Two of the publicly traded Madison Square Garden businesses are merging in a move driven by the expansion of sports betting, according to the company.
Madison Square Garden Entertainment is buying Madison Square Garden Networks in an all-stock deal, the companies announced this morning. MSGE, an arena-owning business anchored by the Manhattan landmark, will pay shareholders of the regional sports network MSGN 0.172 per share—that is, about six Networks shares will be swapped for one Entertainment share.
“With the acquisition of MSG Networks, MSG Entertainment anticipates it would capture more of the emerging revenue opportunity related to the potential expansion of legalized sports gaming in its market,” the company stated in a release.
The combined entity combines Madison Square Garden’s live entertainment and digital media properties, which should ease the way to offer sports gaming products with potential gambling partners. Sports betting has been legal in New York state since 2013, but only in casinos and on tribal land. Mobile sports betting is expected to be legalized this year. MSG Networks generated almost $637 million in revenue in calendar year 2020, while Entertainment brought in $763 million in fiscal 2020, about a 25% drop from 2019 due to the pandemic’s effects on live venues.
While the deal may generate long-term value for shareholders if MSG management is correct in its bet on sports gambling, the transaction is sure to draw the ire of some on Wall Street right now. The acquisition price of MSG Networks is the equivalent of $16.16, a discount to where shares closed Thursday, at $17.38. That 7% discount is unusual, since acquisitions of publicly traded companies typically come at a premium to the stock price, often 20% or more. MSG management says blame the media: “The exchange ratio is approximately 4% above the ratio of the unaffected closing stock prices of the two companies on March 10, 2021, the last trading day before a press report speculated on a potential transaction,” MSG said.
Stock market reaction Friday was negative: MSG Networks stock opened trading 7% lower, while MSG Entertainment shares started the day 6% weaker. The Dolan family controls the voting power of both companies—78% of the votes of Networks and 71% of Entertainment. That guarantees the merger will occur, though it doesn’t preclude shareholder lawsuits over fairness of the price. However, the fact that the transaction is for shares and not cash avoids one obvious trait of a freeze-out merger—one in which minority shareholders are forced out of a business altogether.
Uninvolved in the transaction is separately traded MSG Sports, a holding company that owns the Knicks, Rangers, various minor league and esports teams plus a couple of training facilities. It was only slightly down in opening trading Friday.