On March 31, 2020, The Madison Square Garden Company (NYSE: MSG, $211.41, Market Capitalization $5.1 billion), a world leader in live sports and entertainment experiences, announced that its Board of Directors had approved completion of the Company’s separation into two independent, publicly-traded companies by way of a tax-free spin-off of its Entertainment business. The Sports business will remain in the existing Company, which will be renamed Madison Square Garden Sports Corp and will change its stock ticker from “MSG” to “MSGS” in connection with the separation. The Entertainment business will be part of a new company that will be named Madison Square Garden Entertainment Corp. at separation, and its common stock would be listed on the NYSE under the symbol “MSGE”. Each MSG common stockholder will receive one share of MSG Entertainment Class A or Class B common stock for every share of MSG Class A or Class B common stock, respectively, held as of the record date. The record date for the distribution for common stockholders is April 13. MSG expects that the ‘when-issued’ public trading market for Madison Square Garden Entertainment Corp. (Spin-Off) ordinary shares to begin on the NYSE on 4/9 under the symbol “MSGE WI” and will continue throughout the period leading up to and including the distribution date of 4/17.
The regular-way’ trading of Madison Square Garden Entertainment Corp. ordinary share is expected to begin on the NYSE on 4/20. Beginning on 4/9 till the distribution date, The Madison Square Garden Company (to be renamed as Madison Square Garden Sports Corp) expects that there will be two ways to trade its ordinary shares, either with or without the right to a distribution of MSG Entertainment ordinary shares. Ordinary shares will continue to trade on the NYSE on a ‘regular-way’ basis until the distribution date. The shares will also trade without the right to receive the MSG Entertainment in the ‘ex-distribution’ market beginning on 4/9 under the symbol “MSGS WI.”
As previously disclosed, James Dolan will serve as Executive Chairman of MSG Sports and as Executive Chairman and Chief Executive Officer of MSG Entertainment. Andrew Lustgartenis expected to serve as President and Chief Executive Officer of MSG Sports and as President of MSG Entertainment.
Valuation and Recommendation
We value The Madison Square Garden Company (MSG) using Asset-based 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 the valuing Sports team is Forbes valuation, and we apply a discount of 25% to each to arrive at our estimated Market Value. Our estimated EV forMSG Sports (Stub) stands at $4.7 billion. We arrive at an Equity value attributable to MSG shareholders of $4.4 billion by accounting for an estimated Net debt of $265 million. We arrive at an intrinsic value of $185.00 (Previously: $200.00 per share) for MSG Sports. 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, along with the air rights attached to the Garden. We value Chicago Theater, LA Forum, Radio City Christmas Spectacular, TAO Group, and Booking business using EV/EBITDA valuation. We arrive at an intrinsic value of $130.00 (Previously: $170.00 per share) for MSG Entertainment. Our current valuation factors in the material impact of the COVID-19 pandemic, which has halted the Company’s operations due to the cancellation of events and closure of its venues. We have reduced our target price to $315.00 (Previously: $370.00) per share for The Madison Square Garden Company, which implies a potential upside of 49.0% from the current market price of $211.41 as of 3/31. We retain our ‘Buy’ rating on the stock, notwithstanding the short term impact of COVID-19 pandemic factoring in the embedded value of its assets. Risks to our price target include lower than expected US economic growth due to the fallout of COVID-19 pandemic, the uncertainty of the Sphere costs/ profitability, lease of key assets and league actions of professional sports teams.
Distribution of MSG Entertainment shares to MSG shareholders
MSG shareholders will receive one ordinary share of Madison Square Garden Entertainment Corp (Spin-Off) for every ordinary share of MSG held as of the record date. The Madison Square Garden Company will distribute all of the outstanding shares of MSG Entertainment common stock on a pro-rata basis to holders of MSG common stock.
Coronavirus Impact
On 3/18, MSG filed an amended Form 10 for EntertainmentCo given the material impact to the business due to COVID-19. As of March 24, 2020, as a result of government-mandated assembly limitations and closures, all of the scheduled events at The Garden, Hulu Theater at Madison Square Garden, Radio City Music Hall, the Beacon Theatre, The Chicago Theatre and the Forum are postponed or cancelled through April 2020.
The widespread global effects of COVID-19 have resulted in significant impediments to the construction of the MSG Sphere at Las Vegas that are beyond the Company’s control, including disruptions to its supply chain. As a result, the Company will implement a temporary suspension of construction, with all work ceasing over approximately the next two weeks. As a result of this delay, the Company does not expect to achieve its goal of opening the venue in the calendar year 2021.
Valuation
A] MSG Sports (Stub)
Our SOTP framework values MSG Sports (Stub) by valuing the teams. The starting point of the valuing Sports team is Forbes valuation, and we apply a discount of 25% to each to arrive at our estimated Market Value. In February 2020, Forbes has revalued the New York Knicks at $4.6 billion, which was earlier valued at $4.0 billion. New York Rangers was revalued at $1.65 billion, which was earlier valued at $1.55 billion. Valuation for 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 $3.5 billion and NY Rangers at $1.2 billion. We value CLG Gaming, and others by taking a Private Market Value estimate of $10 million to arrive at an estimated value of $8.0 million by applying a 20% discount. Our estimated EV for MSG Sports (SpinCo) stands at $4.7 billion. We arrive at an Equity value attributable to MSG shareholders of $4.4 billion by accounting for net debt of approximately $265 million. We value MSG Sports at $185.00 per share (Previously: $200 per share) on a standalone basis by considering a diluted number of shares of 24.0 million. Our reduced valuation factors in the impact of COVID-19 pandemic, which has led to the cancellation/ postponement of various sports events at its venues.
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 $1.2 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 Theater, LA Forum, Radio City Christmas Spectacular, TAO Group, and Booking business using EV/EBITDA valuation. We value Radio City Christmas Spectacular at approx $304 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 8.0x multiple (77.5% stake valued at approx $174 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 $144 million and $72 million, respectively. We assign EV/EBIDTA multiple of 8x to Chicago Theater, 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, Townsquare Media and Draft Kings. We arrive at an intrinsic value of $130.00 (Previously: $170.00 per share) for MSG Entertainment. The reduced valuation factors in the slowdown in the entertainment business due to the material impact of COVID-19, which has led to the Company shutting down its venues and postponing/ cancelling its events until further notice.
Our consolidated target price for MSG stands at $315.00 per share, implying a potential upside of 49.0% from the current market price of $211.41 as of 3/31. We thereby retain our ‘Buy’ rating on the stock.
Company Description
The Madison Square Garden Company (Parent)
The Madison Square Garden Company (MSG) (to be named Madison Square Garden Sports Corp) 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 Theater; the Forum in Inglewood, CA; and The Chicago Theater. 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 (to be sold in 2Q20), and The Chicago Theater in Chicago. Also, the Company leases Radio City Music Hall and the Beacon Theater in New York City. 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, Cathédrale, 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.