MADISON SQUARE GARDEN INC MSG
June 22, 2010 - 9:39pm EST by
flyer
2010 2011
Price: 20.75 EPS $0.72 $0.00
Shares Out. (in M): 76 P/E 29.0x 0.0x
Market Cap (in $M): 1,568 P/FCF 12.0x 0.0x
Net Debt (in $M): -850 EBIT 90 0
TEV ($): 718 TEV/EBIT 8.0x 0.0x

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Description

I. THESIS
Madison Square Garden, Inc. ("MSG" or the "Company") was spun off from Cablevision Systems Corporation ("Cablevision"), owned by the Dolan family, on 2/09/10.  Intrinsic value for MSG, based upon a sum-of-the-parts valuation analysis, is up to $46/share, upside of 133% from the current price of less than $20/share, while downside is $23/share, which is actually upside of 18%.  Fair value will be realized over the course of the coming quarters as: 1) natural selling pressures from the large institutional Cablevision investors subsides (Fidelity and many other large firms cannot or are unwilling to hold $1.7 BN market companies, especially complicated businesses that do not fit a specific industry or subsector classification); 2) meaningful analyst coverage emerges; 3) the greater investor community begins to pay attention to and understand MSG's business, and; 4) for returns in excess of the SOTP valuation, a variety of free call options are realized.
 
 
II. COMPANY OVERVIEW
MSG has 3 operating units - MSG Media, MSG Entertainment and MSG Sports:
 
A) MSG Media: This unit is a strong cash generator with meaningful revenue, earnings and cash flow growth potential, thanks to the strength of the segment's regional sports networks ("RSN"), namely MSG and MSG+, that offer exclusive access to all-things programming for the New York Knicks, New York Rangers and 5 other New York area sports teams, along with college sporting events (ACC, Big East, Pac-10) and original content series. The vast majority of revenues are derived from long-term affiliate contracts with cable companies that carry the networks and in return pay MSG a per-subscriber fee.  In addition to the regional sports networks, MSG Media includes the Fuse network, which provides in-house music programming for blue chip music bands and events that have exclusive relationships with MSG or that take place at the Madison Square Garden and other exclusive MSG venues (Radio City Music Hall, Beacon Theatre, Chicago Theatre and Wang Theatre in Boston).
B) MSG Entertainment: This unit creates and produces live entertainment events, with the flagship program being the Radio City Christmas Spectacular (featuring the Rockettes), and to a lesser degree, the Cirque de Soleil Wintuk show. Also, MSG Entertainment presents concerts, classic television shows (Sesame Street, Thomas the Train), awards shows, and theatrical productions. Additionally, the unit owns or leases several blue chip entertainment venues such as Madison Square Garden, the Theatre at MSG, Radio City Music Hall, the Beacon Theatre, the Chicago Theatre and the Wang Theatre in Boston.
 
C) MSG Sports: This unit owns and operates 4 sports franchises, including the New York Knicks (NBA), New York Rangers (NHL), New York Liberty (WNBA), and Hartford Wolf Pack (AHL). The Sports segment also includes the broadcast rights for several live sporting events including the Big East and NIT college basketball tournaments, the Jimmy V Classic, professional boxing, tennis and track and field.
 
While from an operating and financial perspective, MSG Media is clearly the crown jewel, each unit includes blue chip assets, and the strategic value of combining the RSNs (Media) and the sports teams is significant.  Note the multiplicative impact that an improved Knicks or Rangers team next year could have on the MSG's business value (and there is only one direction this Knicks team can go); it will not only lead to more games (playoffs), higher ticket sales, merchandise and concessions revenues for the Sports segment, and generally increase the valuation multiple and desirability of the sports franchises, it will provide better per-subscriber affiliate revenues and advertising rates for MSG and MSG+, which is all cash that goes straight to the bottom line.  It is worth noting that the Knicks have preserved approximately $30 MM of cap space to spend on a deep free agent market during the summer of 2010.  Even if the Knicks fail to sign Lebron James, the team still has the financial capacity to build a franchise around 2 to 3 stars, such as the Celtics did during 2008.  Therefore, the upside potential for MSG is quite substantial.
 
