SBJ/Feb. 14-20, 2011/Opinion

Wilpons' financial morass offers lessons for franchise owners

ROBERT
BOLAND

My career as a professor of sports business has benefited from good timing. I have been fortunate to teach timely courses and even get inside several prospective franchise purchase deals, including serving as a chief adviser to a group bidding for an NFL franchise. But this semester, as I teach two new courses on professional franchises, the timing of the “claw back” lawsuit against the Wilpon family stemming from the Bernard Madoff scandal could not be better. Better, that is, to try to analyze what owning, operating and hanging onto a pro sports franchise means in 2011 and to take some lessons from it.

It wasn’t so long ago that the future of the New York Mets under the Wilpons’ leadership looked bright. How could one financial mistake produce so many tremors that they would threaten all that the family had built in 30 years of owning a share of the Mets? Surely owning such diverse and valuable assets as an $800 million franchise, a successful regional sports network and a new stadium would provide insulation against all but the most dire of circumstances.

The first lesson about franchise ownership drawn from the Mets situation: The margin for error for any owner has shrunk to the degree that one big mistake — trusting Madoff — combined with other decisions, made with good intention but without great success, can threaten to cost one of the more stable ownership groups in all of sports its franchise. The most unsettling part is that the Wilpons and the Mets are not alone. They have company, whether it is the seemingly impervious Los Angeles Dodgers or the perpetually challenged New Orleans Hornets, and for the strangest reasons.

Can some wisdom be gleaned to save other franchises from going down this road, especially now when the value of sports franchises has grown to such a degree that they represent the major piece in the portfolios of all but the most seriously wealthy owners?

Perhaps the next lesson of franchise ownership is to recognize that teams can no longer be kept at arm’s length from the rest of an owner’s portfolio. They are simply too valuable now.

This folds into the third lesson: that teams are targets. Given their huge valuations, franchises will be the target of creditors, especially when they overreach trying to jump to a higher foothold. The Wilpons and Mets had seemingly done all the right things in trying to grow their business: starting SportsNet New York, signing expensive free agents and building a stadium. Yet it’s these decisions, coupled with the Madoff thefts, that have left them vulnerable.

One of the most troubling parts about the Madoff scandal is that it may not have been preventable. Even the Securities and Exchange Commission didn’t uncover his scheme. And the Mets did what any investor would do when an adviser gave a 15 percent annual return: They said “Thank you,” and invested more. But when Madoff’s embezzlement hit the Wilpons’ cash reserves, compromising the operational liquidity of the Mets — which had already been stretched thin by otherwise “good debt” from the new stadium, RSN and a high payroll — the fragile nature of franchise ownership in 2011 was revealed. The perfect storm may have hit the Mets, but that storm is still off the coast waiting for another team pushing the boundaries of fiscal restraint. So the next lesson may be that these crises may simply not be avoidable.

There is a path for the Wilpons to keep control of the Mets but it is a rocky one. They can raise capital by selling a minority interest in the team and improving liquidity; hope new general manager Sandy Alderson turns a reported loss into a small profit with better management of player costs; and look for a fast start, combined with better ticket pricing and competitiveness, that keeps RSN ad rates high.

That doesn’t leave much room to maneuver, and it all hinges on selling that minority share. This might have been the first thing the Wilpons may have tried when news of the Madoff scandal broke, but the Wilpons were former minority owners who gained control of the Mets. The team was their legacy, and they sought to weather the storm. Perhaps the next lesson is that in 2011 owning the noncontrolling 49 percent of any franchise is a luxury few owners can still afford.

Taking a minority stake might still prove to be a way for someone to ultimately get control of the Mets for less than full market value. But those same potential minority shareholders also risk the team (and their investment) being driven into bankruptcy. As a consequence, any minority investor will want some form of a right of first refusal to buy the Wilpons’ controlling interest in the team in the future and assurance that any shares sold in the team also be guaranteed by the Wilpons’ profits from SNY.

Sports business experts have speculated for some time that any pro franchise is made up of three parts with roughly equal value: team, facility and media deals. Perhaps the final lesson is that these three components are not easily separated, as was so casually thought when the Chicago Cubs went to market in pieces a couple of years ago. Franchises are complex and interlinked businesses, and running one is more challenging than ever in 2011.

Robert Boland (robert.boland@nyu.edu) is a professor of sports business at New York University’s Preston Robert Tisch Center for Hospitality, Tourism and Sports Management.

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