MADISON SQUARE GARDEN CO MSG
November 20, 2018 - 1:03am EST by
tyler939
2018 2019
Price: 250.91 EPS 1.32 0.69
Shares Out. (in M): 19 P/E 492 129
Market Cap (in $M): 5,960 P/FCF na na
Net Debt (in $M): -1,150 EBIT 24 38
TEV ($): 5,091 TEV/EBIT 133 62.14

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Description

In late June 2018 MSG announced board approval to explore a possible spin-off of its sports assets. The stock ran almost 23% and peaked at $327. Four months later, thanks in part to the overall market declines, we are back to where the stock was before the June announcement, and are given a second chance to participate in the upside. For what it’s worth, Silver Lake (MSG 2nd largest holder) seems to feel the same way, and just boosted its stake from 6.3% to 7.4% while the stock was trading in the high $260s- low $270s range a few days ago.

i

MSG is one of only four major publicly traded sports assets (Liberty Braves - BATRA, Manchester United – MANU, and Formula One racing - FWONA, being the other three). One reason that the vast majority of such assets are privately owned, and are traded highly infrequently between single owners, is the inherent inefficiency of such assets being held by a corporation. A purchase of a sports team by a Steve Ballmer of the world allows him to create enormously valuable tax shields and enables him to pay a price that typically exceeds any prior estimate, and then write off that cost over the next decade as a tax deduction.

For many years now MSG has been trading at a dramatic discount to the value of its assets (particularly the Knicks and the Rangers). This valuation gap was attributed primarily to the notion that Jim Dolan would never monetize the teams. This started to change in 2017 as Dolan seemed to have focused his attention on live entertainment (exemplified by the Spheres project with its outsized capital requirements), until finally the Sports spin announcement confirmed where his priorities are. It’s not hard to see why the stock soared on the announcement as the move will provide funding for the Spheres, while at the same time unlocking significant value for the shareholders.

And while the “when” part of the thesis is still hard to pin down (with tax considerations complicating the picture), the “if” part seems to be firm enough to finally look at the “how much”.

ii

As a starting point, we looked at Forbes’ estimates (Knicks at $3.6bn Feb 2018 + Rangers at $1.5bn Nov 2017) and found them understating the potential realizable value. We think they are likely to go up the next time Forbes takes a stab at it. Not in a small part due to the May14 legalization of sports gambling by the Supreme Court. With gambling already legalized in NJ, and NY likely to follow the suit in 2019, sports betting opens up attractive monetization opportunities for top sports teams. The path to monetization has yet to be mapped out but already several more or less obvious solutions come to mind. National sports leagues and teams could create their own betting websites and apps, attach betting software to their streaming offerings, sell official live data; they could install betting booths inside stadiums, enabling fans to make bets as they attend the games. Most of these will take some time to take shape, but the most obvious and easily accomplishable way would be through sponsorship, not unlike that with the 5m/year DraftKings deal we’ve already seen. But there’s room for creativity even in this category, where for instance a wireless provider could be a part of a sponsorship deal, offering fans high-speed internet connection in the stands to be used to place bets.

But staying on the conservative side, and just pricing in a standard y/y growth discounting any impact from the gambling legalization, it seems realistic to see a 15% mark-up from Forbes next year. (For reference point the most recent valuations were upped 10% and 20% from Forbes’s prior $3.3 billion and $1.25bn respectively)

 

Next, looking at the last 13 NBA and 11 NHL actual sports team sales in the recent 10 years, we observe that those trades garnered on average nearly 40% premiums relative to the Forbes’s numbers, with the more recent transaction getting much higher numbers. So we apply a 25% premium to Forbes’ next year expected number. Assuming $30m for Liberty, Wolfpack and CLG, and taking a 20% NAV discount for the Sports as a standalone we see around $540 valuations for the Sports piece. Allocating $200m of MSG cash to the Sports gets us to $240 per share.

 As for the timing of the sale, the tax consideration and interplay with Spheres capex, seem to imply the sale completion in 2020, but some tranches could go up sooner than that to get a glimpse of the value before the final spin.