 
III. CATALYSTS
 
1. The cessation of the natural selling pressure from the large, institutional Cablevision shareholders that cannot or are uninterested in holding a $1.7 BN market cap company that furthermore does not fit a specific or traditional strategy classification (i.e., growth or value) or subsector.
 
2. The emergence of meaningful sell-side analyst coverage.
 
3. The focus of the greater investment community on understanding the complex nature of the different business units (sports franchises + exclusive media distribution businesses + exclusive sports and entertainment productions + Class A real estate assets) and thereby ascribing an appropriate valuation to the stock.
 
4. Market recognition of the new RSN affiliate contracts signed with Cablevision and DirecTV that represent incremental EBITDA of approximately $30 MM annually.  Note that the contract with Cablevision lasts ten years (through 2020), which includes annual price escalators.  These two contracts started in January 2010 have only been included in one quarter of historical financials, thereby understating the true earnings/cash flow power of the Media segment.  This implies a potential value increase of $4/share - $5/share, assuming an EBITDA multiple of 8x - 12x.  Again, the nature of this affiliate revenue has negligible costs associated with it and therefore largely translates into earnings and cash flow.
 
5. Bringing 1 - 3 big stars to the Knicks.  The Knicks habitually ranks in the top 3 for ticket receipts in the NBA despite the embarrassing mismanagement, on-court performance and lack of any meaningful big name stars.  With the Knicks' sizable cap space heading into the deep free agent season during the summer of 2010, the franchise could substantially upgrade its talent pool and therefore revenues and earnings, thereby boosting the Knicks' financial performance and franchise value (however, note that basketball teams are generally valued at 2.5x - 3.0x revenues with a much lesser regard for profitability).
 
6. Incurring capital expenditures for the Madison Square Garden renovations meaningfully below management's forecast of $775 - $850 MM and thereby incurring less debt to finance the project.  Note that our valuation analysis assumes the Company incurs the maximum $850 MM in capital expenditures.  This additionally overly penalizes the valuation, as it assumes this $850 MM all occurs today, whereas the actual expenditures will be incurred over the coming 2+ years and therefore have a far lower present value than $850 MM.
 
7. While not likely to occur any time soon, upgrading the management team would significantly improve MSG's prospects for significantly unlocking the value potential of its blue chip assets.  In an ideal world, this would entail installing a new management team (read, no Dolan family members) focused on improving the financial performance of the Knicks and Rangers and thereafter selling the sports franchises and blue chip real estate assets at more desirable valuations while focusing on the growth and cash flow potential of the Media business to maximize shareholder value.  However, this is more hope than reality and is not pivotal to the realization of MSG's fair value. 
 
 
IV.  VALUATION
 
SUM OF THE PARTS ANALYSIS:
 
A) MSG Media: RSNs are not generally public companies, but they have historically been acquired at high EBITDA multiples in the range of 15x - 25x (see Appendix for details), with an average of 17x - 19x according to not only the precedent transactions in this analysis but also the combined 37 transactions analyzed between 1994 and June 2009 for DTV's S-4 filed on 6/08/09.  With over 16 MM subscribers in arguably the premier sports market in the country, MSG's RSNs warrant a premium valuation multiple, particularly in light of their mid-30%s EBITDA margins as compared, for example, to the 22% EBITDA margins for Liberty Sports Group's RSNs, which notably generated only $45 MM of EBTIDA with far less iconic content than that of MSG, and which sold for a valuation of 13x EBITDA.  Consider that this analysis only places an 8x - 12x multiple on MSG's RSNs, which is a heavily conservative valuation and provides a sizable margin of safety on the enterprise value range of $1.5 BN to $2.4 BN.  Note that this valuation includes existing FY09 EBITDA ($162 MM) as well as the $30 MM of incremental EBITDA from the new Cablevision and DirecTV contracts.  As it relates to the high margin nature of incremental revenues, consider that in FY09, MSG Media's revenues increased by $45 MM but operating cash flow increased by $55 MM, $10 MM more than revenues. 
 
