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The Ledger: Why Analysts Like MSG Entertainment’s Potential Sphere Spinoff

The potential spinoff is "compelling" because MSG Sphere and Tao Group would have "a healthy capital structure to fund growth."

The Ledger is a weekly newsletter about the economics of the music business sent to Billboard Pro subscribers. An abbreviated version of the newsletter is published online.


MSG Sphere, the yet-to-be-built music venue in Las Vegas, could break away from the company that dreamed it up and funded its construction – and that may be good news for MSG Entertainment shareholders.

Last week, the MSG Entertainment board of directors approved a plan to explore a potential spin-off of its live entertainment and MSG Networks businesses into a separate, publicly traded company. That would leave MSG Entertainment with two divisions: MSG Sphere, the state-of-the-art venue under construction in Las Vegas, and Tao Group Hospitality Group, the owner of 70 branded nightclubs and restaurants — including TAO, Hakkasan, LAVO and Beauty & Essex — in 20 markets globally.


Officially, MSG Entertainment says there is “no assurance that the proposed transaction will be completed” as described, or at all. A final decision “would be subject to various conditions, including certain league approvals, receipt of a tax opinion from counsel and final MSG Entertainment Board approval,” according to the press release.

If a spin-off does occur, it would separate MSG Entertainment’s more mature, low-growth businesses from segments that are more speculative but provide an opportunity for higher returns. The live entertainment and media business would include MSG Networks, which broadcasts five basketball and hockey teams on MSG Network and MSG+, and MSG Entertainment’s collection of venues — including Madison Square Garden, The Hulu Theater at Madison Square Garden, Radio City Music Hall, the Beacon Theatre and The Chicago Theatre — in addition to its sports and entertainment booking business, the Radio City Rockettes and the Christmas Spectacular production and arena license agreements with the New York Knicks and New York Rangers.

MSG Entertainment would be left with MSG Sphere, a majority interest in Tao Group Hospitality, about a one-third interest in the live entertainment and media company, and most of the company’s cash on hand. Construction on MSG Sphere broke ground in 2019 and is expected to be completed in 2023.

Wolfe Research analyst Peter Supino called the potential spinoff “compelling” because MSG Sphere and Tao Group would have “a healthy capital structure to fund growth,” including most of MSG Entertainment’s cash on hand and little debt, he wrote in an Aug. 22 research note. The spinoff would allow MSG Sphere and Tao Group “to raise capital at relatively lower interest rates to fund future initiatives if the company’s strategy were to shift to a more capital-intensive approach” from the capital-light strategies — such as licensed models and managed venue models — MSG Entertainment executives had previously discussed. Oppenheimer analysts Ian Zaffino and Isaac Sellhausen emphasized the spinoff would allow MSG Sphere and Tao Group “to pursue growth opportunities” while keeping a stake in the traditional entertainment business.

The more established live entertainment and MSG Networks businesses “have long-term track records and are well understood by our investors,” explained David Byrnes, executive vp and chief financial officer, during MSG Entertainment’s Aug. 19 earnings call. In contrast, MSG Sphere and Tao Hospitality Group “will appeal to higher-growth oriented” investors,” he said. “So, the transaction would provide each company with enhanced flexibility to pursue its own business and capital allocation strategies while also offering investors greater visibility into each company’s businesses and greater investment choice.”

At the same time, however, Supino believes MSG Networks’ free cash flow contributions to the live entertainment and media company “will become more limited to potentially negative over time” due to long-term local media rights deals in place through 2035 (with MSG Sports) “which could constrain repayment potential.”

MSG Entertainment is just one year removed from its poorly received merger with MSG Networks, but an MSG Sphere-Tao Group spin-off appears likely to draw a more positive response than last year’s combination. Oppenheimer described the potential spinoff as “a reversal from the unpopular acquisition of MSGN” in 2021 in their Aug. 19 research note. That merger of two Dolan Family-controlled businesses prompted lawsuits from MSG Networks shareholders, who alleged the company was undervalued in the transaction and executives “did not utilize any of the procedural protections available when a controller stands on both sides of the deal,” according to the complaint.

MSG Entertainment’s share price rose 3.5% to $64.91 the day after the spinoff proposal was announced. In contrast, shares fell 9.9% the day after the MSG Networks merger was officially announced on March 26, 2021, on top of a 19% decline since news of the merger first broke on March 10, 2021.

Poor reception aside, joining MSG Networks with MSG Entertainment played a significant role in shaping the current company. Last year, the live entertainment business was still hamstrung by COVID restrictions and a global touring slowdown. Importantly, the merger provided MSG Entertainment with “significant cash flow” that management has “directed toward our Sphere initiative,” Byrnes said during the earnings call. “And it will continue to do that until this proposed separation is completed,” he added.



Through August 26, the % change over the last week, and the year-to-date change.

Universal Music Group (AS: UMG): 20.39 euros, -2.2%, -17.7% YTD
Spotify (NYSE: SPOT): $109.31, -1.9%, -53.3% YTD
SiriusXM (Nasdaq: SIRI): $6.17, -3.8%, -3.0% YTD
Live Nation (NYSE: LYV): $91.80, -2.6%, -23.3% YTD
Warner Music Group (Nasdaq: WMG): $27.40, -3.4%, -36.6% YTD​​​​​​​
HYBE (KS 352820): KRW 175,500, -5.9%, -49.7% YTD
Tencent Music Entertainment (NYSE: TME): $5.06, +13.5%, -26.1% YTD
Deezer (PA: DEEZR): 4.35 euros, +0.9%, -27.5% YTD

NYSE Composite: 15,178.21, -2.6%, -11.6% YTD
Nasdaq: 12,141.71, -4.4%, -22.4% YTD
S&P 500: 4,057.66, -4.0%, -14.9% YTD