Sunday, 13 September 2015

MSG the world's greatest arena

Everyone knows Madison Square Garden it's the world's greatest arena. But what many don't know is that the stadium is listed along with the New York Knicks, Rangers and its cable network. They are all unique must have assets in the world's biggest media market. Being a conglomerate Madison Square Garden trades at a discount to its underlying values luckily for us it will separate into two companies in a spin-off next month.

Spin kings
Madison Square Garden (MSG) as we know it will separate into MSG networks and The Madison Square Garden Company. This later company will own the Knicks (NBA), Rangers (NHL) and their associated womens and development teams. Alongside The Garden, The theatre at Madison Square Garden, the Forum, the no1 and 2 highest grossing stadiums in the US. Leases on Radio City Music Hall (the Rockettes), the Beacon Theatre, Wang Theatre and Chicago (owned outright.)

Source: MSG investor presentation

This split optimises the capital structure and highlights the MSG cable network which tends to get forgotten when you own The Garden, Knicks and Rangers. The companies have two different strategies the network will be run for cash flow while the spun-off Garden will be run for growth. The network will distribute $1.46 billion in cash to the Garden using $525m for a share buyback while using the remaining for growth.

The companies have entered into long term media right agreements. MSG Networks agreed to 20 year terms paying the Garden company $100m for the Knicks and $30m for the Rangers with annual escalators. Note this number is up from the $80m calculation for internal purposes. When this term expires the network has rights to match third party offers.

The Knicks even when they're bad they're good
The great thing about sports is the fans will pay nearly anything to watch their team. Unlike most companies they have pricing power. In a world where people are concerned about the outlook for media sports retains its value because its live people still watch the advertising. Steve Ballmer famously paid $2 billion for the Clippers. Forbes values the Knicks and Rangers at $2.5 billion and $1.1 billion worth $3.6 billion together. Though this number needs to be discounted because it includes some value for the sports network. Even with their poor performance last year the Knicks ranked the top three in ticket receipts in the NBA the fifth consecutive year season tickets have sold out. Add in the value of the Garden and other properties gets another $2 billion compared to the current market value of $5.3 billion you essentially get the network for free. Normally I don't like sum of the part valuations but MSG has a catalyst with the spin-off taking place next month. If the market doesn't recognise the value someone will. It's hard to tell what the network is worth but Fox bought a controlling stake in the Yankee's Yes network last year at an implied valuation of $3.9 billion providing a possible comp for MSG.

You've haven't made it until you've played there
We haven't even talked about the Garden yet with a 136 year history it is one of the most valuable properties in the world over 2 million sport fans visit each year. As a performer you haven't made it until you've played there. Billy Joel has the record for performances at the World's most famous arena with 65 shows extending his record to 19 consecutive sold out shows. If you do a gig at the Garden it's reported around the world. MSG own the complex, the platform its built on and air development rights above the property. Though they would need approval from the city as they sit atop Pennsylvania Station. The company just spent $1 billion on redeveloping the stadium so capex going forward is minimal. The company is controlled by the Dolans with super voting rights but they have had a good track record for creating value for shareholders. Past spin-offs include AMCX networks from Cablevision and Madison Square Garden itself before this split.

Live, local, iconic
Unique venues, legendary sports teams and exclusive entertainment production. It's very unusual to have properties like this listed but trading at a discount to private market value with a near term catalysts (spin-off) to drive value is even more unusual. If the market doesn't recognise the value with a spin-off it is likely someone will.


Decisive has a long position in Madison Square Garden (MSG).The material in this article is for informational purposes only and in no way constitutes a solicitation of business or investment advice. The material has been prepared without regard to any client's or other person's investment objectives. Before making an investment decision you should consider the assistance of a financial adviser and whether any investment or service is appropriate in light of your particular investment needs.