The Fuse network is likely worth at least an additional $55 MM assuming a very conservative $1.00/subscriber valuation as Fuse is currently an operating and cash flow drain despite its sizable subscriber base of 55 MM.
 
B) MSG Entertainment: For the SOTP valuation, MSG Entertainment is viewed as a free call option.  The primary focus of this segment is the production of the Radio City Christmas Spectacular, which generates $125 MM of revenue and is viewed by 2 MM people annually.  Christmas Spectacular EBITDA fell by $25 MM in 2008 due largely to reformatting the show for arena tours, which should subside in future years.  Furthermore, the Beacon Theatre's renovation during this time has eliminated another $8 MM of EBITDA from the Entertainment segment.  Therefore, exclusive of the impact of the economic downturn, EBITDA has declined $33 MM for secular reasons alone.  Assuming, the Entertainment segment only regains 50% of its peak EBITDA levels during 2007 of $50 MM and generates $25 MM of EBITDA, the Entertainment business is worth a conservative $100 - $200 MM, assuming valuation of 4.0x - 8.0x EBITDA.  Consider that its peer group trades at an average of 7x FY10E EBITDA, and the most relevant peer, Live Nation Entertainment, trades at 7x (see Appendix for details) and has assets that are not as iconic or perpetual in life span as the Christmas Spectacular.  While MSG Entertainment is not a good business, at a minimum, its EBITDA generation should meaningfully increase in the future.  To be additionally conservative, this analysis ascribes no value to any of the blue chip concerts or the live events presented at the Company's venues.
 
C) MSG Sports: The Knicks and Rangers were purchased in 1997 for $300 MM and $195 MM, respectively, and are accounted for at historical cost on the balance sheet. However, Forbes ascribes a valuation of $586 MM for the Knicks and $416 MM for the Rangers as of the end of 2009 (see Appendix for details). While these assets cannot be sold for at least two years per the terms of the spinout, and frankly are unlikely to be sold shortly thereafter, substantial hidden asset value exists for these franchises. The SOTP Base case employs the Forbes valuations, with a 25% discount and premium applied to the Min and Max cases, respectively.  This analysis ascribes no value to the Liberty, Wolf Pack or the presentation rights for any of the live sporting events, which in reality are clearly worth a meaningful amount.  Lastly, consider that in 2009 the Knicks generated $21 MM of EBITDA while smaller market teams including the Chicago Bulls and Detroit Pistons generated EBITDA of $51 MM and $47 MM, respectively.  There is therefore no reason the higher revenue generating Knicks should not easily generate $50 MM of EBITDA in the future.
 
D) Air Rights: Along with the land and buildings, the Madison Square Garden venues possess the air rights for the events hosted in the building.  In addition to MSG Entertainment, the SOTP valuation views the Air Rights as a free call option.  According to Gabelli & Co., these rights have a value of $225 MM ($3/share) assuming a 50% discount to the 4.5 MM sq ft capacity valued at $100/ sq ft.
 
E) Venues: This analysis assumes the venues have no value, which is absurdly conservative.  MSG owns the land, building and development rights for Madison Square Garden, the Theatre at Madison Square Garden and the Chicago Theatre, as well as the long-term lease rights to Radio City Music Hall, the Beacon Theatre and the Wang Theatre in Boston.  Each of these assets is tier 1 in nature, especially the Garden.  The hidden asset value has big upside but is not included in this valuation.  What a call option!
 
