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The Edge Sees Early Value, Enters MP

With the NBA basketball finals coming to an end last night (congrats to the Toronto Raptors), the sporting world turns their attention to what’s happening in NYC at Madison Square Garden Co. (MSG). While fans look to see if James Dolan will fail (again) to bring a marquee player to the Knicks this summer, we’ve analyzed MSG and its upcoming Spinoff of its trophy sporting assets. Don’t wait for the first Form-10, it’s time to get in now pre-Spin as the Spinoff is not the only option being explored.

What’s Happening?
MSG Sports (Spinoff) 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), with an 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 has subsequently jumped +222% since its listing. Likewise, baseball franchise owner Liberty Braves (BATRA/B/K), Spun off from value creator John Malone, was up +50.3% compared to the S&P Total Market Index return of +37.3% from April 2016 (when it listed as a tracking stock) to date.

Though MSG has filed an initial (and confidential) prospectus with the SEC regarding the Spinoff back in October 2018, it seems that Chairman and CEO James Dolan is still exploring all opportunities for the business, meaning a sale of the teams is still 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 $7bn for MSG Sports (Spin). Likewise, long-term holder Silver Lake LLC increased its stake by 32% in December 2018 and first-time buyer Blue Harbour Group initiated a new position with a 2.3% stake in this same period, both coming on the back of the announcement of the Spinoff (made in October 2018).

The Edge View (MSG, Parent)…
The entertainment company will hold iconic properties like Madison Square Garden and The Forum, along with a net cash balance of $1bn. MSG (Parent, ex-Spin) is 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), signaling the management’s efforts to ensure the successful launch of MSG Sphere in 2021, which can potentially boost the top-line of MSG Entertainment.

The Edge View (MSG Sports, Spinoff)…
MSG Sports 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, The Knicks this season will able to spend $70m to bring one or two marquee players, which in turn will improve the team’s potential performance on the court and lead to higher ticket and merchandise sales, attracting even higher valuations.