Madison Square Garden To Spin 100% Of Its Entertainment Business

Spin-Off Update

On November 7, 2019, The Madison Square Garden Company (NYSE: MSG, $275.35, Market Capitalization $6.6 billion), a world leader in live sports and entertainment experiences, announced that its board of directors has unanimously approved pursuing a revised plan for the proposed separation of its sports and entertainment businesses. The Company is now pursuing a spin-off of its entertainment businesses into a separately traded public company, and, as part of this revised structure, the entertainment company would not retain an equity interest in the sports company. The Company had previously been exploring a plan to spin-off approximately 2/3rd of its economic interest in its sports businesses to shareholders, with the entertainment company retaining an approximate one-third interest in the sports company. The proposed transaction is still expected to be completed during 1Q20, subject to certain conditions. The completion of the transaction would be subject to various conditions, including league and final MSG Board approval. J.P. Morgan Securities LLC and PJT Partners LP continue to serve as financial advisors, and Sullivan & Cromwell LLP continues to serve as legal advisor.

The newly revised transaction would be structured as a tax-free pro rata spin-off to all MSG shareholders. Each shareholder would continue to own their current economic interest in both the sports and entertainment businesses. The Company continues to believe that the proposed separation of the sports and entertainment businesses would enable shareholders to more clearly evaluate each company’s assets and prospects while allowing each company to have a capital structure and capital allocation policy most appropriate for its business.

On November 8, 2019, MSG reported tepid 1Q20 results, with a miss on both revenue and EPS versus consensus. The company reported revenues of $ 214.8 million, down 2% YoY, due to lower Entertainment revenues. The company reported an Adjusted Operating loss of 41.1 million and a Net Loss of $80.7 million.

Valuation and Recommendation

We value The Madison Square Garden Company (MSG) using Assetbased valuation and EV/EBITDA methodologies and value MSG Sports (Stub) and MSG Entertainment (Spin-Off) separately. Our SOTP framework values MSG Sports (Stub) by valuing the teams. The starting point of valuing Sports team is Forbes valuation, and we apply a discount of 10% to each to arrive at our estimated Market Value. Our estimated EV for MSG Sports (Stub) stands at $5.0 billion. We arrive at an Equity value attributable to current shareholders of $4.8 billion by accounting for estimated Net debt of $160 million. We have assumed a cash contribution of $350 million to Entertainment Co from MSG Sports by levering the available revolver facility associated with Knicks and Rangers.

We arrive at an intrinsic value of $203.00 (Previously: $217.00 per share) for Sports Co for current shareholders.

Our SOTP framework values MSG Entertainment (SpinCo) by valuing each operating segment/asset separately. We value MSG Arena and Complex using asset-based valuation. The most significant chunk is Madison Square Garden, which we value essentially at the book. MSG also has remaining air rights attached to the Garden. We value Chicago Theatre, LA Forum, Radio City Christmas Spectacular, TAO Group, and Booking business using EV/ EBITDA valuation. We arrive at an intrinsic value of $167.00 (Previously: $153.00 per share) for Entertainment Co for current shareholders. The increased valuation factors in the expected cash contribution at the time of the spin-off. We arrive at a target price of $370.00 per share for The Madison Square Garden Company which implies a potential upside of 34.4% from the current market price of $275.35 as of 11/12. We retain our ‘Buy’ rating on the stock.

Key Pointers regarding the spin-off from the Earnings call

•A key reason for retaining stake in the Sports Co in the previous spin-off structure was to provide the Entertainment Co with the additional financial flexibility to enable it to fund its growth plans. With more staggered Capex plans for London venue (MSG Sphere), Entertainment Co will have sufficient financial flexibility to pursue its venue expansion plans without the need for the retained interest in the Sports Co.

•MSG shareholders will maintain their current economic interest in both the entertainment and sports businesses, and the new structure eliminates any potential tax leakage associated with the sale of the retained interest in the sports company. The change to a spin-off of entertainment from sports also provides the company with additional tax efficiencies. The change also makes the approval process simpler because there is no longer any requirement of transfer in any ownership interest in the sports teams.

•If the company were to borrow some portion of the $365 million in revolvers associated with Knicks and Rangers, these proceeds could go directly to the entertainment company without incurring tax. With the old spin structure, borrowings at the sports company to help fund entertainment’s growth plans would have been taxable.