F) Balance Sheet Adjustments:
 
1) Forecast for MSG Capital Expenditures: To be very conservative, the maximum forecast for the MSG renovations of $850 MM is deducted from MSG's valuation.  Not only does it assume the maximum estimate for total spend, but it over-penalizes the valuation by assuming that not only is 100% of the cost incurred today, thereby overstating the present value of the expenditures which will occur over the next 2+ years, and it excludes the tax benefits from the expenditures.  Furthermore, the benefit of the increased value of the building and cash flows generated from selling more, higher-priced club and luxury boxes as well as tickets are not factored into the valuation analysis.  Clearly, this is an overly conservative valuation adjustment.  (Also, consider that the Time Warner Center for the Charlotte Bobcats only cost $350 MM to build from the ground up in 2005, and the Barclays Arena in Brooklyn, NY for the New Jersey Nets is estimated to cost $800 MM, but unlike MSG, it must be built from the ground up.)
 
As you can see, this valuation ignores the sizable hidden value for a wide variety of MSG's assets while ascribing a very reasonable valuation to the majority of its core businesses.  Additionally, the valuation adjusts for the projected MSG renovations, and as such, heavily handicaps MSG's true business value but illustrates just how large the margin of safety is, particularly when the downside case valuation is $23/share, which is actually upside of 18% from the current price, while offering large upside of 133% to $46/share, a very attractive risk/reward relationship.  Note the $30 MM of incremental EBITDA for the RSNs from the January 2010 contract signings with Cablevision and DirecTV; this is not fully accounted for in MSG's historical financials and accounts for approximately $300 MM of incremental value (10x EBITDA multiple), or $4/share.  Please see the SOTP analysis below:
Additionally, consider the additional free call options embedded in MSG:
 
G) Other Call Options:
 
1) Knicks organization fixes the black hole that the organization is currently in and deploys its outsized cap space to acquire 1 to 3 franchise players during the deep free agent market during the summer of 2010.  This would have a multiplicative, positive impact on the Sports segment (better win percentage equates to more playoff games, greater ticket/merchandise/concession/advertising sales) and the Media segment (higher per-subscriber fees and advertising revenues).
 
2) Management stops deploying capital into MSG Entertainment venue acquisitions designed to increase the segment's asset portfolio (note the recent acquisition of the Chicago Theatre to generate proprietary event presentation and distribution through the Fuse network).
 
3) Fuse actually becomes profitable and stops masking the true earnings and cash flow power of the MSG Media segment.
 
4) The cessation of one-time capital requirements for reformatting the Radio City Christmas Spectacular to accommodate a national arena tour.
 
 
V.  VALUE ADDED RESEARCH
 
This is a summary of the value-added research accumulated thus far for MSG.  Below is the list of key sources, followed by an overview of the findings related to the three focal points of this research: 1) the RSN business; 2) the $775 MM to $850 MM of estimated expenditures to renovate the Garden, and; 3) the New York Knicks.  The findings of this research produce generally greater conviction that CONFIRMS a long position in MSG at $22 / share or less. 
 
KEY SOURCES
 
Robert Sanna - Head of Construction, Forest City Ratner Cos., Developer of the Barclays Center.  As the developer for the Barclays Center, the new home of the New Jersey Nets, Mr. Sanna has a unique and valuable knowledge base of the construction elements and costs associated with building and refurbishing professional sports and entertainment venues, such as the Garden.
 
CSL International Study - the prospectus for the Barclays Center's $500 MM municipal bond financing details not only the nature of building and operating a premier sports venue, but it also provides an independent analysis, which provides a meaningful edge in assessing the financial performance drivers for the Garden and MSG Sports teams following the Garden's renovation.  This provides a great edge to understand the expected financial improvement for the Garden as well as the Knicks and Rangers following the renovation.
 
Vornado Realty Trust - Vornado is a leading REIT company with in-depth knowledge of the capital and maintenance costs, as well as valuation, of a marquee sports and entertainment venue such as the Garden. 
 
DTV S-4 - This S-4, filed in conjunction with its merger with Liberty Media, compiled a detailed, historical valuation analysis for its RSN business, which proves very relevant for generating MSG Media's valuation.
 
Martin Sheehan - DTV, Head of Investor Relations.  DTV has a sizable RSN business and Mr. Sheehan provides valuable input on the financial performance and drivers of both DTV's and MSG's businesses.
 
