Description

Overview:

Madison Square Garden Sports (MSGS) represents a discounted, premium way to invest in what has been one of the best performing asset classes of recent decades (sports teams) at a large discount to intrinsic value. Azalea wrote the company up last June but the valuations of NBA teams have skyrocketed since then. As well, though the stock is up some, it trades at essentially the same price as it did in 2018 which makes no sense given the trend in team prices. Also, we are that much closer to the NBA signing a new media rights deal with the current deal with ESPN and Turner Sports expiring after the 2024-2025 season which could be a catalyst for further team price and stock price appreciation.

Description:

Madison Square Garden Sports Corp. (MSG Sports) is a leading professional sports company, with a collection of assets that includes: the New York Knicks (NBA) and the New York Rangers (NHL); two development league teams – the Westchester Knicks (NBAGL) and the Hartford Wolf Pack (AHL); and an esports team - Knicks Gaming, an NBA 2K League franchise. MSG Sports also operates a professional sports team performance center – the MSG Training Center in Greenburgh, NY. For simplicity purposes for the write-up, I’m just going to round MSGS’s assets into the Knicks & Rangers.

Team Values:

There was a quaint time where one could buy an NBA team in a good market for a pretty reasonable (well..for a multi-billionaire anyhow) price. Sales of teams prior to Steve Ballmer’s purchase of the Clippers in 2014 for $2bn, which was viewed as a wild overpay at the time, typically were selling for some mid 9 figure type price depending on the team and market. In fact, in the early part of the prior decade, teams including the Wizards, Bucks, Kings, Raptors, Warriors and Grizzlies all sold for between $350-550mm. 

Fast forward to the halcyon days of late 2022 and early 2023 and the picture looks very different. Late last year, mortgage billionaire Mat Isbhia agreed to purchase the Phoenix Suns, a team that plays in a market a fraction the size of NYC area, for a record $4bn. Perhaps even more amazingly, Marc Lasry in February agreed to sell his 25% co-governor share of the Bucks at an implied valuation of $3.5bn (the Bucks!). For reference, he bought his stake at a valuation of $550mm in 2014.

See team sale prices here: https://www.statista.com/statistics/304679/nba-franchises-latest-purchase-prices/

There are a myriad of factors pushing up team prices and it’s hard to say exactly which are the most impactful but they include:

Expectation of Increased Media Rights: 

The NBA’s current deal pays the league around $24bn over 10 years with ESPN & Turner Sports and, as mentioned, expires after the 2024-2025 season. Numerous press reports indicate that, given the potential competition from additional firms possibly including Amazon, Apple, NBC and numerous others, the league is looking for a deal that is significantly larger than the current deal. There has been speculation that this could be at a $ amount that is 3x the current deal or north of $70bn in total value. 

The increased potential value is a function of many factors– these include— the sheer number of additional large spending media operators who can potentially bid, the scarcity of live event content, the easier monetization and data abilities that the digital age offers, increased international interest in the NBA. 

The new deal could obviously be a large catalyst for the stock as the general public gets a data point about the potential scale of future league revenues. 

In addition, many people view the increase in sports betting as a game changer (sorry) for the teams’ prospects as well both from a sponsorship/advertising perspective as well as a partnership perspective going forward.

Increased Number of Global Billionaires: 

According to Forbes data, there were 66 billionaires in 1990 in America. Today, that number is estimated to be around 735 with the rate of new billionaires growing internationally at a similar rate. There are few trophies a billionaire can buy which truly rival owning a sports team with the possibilities for fame and glory that accompany it. 

I think it’s fair to say that few in the general public would have any idea who Mark Cuban or Jerry Jones are if they were simply comparably wealthy businessmen. And since the number of teams in the primary sports leagues (actually the value of peripheral sports teams in the US such as MLS have grown exponentially also) is for the most part fixed with very occasional expansion, the supply and demand forces serve to push team values ever higher.

I think it’s fair to say that this dynamic plays especially in favor of a team like the Knicks as relates to its valuation. New York City, again according to Forbes, has the most billionaires of any city in the world at 107. If someone wants to own a team with an enormous fan base, a ton of history and a quick subway (or helicopter) ride away, the Knicks are clearly the top option. Not that they are actually for sale…

Favorable Labor Relations:

The partnership between the league and the players has never been more stable. Just a few weeks ago the two sides quietly announced a new 7 year collective bargaining agreement. There were, to my knowledge, zero threats of strikes or lock-outs or any kind of labor strife. This is a far cry from the tense relations experienced by the two sides in the past.

Recent increased shareholder friendliness:

At the end of October, the company paid a one time special dividend of $7 per share and authorized a $75mm accelerated stock buyback “in light of the Company’s strong performance in 2022 and the trading price of its common stock relative to the intrinsic value of its professional sports teams.” 

So what is MSGS actually worth?

I believe that crown jewel sports teams are one of the very few assets that can and ought to be valued based on factors beyond a typical FCF valuation given the supply and demand and non-financial benefits associated with owning a team. MSGS is solidly profitable (net income of $52mm in the year ended June 202) and I believe poised for a significant increase in earnings over coming years given the dynamics around the media rights deals discussed. As well, the Knicks and Rangers are both poised for significantly increased postseason revenues this year and (hopefully) going forward. Also, I do believe that the Knicks are being better run by Leon Rose in his team than under prior Dolan hired regimes.

The most recent Forbes value of the Knicks in 2022 was $6.1bn. I believe this number is far less than what the team would fetch on the actual open market given all the factors cited above and recent trends regarding team prices. Teams generally sell at a decent premium to the Forbes valuations anyhow. But I believe that the market is significantly higher and should keep compounding given the favorable dynamics discussed. If one assumes that the Knicks are worth closer to $8bn and take the Rangers at their recent Forbes value of $2.2bn, that produces an enterprise value of $10.2bn. 

The company has around $1.1bn of net debt so equity value implied of  $9.1bn or around $380 per share given 24 million FD shares. Even if you take a 20% discount for Dolan control, lack of sale catalyst etc that still gets you an equity value over $300 and up > 50% for an asset that should continue to compound in value going forward.

Catalyst

New media rights deal negotiated by the league in the next two years.