Madison Square Garden Sports (MSGS) and Madison Square Garden Entertainment (MSGE) – both spun-out of the Madison Square Garden Company (MSG) – began trading on the New York Stock Exchange last Monday (April 20). The tax-free spinoff creates formal separation between MSG’s venue and live experiences business (includes: Madison Square Garden, Radio City Music Hall and Tao Hospitality Group) from its pro sports teams (includes: NY Knicks, NY Rangers). MSG shareholders received one share of MSGS and one share of MSGE for every MSG share previously held.
Howie Long-Short: The MSG Sphere project was behind the company’s decision to spinoff the sports assets from their entertainment portfolio. Initially, MSG planned to sell down ownership of its teams in order to finance the development of two state-of-the-art buildings (one in Las Vegas, the other in London). That changed last December, when construction of the London arena was ‘delayed‘. Without the need for as much capital MSG managed to retain its ownership stake in the pro sports franchises, but the nearly two-year long process to complete the spinoff was already well underway.
Taking on the risky sphere project and transforming MSGE into more of a growth (as opposed to value) business meant appealing to a different investor base. Brandon Ross (TMT analyst, LightShed Partners) explained that with an investment in the spheres likely to alienate much of the old MSG investor base, it made sense to “set up the company so that those interested in the teams can invest in [MSGS] and those with the stomach for a higher risk investment opportunity – with a potentially higher reward – could [invest in MSGE].” It’s a playbook those familiar with MSG history will recognize. Cablevision spun off their sports and entertainment assets (into MSG) when the company decided it was going to spend north of $1 billion on renovations to The Garden (detractors thought it was a vanity project). Of course, that project turned out to be an overwhelming success.
The problem was, despite MSG owning the World’s Most Famous (and valuable) Arena the company’s share price never reflected as much. Ross said that “everyone would look at Forbes’ team valuations, just do some dumb math and realize that MSG wasn’t getting any credit for their entertainment assets or the real estate that goes along with them.” Splitting up the company should allow for shareholders to unlock that value.
MSGE (+17%) and MSGS (+8%) are both up since last Monday morning (4.20), but Ross says the companies are still trading at a deep discount. “Combined they’re at $254. MSG shares traded at +/- $340 at their high.” The TMT analyst suggested that MSGE, in particular, “remains at a steep discount relative to the sum of its parts – even with all of the uncertainty surrounding the live events business and the share price +20% over the last week.” That’s because the company started trading at such a low price. “If you assumed the Las Vegas Sphere was only worth half of what it costs to build and that Madison Square Garden is just worth its book value – no air rights, no land – that’s where trading began.”
The upside in MSGE is in a return to normalcy. It’s pretty safe to assume that sports will return sooner than later and that at some point within the next year (or two) fans will be packing venues again. When that happens, Ross says “the entertainment business will become more grounded in financial results and the market will begin to assign reasonable multiples [to EBITDA] as opposed to just treating [companies like MSGE] as sum of the parts real-estate play.” While there’s still some risk in the sphere project (see: it’s a big venue, first of its kind so no proven demand), if the company can manage to get it open “it should drive the stock up by at least 50% – even it turns out to be a zero ROI project.”
It’s fair to wonder why MSG chose to complete the public spinoff at a time when there are no games and sports/entertainment revenues are negligible, but with the deal ensuring the liquidity of MSGS Ross says there was no reason not to finalize it now. “Honestly, I don’t think [the timing of the spinoff] matters. While [nearly] all of the cash is staying on the entertainment side, it’s not as if sports was left naked. MSGS was left with $50 million in cash, along with another $50 million on a revolving credit agreement and there is a lending relationship in place that enables sports to borrow money at a very reasonable interest rate.” Sports will be back and MSGS has the capital to float the business until they resume.
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