John Moag - Founder of Moag & Company sports valuation firm.  Moag & Co. published a 2003 basketball franchise valuation report that I obtained, and Mr. Moag offers productive insights on how to approach sports franchise valuation outside of the Forbes analyses.
 
A) THE RSNs
 
RSNs - Financial Performance:  On 4/30/10, I spoke with Mr. Martin Sheehan, Head of IR at DTV, to gain industry perspective on what drives the RSN business. I prefer to speak with competitors as opposed to MSG given that every company is a promoter of its business and stock price and will therefore paint an overly rosy picture of its prospects while painting a generally more critical picture of the competition.
 
MSG's RSNs generate EBITDA margins in the low 30% range while DTV's generate margins in the low 20% range.  Furthermore, prior to 2009, MSG's RSNs generated low 20% EBITDA margins, similar to DTV.  My concern is that MSG may be understating intersegment costs, namely broadcast rights paid to the sports franchises.  However, Mr. Sheehan believes MSG's industry leading margins may actually be attributable to the start of Cablevision paying market rates for the RSNs.  However, the problem with that analysis is that Cablevision did not initiate its contract with MSG until January 2010 and any rate increases would therefore not be included in 2009 results.  Unfortunately, this research neither confirms nor denies my suspicions about how MSG generates margins that are 50% greater than those of DTV.
 
Secondly, the RSNs survival relies upon the Company's ability to maintain and re-sign the broadcast rights with the sports franchises.  Therefore, the RSNs' business value would be permanently impaired should the Knicks and Rangers not extend their respective broadcast rights with MSG.  According to Mr. Sheehan, RSN renewal risk is very limited with small and mid size market teams, such as DTV's Pittsburgh Penguins, given that they are unable to independently support an RSN from a financial perspective.  However, large market teams such as the Knicks could support its own RSN should it choose not to renew its contract with MSG.  Therefore, in summary, the value of MSG's RSNs proves meaningfully greater with the Company's ownership of the sports teams as well, and splitting up the Company could hamper the valuation potential of the RSNs. 
 
RSNs - Valuation.  In addition to the recent precedent transactions compiled for my MSG analysis and write-up, DTV's S-4 contains an RSN valuation analysis, which shows an average EBITDA multiple of 18x, taken from a sample set of transactions that spans the past 15 years (1994 - 2009).  This confirms how conservative my RSN valuation range of 8x - 12x is, especially when considering that the respective league leading Knicks and Rangers provide MSG with one of the premier RSNs in the country, with the YES Network proving perhaps the only superior industry participant.
 
B) THE GARDEN RENOVATIONS
 
The Garden - Renovation Costs & Financing:  MSG's maximum capex estimate of $850 MM is likely inflated by approximately $100 - $200 MM.  First, Forest City Ratner Cos. is building the Barclays Center, the new home of the New Jersey Nets and other minor league sports teams, in Brooklyn, NY, from the ground up for an estimated $800 MM.  Consider that the Garden is simply being renovated, requiring a fractional amount of steel and other raw materials relative to the Barclays Center, but the Garden renovation is estimated to cost $850 MM (up from an original estimate of $500 MM).  Mr. Robert Sanna, the Head of Construction for FCRC, confirmed the $800 MM cost estimate for the Barclays Center and also interestingly noted that there is no cost differential in terms of labor between the Garden renovation and the Barclays Center construction, as both Manhattan and Brooklyn (site of the BC) operate under the same labor union contracts.  Therefore, it is difficult to understand how the Garden renovation could cost so much in light of the Barclays Center cost estimates. 
 
There appears to be only one meaningful cost differential between the two venues and that is the additional costs associated with building the more complex HVAC systems for the Garden that sits five stories above ground (including an ice rink) and on top of one of the busiest train stations in the country, Penn Station.  Even in factoring these larger relative costs, the $850 MM capex estimate to renovate the Garden still appears overly conservative by some $100 MM - $200 MM, according to Mr. Ratner.  My valuation analysis assumes the full $850 MM estimate and is therefore, if anything, an overly conservative estimate.  As another data point, consider the average new professional NBA/NHL arena constructed over the past 15 years is $450 MM in 2010 construction cost dollars, per the CSL International market feasibility study found in the prospectus for the Barclays Center municipal bond issuance.
 