•Without the retained interest in Sports Co, MSG need not obtain a private letter ruling from the IRS. However, a revised structure will require the company to file a new Form 10 with the SEC. Even with the changes to the structure, the company is targeting spin completion during the first quarter of the calendar 2020.

•The entertainment company will start with a robust cash position, which is expected to include the vast majority of its current $950 million. At the time of the spin-off, Entertainment Co would receive a cash contribution from the Sports Co, by levering the available revolvers of $365 million associated with the Knicks and Rangers.

1Q20

In 1Q20, the Company generated revenues of $214.8 million, a decrease of 2% YoY. This was due to lower revenues reported by the MSG Entertainment segment compared to 1Q19. The Company also generated an operating loss of $89.3 million and an adjusted operating loss of $41.1 million, as compared to an operating loss of $50.8 million and an adjusted operating loss of $9.9 million in 1Q19. This was primarily due to higher Corporate and Other expenses, due to increased employee compensation related to Corporate, as well as additional expenses in MSG Sphere related content development and technology. Net loss attributable to MSG shareholders was $80 million, and Diluted loss per share was $3.36 per share.

Segmental Information

MSG Sports

For 1Q20, MSG Sports revenues were $56 million, up 1% YoY, as compared to the prior-year period, due to higher revenues from other live sporting events, slightly offset by a decrease in ticket-related revenues. The lower growth can also be attributed to the absence of New York Liberty games as the professional sports franchise was sold in January 2019. The segment reported an Operating loss of $20.2 million and an Adjusted Operating loss of $13.7 million in 1Q20. The losses reflect higher direct operating expenses and selling, general and administrative expenses, slightly offset by the increase in revenues. Also, results for the MSG Sports segment include a significant charge related to a player waiver recorded during 1Q20.

For 1Q20, MSG Entertainment revenues were $159.0 million, down 2% YoY as the company did not hold any significant event during 1Q20 and also due to the impact of the wind-down of Obscura Digital’s third-party business. The segment reported an Operating loss of $2.6 million compared to Operating Income of $1.7 million in 1Q19 and Adjusted Operating Income stood at 6.2 million, down 31% YoY, compared to $9 million in the prior-year period. The decrease was primarily due to lower revenues and higher selling, general, and administrative expenses, partially offset by lower direct operating expenses.

Valuation

A] MSG Sports (Stub)

Our SOTP framework values MSG Sports (Stub) by valuing the teams. The starting point of valuing Sports team is Forbes valuation, and we apply a discount of 10% to each to arrive at our estimated Market Value. In February 2019, Forbes revalued the New York Knicks at $4 billion, which was earlier valued at $3.6 billion. The valuation for New York Rangers and other teams remained unchanged. We are taking a conservative approach and valuing teams at a discount to Forbes valuation. Using this approach, we value NY Knicks at $3.6 billion and NY Knicks at $1.4 billion. We value WNBA Liberty, CLG Gaming, and others by taking a Private Market Value estimate of $10 million to arrive at an estimated value of $9 million by applying a 10% discount. Our estimated EV for MSG Sports (SpinCo) stands at $5.0 billion. We arrive at an Equity value attributable to current shareholders of $4.8 billion by accounting for a net debt of approximately $160 million. We value Sports Co at $203.00 per share (Previously: $217 per share) on a standalone basis for current shareholders by considering a diluted number of shares of 23.8 million.

B] MSG Entertainment (Spin-Off)

