do the accounting for a transaction is important, but not as important as knowing the way transactions should be structured. Being familiar with the “how” and “whys” of mergers and acquisitions makes someone a valued business adviser.  That is the purpose of the following articles and cases.  

UPDATE JULY 2020:

Sadly, the Mets deal has fallen through. The Wilpons remain the majority owners of the Mets, but still seek to sell the team if the press reports are to be believed. Billionaires and celebrities (J-Rod for one. If you don’t know who that is you need to read the gossip pages more!) have shown interest, but at bargain basement prices. The reasons why the Cohen deal fell through are still not entirely clear. There has been some suggestion of bad faith negotiating on the part of the Wilpons. Since there is no confirmation of that they (like anyone else) are entitled to the benefit of the doubt. We can piece together some information about the aborted transaction, and there are additional lessons to be learned from the way this deal cratered.

Never burn a bridge. Apparently Mr. Cohen may still be interested in the transaction. One must believe the deal will change (a reduced offer) though if the team is eventually sold to a group lead by Cohen. Besides any personal animosity, this would simply result from a change in negotiating leverage. Nevertheless, if the Mets’ ownership needs to sell, having one more potential buyer in the game can hardly hurt. There is always something to be said about keeping options open as long as you can. Cohen clearly has the money to buy the team.

Close the deal as fast as you can. Deals have their own life-spans and they are short. The Wilpons may have thought time was their ally but it was not. Who could have predicted the “Black Swan” event of the COVID virus? This shortened the 2020 baseball season and truncated the revenue any new owner would have realized. In any deal the first year revenues should be the most predictable and be the bellwether for the deal. The Wilpons are asking for an eight digit payment for the team. Not knowing the first year revenues can be truly troubling for any buyer.

Uncertainty kills deals. The MLPA contract expires at the end of 2021. This is another area of uncertainty. Suppose the labor negotiations break down and there is a players strike? Even if it is for only a part of the season, there could be another year of impaired revenue in 2022. Let’s not forget the fact COVID can still be around next year too. If this isn’t enough, the fan base is not growing, and the average fan is aging. This is hardly the demographic that will excite a purchaser. A growing market could suggest growing revenues. Sadly, this is not the case for baseball. (I say this as a huge fan!)

Thanks, now get out. The Wilpons want to remain as the management of the team for up to five years after the team is sold. In other words, they want take their money off the table, and still run the team. I don’t know about you, but if I am giving someone in excess of $2 billion for their business, I would want to call the shots to protect my substantial investment. The Wilpons running the team after a sale is an interesting example of the principal-agent problem economists talk about. Management should act in the best interests of the ownership. Having the old owners run the team should send up alarm bells all around. Would they act in the best interests of the new owners? This just adds to the uncertainty in the transaction. To be fair, there may have been some regulatory reasons why the Wilpons needed to stay…

Regulators can kill deals. While it is charitable to call the baseball commissioner a regulator, he does control major aspects of the business. The Commissioner and the rest of the owners need to approve a new owner. Cohen was sanctioned by the SEC for certain practices in his securities business. A pundit suggested one possibility why the deal died was because the baseball establishment wanted someone with a pristine slate to be the new owners of the Mets. Perhaps the proposed awkward management arrangement was an attempt to assuage the concerns of the other owners. In short, you need to get the prior approval of a regulator before you consummate a deal. Regulators can also unwind ownership later if they are not particularly fond of you. That happened to the ownership of the Los Angeles Dodgers in 2012 in a very ugly affair.

In short, frustrated Mets fans should not look for a quick deal. The Wilpons have not yet hit their threshold of pain in this transaction. They do not seem to be in rush to sell. As a negotiating strategy, this is spot on. Compulsion to sell will only reduce the final price as buyers will smell blood in the water. At the same time, buyers will not be looking to leap into the fray because of the uncertainties involved. From a fans perspective, I truly hope I am wrong.

[1] Not to mention the fact the Mets’ team payroll is reportedly  in excess of $160 million.

[2] Actually, there are many baseball teams that have not been in the World Series for a far longer period than the Mets. Baseball fans are not always rational though!

[3] To be fair, the Mets are in the top third of total team salarys in Major League Baseball.

[4] I have met a limited partner of the New York Yankees that actually has a business card saying his occupation is “Limited Partner”.  This is somewhat ill-advised since it may be misinterpreted as implying active management of the team, but the limited partner wanted to show his pride in owning part of the Yankees.  The Yankees are one of the most “storied” franchises in all of professional sports. 

[5] There is the issue of excess parachute payments under Internal Revenue Code Section 280G.  This will not be discussed here but mentioned to demonstrate its importance to structuring the transaction.

[6] You may be familiar with the book of the same name and the movie starring Brad Pitt.  It is a philosophy of management employing data analytics and ‘Sabermetrics” (the baseball version of Big Data).