In terms of financing, FCRC is employing tax-free bonds ($500 MM/BBB- ratings), while the city and state are contributing $131 MM and $100 MM, respectively, to the project.  As part of the ongoing research process, it is worth determining whether MSG can obtain similar financing options for the Garden renovations as this would clearly lower the estimated project expenditures for the Company.  Based upon CSL's market feasibility study, new combined NBA/NHL arenas only receive on average 5%-10% of construction costs financed by public sources, but the Dolans also have a unique asset and may therefore have some negotiating leverage for a greater degree of either public funding or tax breaks.
 
The Garden - Pro Forma Financial Performance:  It is additionally important to note the multiplicative benefits produced by the Garden's renovations; note that no such benefits are factored into my financial and valuation analyses and therefore serve as potential upside.  To quantify such benefits, I found a sports venue competitive market analysis produced by CSL International for the prospectus of the $500 municipal bond issuance for the Barclays Center in Brooklyn, NY, the future home of the New Jersey Nets.  Specifically, note that the Garden renovation will increase the number of suites from 89 to 167; the existing Garden suites generate $425K of annual license fees, and the incremental 78 suites therefore should generate an additional $33 MM of annual revenues.  Suite pricing could be higher given the new, upgraded suite quality and anticipated free agent signing(s) in the summer of 2010. 
Additionally, in terms of pricing, keep in mind that the Barclays Center aims to sell its suites for an average annual price of $300K, but the Nets in Brooklyn are expected to generate meaningfully lower suite and ticket prices than the Knicks in Manhattan.
 
In terms of ticket and event demand, MSG has a captive market and therefore has 91% attendance records for both the Knicks and the Rangers, as well as constant demand to host live entertainment events at the Garden (48% greater NY / NJ live event market share in 2009).  Therefore, demand will always be stable, and the real upside potential is ticket price increases.  In terms of live events, ticket pricing has steadily increased at an 11% CAGR over the past 11 years, including a resound 9% during the economic turmoil of 2008.  In terms of sporting events, upon receiving a new stadium or upgrading an existing stadium, pro sports ticket prices have on average increased 20% in the first year, including a 32% increase for the L.A. Lakers (indicative for the Knicks) and 40% for the New Jersey Devils (indicative for the Rangers).  This bodes well for the Garden's and MSG Sports' financial performance following the renovation, as these pricing increases go straight to the earnings and cash flow lines.
 
The Garden - Valuation:  My valuation analysis assumes no value for the Garden.  That being, Vornado stated that it would be a potential buyer of the asset, should MSG ever decide to sell.  Vornado suggested given its iconic status and excess demand to host events there, the Garden would warrant a premium valuation to its counterparts, and may warrant a cap rate of approximately 5%.  Unfortunately, the operating income for the Garden is attributed amongst the segments and is therefore not clearly quantifiable, rendering a valuation analysis somewhat frivolous, but it's safe to say that the building is worth several hundred million dollars even before the planned renovations (note my valuation analysis assumes no value for the Garden).  As an alternative value realization strategy, MSG could convert the Garden into a REIT and realize value via a far lower tax rate and regular cash distributions to MSG shareholders.
 
There are also several other sources of cash or value attributable to the Garden that are not factored into my valuation analysis.  First, the renovations will receive very sizable tax breaks from the city / municipality; MSG has not quantified such tax breaks, but they will provide meaningful cash or value generation in excess of my analysis.  Second, Barclays Center received almost $250 MM of equity from the city / municipality.  MSG should have the ability to generate certain contributions from NYC and the state of NY, and the Company has meaningful leverage to move the stadium if the city disagrees to adequate equity injections or tax breaks.  Note that in 2004 - 2005, the Dolans threatened to move the Garden out of NYC when a competing stadium planned to move into the western portion of Manhattan, and that second stadium was subsequently abandoned following the Dolan's actions.  Third, similar to the Barclays Center project, MSG should be able to employ lower-cost municipal bonds should it not have the requisite operating cash flow and equity injections to complete the renovations.
 
