EUR 442.45 For Business Accounts Only

Selloff Leaves Trophy Assets at Even More Attractive Levels

The ongoing Coronavirus outbreak has led to the suspension of the current NBA season and the broad implementation of curfews around the country on non-essential travel, resulting in the selloff in the major indices. The Madison Square Garden Co. (MSG) has decreased by -34.3% YTD compared to the S&P Total Market Cap Index return of -27.6% to date, making the upcoming Spinoff of the Entertainment business even more attractive at these lower levels.

The Edge View...
The outbreak is expected to have an immediate impact on MSG’s (Combined) financials primarily because of the bans on larger public gatherings and the suspension of the NBA season. That said, our medium to long-term thesis remains intact as we expect the COVID-19 impact to gradually decrease in the next 3 to 5 months (through August 2020). More importantly, MSG is now preparing its fourth break-up in the past decade, this time of Madison Square Garden Entertainment Corp. (MSGE, Spinoff). It is the owner of the iconic Madison Square Garden, The Forum, and many other premier entertainment venues across the country, as well as the state-of-the-art Sphere under construction in Las Vegas (with another planned for London).

On the other hand, MSG (Parent ex-Spin) will rename to Madison Square Garden Sports Corp. (MSGS) and will be the first publicly listed company of its kind, with ownership of the most expensive teams in basketball (NBA – New York Knicks) and ice hockey (NHL – New York Rangers) and ever-increasing brand value due to the limited supply of teams in their respective sports leagues and the gradual increase in the number of billionaires around the globe, who likely want to own these assets. To give an example of strong brand value, when Ferrari NV (RACE) was Spun off in January 2016, there was significant buzz around the Spin and RACE subsequently increased +175% since its listing. Likewise, baseball franchise owner Liberty Braves (BATRA/B/K), Spun off from value creator John Malone, was listed as a tracking stock, meaning shareholders do not hold actual assets of the team, whereas they will in the case of MSGS.

It seems Chairman and CEO James Dolan is still exploring all opportunities for the business, meaning a sale of the teams is a viable option. Dolan hinted in a December 2018 interview that he is “not ruling out the possibility” and received “feelers” of a $5bn Knicks valuation, and his belief that a $2bn figure for the Rangers may lead to a meaningful conversation. Therefore, a valuation of $5bn for The Knicks and a $2bn for The Rangers is in play for a potential sale. This translates into our Bull case valuation of $6.6bn for MSGS (ex-Spin). Likewise, Silver Lake Group (MSG’s largest investor with 1.9m shares, 7.9% outstanding) still holds its position in MSG heading into the Spinoff, a positive factor to consider on the transaction’s sentiment.

MSGS will be an ever-increasing valuation story with its trophy assets in play, particularly due to the brand value and limited supply of sports teams. Furthermore, Silver Lake is reportedly pushing James Dolan (CEO of MSG) to sell stakes in its sports franchises, the Knicks and Rangers, ahead of the planned Spinoff. The stake sale will benefit MSG (Combined) in raising further funds to invest in building the MSG Sphere in London. Without these funds the MSG Sphere London looks like a distant dream, considering limited financial strength after the $1.45bn spent on the Las Vegas venue. Additionally, Silver Lake Group (the largest investor in MSG) is reportedly interested in buying these stakes in the sports teams itself. Therefore, if the stake sale of the Knicks and Rangers materializes ahead of the planned Spinoff, our Bull case target price is $410.21, implying a potential upside of +109% from current levels.

MSGE will hold iconic properties like Madison Square Garden and The Forum, along with a net cash balance of $1.1bn. The company is in the process of building a new, next-generation concert venue and arena with 18,000 seats called MSG Sphere in Las Vegas, with plans to replicate the project in London. For this task MSG has hired industry veteran Jennifer Vogt, a former executive at The Walt Disney Co. (DIS), signalling the management’s efforts to ensure the successful launch of MSG Sphere in 2021, which will potentially boost the top line of MSGE.

The Sphere will end up costing $1.7bn, in-line with AECOM’s (the contractor in charge of the construction) earlier estimation. MSG has already spent $248m as of December 31, 2019, on construction of The Sphere and the remaining $1.45bn will be spent through to January 2021 (targeted opening). To support this construction cost, MSGS (Parent ex-Spin) will transfer $300m to MSGE as part of the transaction, which is positive for the Spinoff. Additionally, the sports booking business will remain with MSGE, which we believe is an added advantage for the post-Spin company.