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How Madison Square Garden Hopes Its Entertainment Spinoff Will Unlock Potential

MSG Sphere at the Venetian
Courtesy of The Madison Square Garden Company

A rendered cross section of MSG Sphere at The Venetian. The state-of-the-art venue will have nine levels and 875,000 square feet of interior space.

Have MSG’s sports and entertainment arms been inhibiting each other’s success? With an upcoming spin-off, investors hope the parts prove greater than the sum.

The Madison Square Garden Company is not abiding by the adage “together we stand, divided we fall.” Instead, the storied company, owner of professional sports teams and name-brand venues, plans to spin off its entertainment business from its sports segment in the first quarter of 2020. Fourteen months after first announcing its intentions, MSG filed for the spin-off with the Securities and Exchange Commission on Dec. 3, 2019. Two companies will exist as separate, publicly traded companies, MSG Sports and MSG Entertainment. 

MSG’s plan received a vote of confidence when analysts at Oppenheimer, in a Jan. 23 report to investors, called MSG Sports an “interesting investment opportunity” with two valuable, scarce assets: the New York Knicks basketball team and the New York Rangers hockey team. Although the Knicks are the National Basketball Association’s losingest team this century, it is also the league’s most valuable -- $4 billion, according to Forbes -- and stands to win a financial bonanza from the league’s global expansion. After taking into account MSG’s long-term debt, Oppenheimer valued the sports division at about $4.6 billion. 


Key Takeaways:

1) Separating MSG Entertainment will give the new, standalone company a sharper focus on music with a clearer mandate to use capital for new projects such as the MSG Sphere in Las Vegas. 

2) Currently MSG’s financial statements make space for sports and entertainment, but after the spin-off will offer greater transparency with insight into MSG Entertainment’s venues and operations. 

3) The sports spinoff will likely be a more predictable investment than the entertainment entity, since franchises typically appreciate under any conditions.


The spin-off’s math is counterintuitive. In an acquisition, companies hope the whole has a greater value than the parts -- the familiar equation is 1 +1 = 3. But when a company is less valuable apart than the sum of its parts -- the impetus for spin-offs -- the equation changes to, say, 1 + 1 = 1.5. By separating the company, MSG is betting that greater transparency will, if all goes as planned, offer investors greater value for each segment. It’s a common tactic that’s both offensive and defensive. In recent weeks, pharmaceutical manufacturer Eli Lilly announced it plans to separate its human products and animal products, and experts are suggesting Amazon might sell its profitable Amazon Web Services to ease pressure about antitrust enforcement. 

A spin-off doesn’t always work as planned. Over the last five years, the Invesco S&P Spin-Off exchange trading fund has lagged behind the S&P 500 59.4% to 5.5% (albeit in an extraordinary bull market). But for MSG, itself a spin-off from TV and radio broadcaster MSG Networks in 2015, value could be unlocked when the more stable sports division is separated from the growth-minded entertainment division that undertakes bold projects -- the MSG Sphere in Las Vegas scheduled for an opening in 2021, with another planned for London -- and grows through acquisitions and investments. If MSG Entertainment’s risks pay off, both investors and music artists will benefit from the company’s ambitious attitude. 

The transaction would turn MSG Entertainment into a standalone company that Oppenheimer values at $4.1 billion. Its crown jewel is the 20,000-capacity Madison Square Garden, the midtown Manhattan home to the Knicks and Rangers as well as a legendary music venue. MSG Entertainment also leases Radio City Music Hall and Beacon Theatre in New York, and it owns outright the Chicago Theatre and The Forum in Los Angeles. MSG Entertainment would retain majority interests in hospitality company TAO Group and festival producer Boston Calling Events. And Oppenheimer believes MSG’s domed, spherical Sphere in Las Vegas can generate “double-digit returns.” 

Critics of the spin-off could point to the Dolan family, MSG’s controlling shareholders who are expected to run the sports spinoff, too, as cause for concern. (At a Jan. 29 Knicks game, fans chanted, “Sell the team.”) But in spite of MSG CEO James Dolan’s eccentricities -- he has been criticized for the amount of time he spends with his blues band, JD & the Straight Shot, among other things -- shareholders can rest easy, since major sports franchises appreciate under any conditions. (If the Los Angeles Clippers’ value can balloon from $12.5 million to $2 billion under Donald Sterling’s stingy ownership from 1981-2014, the Knicks likely won’t be punished for poor performance either.) And as for the entertainment entity, real estate appreciates, too, but risky projects like the more-than-$1.2 billion Sphere in Las Vegas will decide if MSG Entertainment is best left running on its own.  

 


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