Madison Square Garden announced yesterday that its board of directors had unanimously approved a full spinoff of its entertainment business from its sports businesses. The proposed transaction is expected to be completed during the first quarter of 2020.
- The spinoff would create two distinct companies for MSG shareholders: a sports company that would be driven by the NBA’s Knicks and the NHL’s Rangers franchises and an entertainment company driven by its MSG Sphere initiative and venues like Madison Square Garden, the Hulu Theater at Madison Square Garden, Radio City Music Hall and the Beacon Theatre in New York; the Forum in Inglewood, California; and The Chicago Theatre.
MSG, controlled by the Dolan family and CEO James Dolan, first announced its intention to split its sports and venue operations in two in 2018. Dolan will still control both teams if the current spinoff plan is completed via his super voting shares.
For the fiscal year ending in June 2019, the sports businesses posted revenue of $813 million and the entertainment division revenue of $820 million. During the same period, adjusted operating income (a crude measure of cash flow) was $147 million and $118 million for the two divisions.
MSG’s current enterprise value is $5.6 billion. Forbes’ most recent valuations for the NBA and the NHL pegged the value of the Knicks at $4 billion and of the Rangers at $1.55 billion—which as of today equal MSG’s publicly traded valuation. (Note: For our enterprise values, we equally share revenue generated by the Garden from concerts and other non-sports events for both teams.)
Here’s the bull’s case. The current valuation of the two teams is currently depressed by two factors: bad management and lousy play on the hardwood and ice.
The Knicks have missed the postseason the past six seasons and will likely do so again this year. The Rangers have not been in the postseason the past two years and are a long shot to make it this season. This depresses revenue and value: Each playoff game generates revenue—net of what a substitute concert could—of about $2 million, according to sports bankers. Long term, a consistent playoff team would be able to get higher prices for tickets, sponsorships and premium seating, perhaps adding an average of $60 million a year for each team. Using our blended enterprise/sales multiple of seven for the two teams, the additional revenue would mean about $1 billion in value. That brings us to a total of $6.4 billion for the two teams.
The James Dolan control factor depresses the valuation by about 20%, according to the bankers: If he were to give up control, the combined enterprise value would be closer to $7.7 billion.
Overly optimistic? Probably. But possible.
Source: Forbes
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