We think the valuation numbers above are actually conservative. How much can a recession-resilient, scarce, growing trophy asset fetch in today’s market? The Clippers were sold to Steve Ballmer in 2014 for 2bln, nearly 4x Forbes’ valuation that year. This enormous change of control premium was paid for a second major team in LA, with an unfavorable stadium contract, all before the NBA TV deal and the labor contracts (which brought new revenue and predictability to the sport) were finalized.  In case of NY Knicks we are talking about a major team in a major market, with a worldwide fan base at the time of resolved labor issues and generous, predictable TV revenues. That should bring in an even higher premium. And that’s all not pricing in any potential improvement of the team’s actual performance on the court, which would presumably bring in more revenue. (Forbes uses revenue multiples for its valuations). True, the Knicks, with their dismal record, still manage somehow to sell out. Nevertheless, we should expect a tremendous revenue boost if they actually advance in this lifetime. Getting into the playoffs (it’s been years) will enable them to raise ticket prices potentially compounding double digit increases. Just simply adding these extra games with 20k tickets at $200+ adds $4mln of high margin revenue. Add to that the TV rights revenue or any increases in merch prices, and it’s clear how getting to playoffs (as unlikely as it seems now) would be a game changer from the model perspective

Moving on to the Rangers, They are the most valuable hockey team today. But hockey valuations in general should improve in the near term as the NHL’s national TV deal is set to reprice in 2020. This should greatly improve its current contract (struck back in 2010) which happens to be the worst of all national sports, with rates of just 40c per viewer hour (vs the more typical $1-1.5 for other sports on major networks)

 

iii

The Entertainment piece can itself be viewed as SOTP, separating Madison Square Garden, (“the World’s Most Famous Arena”), from its 1.4mm square feet of air rights. The former, the only arena in Manhattan that also hosts concerts and many other events can be valued at book around $1,100m (with about that much spent on renovation in 2012-13)

The air rights can be valued around $500m. This is conservative, as the negotiations between NY State, the city and MSG around the Penn Station renovations underneath the arena could result in MSG’s air rights potentially doubling, and then being allowed to be sold. For our purposes we will stay with 1.4mm sq feet figure. Expecting $360 per sq ft to get to $500m total value is not too aggressive considering the $500/sq ft paid for St. John’s Terminal air rights two years ago. We may get an update on this number soon, as Google apparently is currently exploring this property.

Next, we value the Sphere assets in Las Vegas at cost ($700) based on capex projections going out to 2019.

The LA Forum (one of the best concert venues in America that they paid 150m to buy and renovate) and Radio City/Beacon Theater / Rockettes (the latter being a $100m+revenue generating asset) together can bring conservatively about $300m.  Lastly, $200 comes from the stakes in TAO and Boston Calling. That brings us to $2.8Bln

Adding to that remaining $500 cash, less $150 of debt and other liabilities, leaves us with about $3.15 bln of equity value for the Entertainment piece, or $133 per MSG share.

Bringing it all together with the Sports piece, we are looking at $373 per share, implying a >35% upside from last Friday’s price.

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

Spin off of the Knicks and Rangers

Legalization of sports betting in New york

Monetization of sports gambling

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    Description

    In late June 2018 MSG announced board approval to explore a possible spin-off of its sports assets. The stock ran almost 23% and peaked at $327. Four months later, thanks in part to the overall market declines, we are back to where the stock was before the June announcement, and are given a second chance to participate in the upside. For what it’s worth, Silver Lake (MSG 2nd largest holder) seems to feel the same way, and just boosted its stake from 6.3% to 7.4% while the stock was trading in the high $260s- low $270s range a few days ago.

    i

    MSG is one of only four major publicly traded sports assets (Liberty Braves - BATRA, Manchester United – MANU, and Formula One racing - FWONA, being the other three). One reason that the vast majority of such assets are privately owned, and are traded highly infrequently between single owners, is the inherent inefficiency of such assets being held by a corporation. A purchase of a sports team by a Steve Ballmer of the world allows him to create enormously valuable tax shields and enables him to pay a price that typically exceeds any prior estimate, and then write off that cost over the next decade as a tax deduction.

    For many years now MSG has been trading at a dramatic discount to the value of its assets (particularly the Knicks and the Rangers). This valuation gap was attributed primarily to the notion that Jim Dolan would never monetize the teams. This started to change in 2017 as Dolan seemed to have focused his attention on live entertainment (exemplified by the Spheres project with its outsized capital requirements), until finally the Sports spin announcement confirmed where his priorities are. It’s not hard to see why the stock soared on the announcement as the move will provide funding for the Spheres, while at the same time unlocking significant value for the shareholders.

    And while the “when” part of the thesis is still hard to pin down (with tax considerations complicating the picture), the “if” part seems to be firm enough to finally look at the “how much”.

    ii

    As a starting point, we looked at Forbes’ estimates (Knicks at $3.6bn Feb 2018 + Rangers at $1.5bn Nov 2017) and found them understating the potential realizable value. We think they are likely to go up the next time Forbes takes a stab at it. Not in a small part due to the May14 legalization of sports gambling by the Supreme Court. With gambling already legalized in NJ, and NY likely to follow the suit in 2019, sports betting opens up attractive monetization opportunities for top sports teams. The path to monetization has yet to be mapped out but already several more or less obvious solutions come to mind. National sports leagues and teams could create their own betting websites and apps, attach betting software to their streaming offerings, sell official live data; they could install betting booths inside stadiums, enabling fans to make bets as they attend the games. Most of these will take some time to take shape, but the most obvious and easily accomplishable way would be through sponsorship, not unlike that with the 5m/year DraftKings deal we’ve already seen. But there’s room for creativity even in this category, where for instance a wireless provider could be a part of a sponsorship deal, offering fans high-speed internet connection in the stands to be used to place bets.

