Madison Square Garden To Unlock Value In Spinoff Of Sports Teams

Jonathan Ball |

April 29, 2019

  • The Madison Square Garden Company plans to split in two.
  • One unit, MSG Entertainment owns and runs venues, and produces shows.
  • MSG Sports owns the New York Knicks and New York Rangers.
  • The current valuation give no value to many of the assets.
  • The spinoff will unlock value that could boost the stock by 13%.

The New York Knicks may be perpetual losers, but the company that owns them, The Madison Square Garden Company (MSG) looks like a winner.

The New York entertainment company, which was spun-off from MSG Networks in 2015, consists of two units, MSG Entertainment and MSG Sports.

MSG Entertainment owns what it calls "the world's most famous arena," Madison Square Garden, obviously. The first building called Madison Square Garden opened in 1879 and actually sat in Madison Square, at East 26th Street and Madison Avenue.

MSG Entertainment runs a growing portfolio of assets, including state-of the art music and entertainment-focused venues, some almost as iconic as MSG, such as the Forum in Los Angeles, and the Beacon Theater and Radio City Music Hall both in New York. The company also puts on shows in the venues, such as Jerry Seinfeld's residency at the Beacon and Billy Joel, who's scheduled to play six shows at the Garden this year. MSG Entertainment also owns the Tao hospitality company.

The Madison Square Garden's other unit, MSG Sports, owns sports teams, such as the two icons that call MSG home: the New York Rangers of the National Hockey League, and the New York Knicks of the National Basketball Association.

In October, MSG announced plans to spin off its sports-team business in a tax-free transaction giving MSG shareholders two-thirds of the new business. MSG Entertainment would retain the remaining third to use as capital. The family of James Dolan, MSG's chief executive officer, would maintain majority-voting control of both companies through its ownership of Class B shares. The proposed transaction is expected to be completed during the first half of 2019.

The market undervalues MSG’s assets, so splitting it into two companies is expected to unlock shareholder value.

The Knicks and Rangers remain the most valuable teams in their respective leagues. The Knicks are valued at $4 billion and the Rangers at $1.55 billion, according to Forbes.

With the two big teams worth $5.6 billion plus $1.2 billion in cash at the end of its December quarter, that comes to $6.8 billion. The air rights alone are valued at $550 million, according to And MSG bought 63% of the celebrity-driven nightlife company Tao Group in 2017 for $181 million. Altogether that's brings the total value of $7.5 billion.

The stock currently trades at $312 giving it a market cap of $7.4 billion. That means the market currently values all the other sporting arenas, sports teams and entertainment assets at $0. Which explains the break-up.

For the second quarter ended December 31, MSG revenues grew 18% year over year to $632 million. Net income fell to $86 million, or $3.42 a share, from $189 million, or $7.96 a share, the previous year. But that's misleading because in 2017 MSG received a $116 million tax benefit. Without it, net income in 2017 was $73 million, or $3.17 a share. In that case, earnings grew 8%.

MarketSmith by Investor's Business Daily puts 2018 earnings at $1.18 a share. It forecasts earnings will grow 22% this year to $1.44 a share, and 28% next year to $1.85 a share.

March quarter earnings are expected Wednesday. Zacks predicts $1.69 per share, which represents a year-over-year surge of 345%. Revenues are expected to jump 14% from the year-ago quarter to $526 million.

In the January quarter, the number of hedge funds owning MSG grew 15% year over year to 46. Mario Gabelli's GAMCO Investors owns a $212 million position, according to Inside Monkey.

Big drivers of future revenues include two new venues in Las Vegas and London, both called the MSG Sphere, and two forays into the up-and-coming sports phenomena of video-game leagues. These are CounterLogic Gaming, an esports organization, and Knicks Gaming, a team in the NBA 2K, a professional competitive gaming league co-founded by the NBA and video-game maker Take-Two Interactive Software (TTWO).

MSG calls the Spheres "an ambitious project that we believe will drive substantial new and enhanced revenue and adjusted operating income opportunities for the company." However, MSG "hasn’t disclosed any financials on the Sphere projects, including projected costs and return objectives," so there remains uncertainty around them. Still, we think the new Spheres and the esports will increase the company's valuation.

But even if they don't, Sports Illustrated reported Dolan had been offered $5 billion to sell the Knicks. That brings MSG's valuation to at least $8.5 billion, which gives us a target price of $354. Again, this values all the other assets at $0.

We're in good company. Last week, Morgan Stanley raised its target price from $310 to $340 and gave the stock an “equal weight” rating. And Imperial Capital reissued its “buy” rating with a $383 price target. Two weeks ago, Zacks Investment Research raised shares from a "hold" to a "buy" and gave them a $344 price target, and Evercore ISI's David Joyce reiterated his $360 price target recently. The stock has a consensus rating of “Buy” and an average target price of $354, so we're right in line with the Street.

Disclosure: I am/we are long MSG. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.