Our SOTP framework values MSG Entertainment (Spin-Co) by valuing each operating segment/asset separately. We value MSG Arena and Complex using asset-based valuation. The most significant chunk is Madison Square Garden, which we value intrinsically at the book. MSG also has remaining air rights attached to the Garden. As per industry sources, Garden has about 1.4 million sq ft of unused air rights, which is valued at approx $350 million. Our estimated value for MSG (including air rights) stands at $1.5 billion. The valuation factors strong bookings trends, signage, and sponsorship, offset by softer TAO results/outlook. We value Sphere at Capex (on cost) incurred out of the $1 billion cash balance. We value Chicago Theatre, LA Forum, Radio City Christmas Spectacular, TAO Group, and Booking business using EV/EBITDA valuation. We value Radio City Christmas Spectacular at approx $440 million. Similarly, we take the same valuation approach for the TAO Group, which was acquired in 2017. MSG has grown the business (through the opening of several new venues) and integrated it into the Garden, extracting further value from the asset. While we use 11.0x multiple (63% stake valued at approx $208 million), this is conservative, given the increased value of the portfolio since MSG has taken control. We value LA Forum and Bookings business (including NCAA games, Boxing, WWE) at approx $231 million and $132 million, respectively. We assign EV/EBIDTA multiple of 11x to Chicago Theatre, LA Forum, and Radio City Christmas Spectacular, TAO Group, and Booking business (along with other lease ventures). MSG Entertainment also includes investments in Boston Calling (includes Tribeca Enterprises, Obscura, Townsquare Media, Draft Kings). We arrive at an intrinsic value of $167.00 (Previously: $153.00 per share) for Entertainment Co for current shareholders. The increased valuation factors in the expected cash contribution at the time of the spin-off.

Our consolidated target price for MSG stands at $370.00 per share, implying a potential upside of 34.4% from the current market price of $275.35 as of 11/12. We thereby retain our ‘Buy’ rating on the stock.

Company Description

The Madison Square Garden Company (Parent)

The Madison Square Garden Company (MSG) is a world leader in live sports and entertainment experiences. The Company was incorporated on March 4, 2015, as an indirect, wholly-owned subsidiary of MSG Networks Inc. (“MSG Networks”), formerly known as The Madison Square Garden Company. The Company was spun-off from MSG Networks on September 30, 2015. The Company reported revenue of $1.6 billion in the year ended June 30, 2019. The Company classifies its business interests into two reportable segments: MSG Entertainment and MSG Sports.

MSG Sports segment includes: The New York Knicks professional NBA franchise and its development team, the Westchester Knicks; The New York Rangers professional NHL franchise and its development team, the Hartford Wolf Pack; Knicks Gaming, the official NBA 2K esports franchise of the New York Knicks, and a majority interest in Counter Logic Gaming, a leading North American esports organization; and a professional sports team Training Center in Greenburgh, NY. For FY19, the MSG Sports segment reported a revenue of $812.7 million.

The company presents or hosts a broad array of premier events in its diverse collection of iconic venues: New York’s Madison Square Garden, Hulu Theater at Madison Square Garden, Radio City Music Hall and Beacon Theatre; the Forum in Inglewood, CA; and The Chicago Theatre. Also under the MSG umbrella is Tao Group Hospitality, a world-class hospitality group with globally-recognized entertainment, dining, and nightlife brands including Tao, Marquee, Lavo, Avenue, Beauty & Essex, and Cathédrale.

MSG Entertainment (Spin-Off)

The standalone entertainment company will include all existing businesses within the MSG Entertainment segment. The Company owns the Madison Square Garden Arena (“The Garden”) and The Hulu Theater at Madison Square Garden in New York City, the Forum in Inglewood, CA, and The Chicago Theatre in Chicago. Also, the Company leases Radio City Music Hall and the Beacon Theatre in New York City and has a booking agreement concerning the Wang Theatre in Boston. Additionally, TAO Group operates various restaurants, nightlife, and hospitality venues under long-term leases and management contracts in New York, Las Vegas, Los Angeles, Australia, and Singapore. TAO Group is a hospitality group with globally-recognized entertainment dining and nightlife brands: TAO, Marquee, Lavo, Avenue, The Stanton Social, Beauty & Essex, and Vandal.

MSG Entertainment presents or hosts live entertainment events such as concerts, family shows, performing arts and special events, which are presented or hosted in the Company’s diverse collection of venues along with live offerings through TAO Group Holdings LLC (“TAO Group”) and Boston Calling Events LLC (“BCE”). BCE produces New England’s premier Boston Calling Music Festival. MSG Entertainment also includes the Company’s original production - the Christmas Spectacular Starring the Radio City Rockettes (the “Christmas Spectacular”). In November 2017, the Company acquired a 100% controlling interest in Obscura Digital (“Obscura”), a creative studio, which is now part of the MSG Entertainment segment. The Company conducts a significant portion of its operations at venues that it either owns or operates under long-term leases.