C) THE NY KNICKS
 
NY Knicks - Financial Performance.  The Knicks should have capacity to generate at least $50 MM of EBITDA once its outsized retirement and settlement obligations have been fully paid (includes former player Stephon Marbury and former coaches Isaiah Thomas and Larry Brown, among others).  The Knicks have paid over $80 MM in such costs over the past three years, clearly an outsized but temporary burden for the franchise.  As a basis of comparison, lower market teams (read, lower revenues) such as the Chicago Bulls and Dallas Mavericks generate $50 MM of EBITDA, while in 2009 the Knicks generated EBITDA of only $21 MM. 
 
Additionally, please see "The Garden" section for insights on the upside potential for the Knicks' financial performance following the facility's planned renovation.
 
NY Knicks - Valuation: On 4/27/10, I called Mr. John Moag, the CEO of Moag & Company, after reading a 2003 basketball franchise valuation report published by his firm.  He stated basketball franchise valuation entails meaningfully greater complexity than a revenue multiple, a contrast to the Forbes methodology that has historically ascribed a very consistent valuation of approximately 2.9x to 3.1x revenues. Mr. Moag stated that each transaction has many moving parts, and there is a massive valuation discrepancy between the "haves" and the "have-nots" of the NBA.  This is particularly relevant for this analysis, as the Knicks are clearly a leading franchise (#2 in gate receipts during the 2008-2009 season despite an extremely poor record with no big name stars), and it implies that the Knicks should generally yield a premium valuation relative to its NBA peers (with the exception of the L.A. Lakers).  This valuation analysis, combined with the aforementioned financial and valuation upside for the Knicks, suggests upside to the $586 MM valuation ascribed to the Knicks in my analysis, per the 2009 Forbes analysis.
 
 
VI.  REASON FOR OPPORTUNITY
1. Natural Spinoff Selling Pressure: MSG was spun off from Cablevision in February 2010, which has created natural selling pressures from the large institutional Cablevision investors that cannot or are unwilling to hold a $1.7 BN market cap company, especially a complicated businesses that does not fit a specific industry or subsector classification.
 
2. Lack of Analyst Coverage: As a recent spinoff with a modest market cap size, no meaningful sell-side analyst coverage has emerged to generate interest in and understanding of the stock.
 
3. Lack of Investor Understanding and Asset Complexity: In conjunction with the above point, the greater investor community has not started to pay attention to, let alone fully understand, MSG's complex business.  Further complicating the issue is the asset-rich, cash-weak nature of the Entertainment and Sports segments, which mask the cash-rich nature and superior business value of the Media segment.
 
 
VII.  CAPITAL STRUCTURE
MSG has no outstanding debt or preferred securities.
 
 
VIII.  RISKS
1. Management - Capital Allocation: The Dolan family has a long track record of poor management for its businesses, particularly sports franchises such as the Knicks and Rangers, which are not generally good businesses.  The business value for these sports franchises is largely supported by the asset scarcity, broadcast rights and ego appeal, not earnings and cash flow generation.  Additionally, MSG has begun acquiring venues such as the Chicago Theatre to provide proprietary content for distribution over its Fuse network and additional hosting sites for its Radio City Christmas Spectacular and Cirque de Soleil Wintuk show.  These acquisitions have not proved value productive to date, and management has stated that it continues to pursue this strategy.  Furthermore, the Company has recently reformatted the Radio City Christmas Spectacular in order to travel the show and accompany a variety of venues, which has also failed to produce shareholder value; the same can be said for the Fuse network, which currently overshadows the true earnings and cash flow power of the MSG Media segment's RSNs despite Fuse's large subscriber base of 55 MM versus the RSNs' 16 MM.  In summary, management's demonstrated inability to effectively deploy capital could continue to negatively impact MSG's returns and value creation in the future.
 