    But staying on the conservative side, and just pricing in a standard y/y growth discounting any impact from the gambling legalization, it seems realistic to see a 15% mark-up from Forbes next year. (For reference point the most recent valuations were upped 10% and 20% from Forbes’s prior $3.3 billion and $1.25bn respectively)

     

    Next, looking at the last 13 NBA and 11 NHL actual sports team sales in the recent 10 years, we observe that those trades garnered on average nearly 40% premiums relative to the Forbes’s numbers, with the more recent transaction getting much higher numbers. So we apply a 25% premium to Forbes’ next year expected number. Assuming $30m for Liberty, Wolfpack and CLG, and taking a 20% NAV discount for the Sports as a standalone we see around $540 valuations for the Sports piece. Allocating $200m of MSG cash to the Sports gets us to $240 per share.

     As for the timing of the sale, the tax consideration and interplay with Spheres capex, seem to imply the sale completion in 2020, but some tranches could go up sooner than that to get a glimpse of the value before the final spin.

    We think the valuation numbers above are actually conservative. How much can a recession-resilient, scarce, growing trophy asset fetch in today’s market? The Clippers were sold to Steve Ballmer in 2014 for 2bln, nearly 4x Forbes’ valuation that year. This enormous change of control premium was paid for a second major team in LA, with an unfavorable stadium contract, all before the NBA TV deal and the labor contracts (which brought new revenue and predictability to the sport) were finalized.  In case of NY Knicks we are talking about a major team in a major market, with a worldwide fan base at the time of resolved labor issues and generous, predictable TV revenues. That should bring in an even higher premium. And that’s all not pricing in any potential improvement of the team’s actual performance on the court, which would presumably bring in more revenue. (Forbes uses revenue multiples for its valuations). True, the Knicks, with their dismal record, still manage somehow to sell out. Nevertheless, we should expect a tremendous revenue boost if they actually advance in this lifetime. Getting into the playoffs (it’s been years) will enable them to raise ticket prices potentially compounding double digit increases. Just simply adding these extra games with 20k tickets at $200+ adds $4mln of high margin revenue. Add to that the TV rights revenue or any increases in merch prices, and it’s clear how getting to playoffs (as unlikely as it seems now) would be a game changer from the model perspective

    Moving on to the Rangers, They are the most valuable hockey team today. But hockey valuations in general should improve in the near term as the NHL’s national TV deal is set to reprice in 2020. This should greatly improve its current contract (struck back in 2010) which happens to be the worst of all national sports, with rates of just 40c per viewer hour (vs the more typical $1-1.5 for other sports on major networks)

     

    iii

    The Entertainment piece can itself be viewed as SOTP, separating Madison Square Garden, (“the World’s Most Famous Arena”), from its 1.4mm square feet of air rights. The former, the only arena in Manhattan that also hosts concerts and many other events can be valued at book around $1,100m (with about that much spent on renovation in 2012-13)

    The air rights can be valued around $500m. This is conservative, as the negotiations between NY State, the city and MSG around the Penn Station renovations underneath the arena could result in MSG’s air rights potentially doubling, and then being allowed to be sold. For our purposes we will stay with 1.4mm sq feet figure. Expecting $360 per sq ft to get to $500m total value is not too aggressive considering the $500/sq ft paid for St. John’s Terminal air rights two years ago. We may get an update on this number soon, as Google apparently is currently exploring this property.

    Next, we value the Sphere assets in Las Vegas at cost ($700) based on capex projections going out to 2019.

    The LA Forum (one of the best concert venues in America that they paid 150m to buy and renovate) and Radio City/Beacon Theater / Rockettes (the latter being a $100m+revenue generating asset) together can bring conservatively about $300m.  Lastly, $200 comes from the stakes in TAO and Boston Calling. That brings us to $2.8Bln

    Adding to that remaining $500 cash, less $150 of debt and other liabilities, leaves us with about $3.15 bln of equity value for the Entertainment piece, or $133 per MSG share.

    Bringing it all together with the Sports piece, we are looking at $373 per share, implying a >35% upside from last Friday’s price.

    I do not hold a position with the issuer such as employment, directorship, or consultancy.
    I and/or others I advise hold a material investment in the issuer's securities.

    Catalyst

    Spin off of the Knicks and Rangers

    Legalization of sports betting in New york

    Monetization of sports gambling

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