2. RSN Renewals: Should any of the RSN sports franchises elect to move RSN carriers or start their own RSNs, the cash flow and business value risk to the MSG Media segment would be substantial.  This happened once in 2006 when the NY Mets independently started SportsNet New York versus renewing the existing agreement with MSG.  However, the risk of a lost renewal is very unlikely over the near term as the Knicks and Rangers will always anchor the RSNs, while the NJ Devils deal runs until 2024 and the Buffalo Sabres deal runs until 2017.
 
3. MSG Renovations: MSG plans to upgrade the Garden during 2011 - 2013, renovating the lower bowl during 2010 - 2011 and the upper bowl during 2011 - 2012.  The planned capital spend is in the range of $775 - $850 MM, which does not include the foregone revenues from the related closure periods, which could be as high as $80 - $90 MM annually (60% - 70% of revenues), but marginal costs are accordingly expected to decline at a similar pace to sales.  MSG is expected to require debt financing for the project.
 
4. Collective Bargaining Agreements ("CBA"): The CBAs for both the NBA and NHL expire in 2011 and are subject to renegotiation.  Should the parties not reach agreements on their respective agreements, a strike could ensue for either league, severely hampering the earnings and cash flow generation as well as the business values for the respective teams.  At this stage, no major headwinds appear to be threatening an extension for the CBA of either league.

Catalyst

1. The cessation of the natural selling pressure from the large, institutional Cablevision shareholders that cannot or are uninterested in holding a $1.7 BN market cap company that furthermore does not fit a specific or traditional strategy classification (i.e., growth or value) or subsector.  
2. The emergence of meaningful sell-side analyst coverage.  
3. The focus of the greater investment community on understanding the complex nature of the different business units (sports franchises + exclusive media distribution businesses + exclusive sports and entertainment productions + Class A real estate assets) and thereby ascribing an appropriate valuation to the stock.  
4. Market recognition of the new RSN affiliate contracts signed with Cablevision and DirecTV that represent incremental EBITDA of approximately $30 MM annually.  Note that the contract with Cablevision lasts ten years (through 2020), which includes annual price escalators.  These two contracts started in January 2010 have only been included in one quarter of historical financials, thereby understating the true earnings/cash flow power of the Media segment.  This implies a potential value increase of $4/share - $5/share, assuming an EBITDA multiple of 8x - 12x.  Again, the nature of this affiliate revenue has negligible costs associated with it and therefore largely translates into earnings and cash flow.  
5. Bringing 1 - 3 big stars to the Knicks.  The Knicks habitually ranks in the top 3 for ticket receipts in the NBA despite the embarrassing mismanagement, on-court performance and lack of any meaningful big name stars.  With the Knicks' sizable cap space heading into the deep free agent season during the summer of 2010, the franchise could substantially upgrade its talent pool and therefore revenues and earnings, thereby boosting the Knicks' financial performance and franchise value (however, note that basketball teams are generally valued at 2.5x - 3.0x revenues with a much lesser regard for profitability).  
6. Incurring capital expenditures for the Madison Square Garden renovations meaningfully below management's forecast of $775 - $850 MM and thereby incurring less debt to finance the project.  Note that our valuation analysis assumes the Company incurs the maximum $850 MM in capital expenditures.  This additionally overly penalizes the valuation, as it assumes this $850 MM all occurs today, whereas the actual expenditures will be incurred over the coming 2+ years and therefore have a far lower present value than $850 MM.  
7. While not likely to occur any time soon, upgrading the management team would significantly improve MSG's prospects for significantly unlocking the value potential of its blue chip assets.  In an ideal world, this would entail installing a new management team (read, no Dolan family members) focused on improving the financial performance of the Knicks and Rangers and thereafter selling the sports franchises and blue chip real estate assets at more desirable valuations while focusing on the growth and cash flow potential of the Media business to maximize shareholder value.  However, this is more hope than reality and is not pivotal to the realization of MSG's fair value. 
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