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MSG: Trophy Properties for 35% Off
Madison Square Garden, owner of the Knicks, Rangers, and New York real estate, looks sharply undervalued.
By ANDREW BARY / BARRON'S
July 16, 2016
N.Y. Rangers Oscar Lindberg, left, and Dominic Moore. Photo: David Hahn/AP
Madison Square Garden holds a group of trophy assets, notably the New York Knicks and New York Rangers sports teams, and the Manhattan venue in which they play, Madison Square Garden.
The company (ticker: MSG) was formed last fall when Madison Square Garden separated its sports teams, arena, and other assets from its regional cable network, now MSG Networks (MSGN), which carries the Knicks and Rangers games. As one of only two public owners of major U.S. sports teams, MSG looks undervalued at a recent share price of $175, based on the company’s estimated asset value of $275 a share. This calculation is from Brett Harriss, an analyst at Gabelli, one of MSG’s largest shareholders. The other sports-team play is Liberty Braves Group (BATRK), a tracking stock for the Atlanta Braves issued by Liberty Media Group (LMCA) earlier this year.
Harriss’ calculation could prove conservative, since he assigns a value of $1.75 billion to the Knicks, below the $3 billion estimate from Forbes magazine and less than the $2 billion that former Microsoft (MSFT) CEO Steve Ballmer paid for the Los Angeles Clippers in 2014. The Clippers were the No. 2 National Basketball Association franchise in Los Angeles, behind the Lakers, while the Knicks are one of basketball’s premier teams, even though they have done poorly on the court in the past few seasons.
As one of the original six National Hockey League teams, and with a passionate fan base, the Rangers, too, are valuable. Harriss’ estimate of $800 million looks conservative, given that financier Bill Foley recently agreed to pay the NHL $500 million to put a new team in Las Vegas—hardly a hockey town. The Garden itself is a bigger draw following a $1 billion renovation completed in 2013, and both teams have sold out the arena for many seasons.
“Who wouldn’t want to own the Knicks and Rangers and the world’s most famous arena?” asks Mark Boyar, president of Boyar Asset Management. He values MSG similarly to Harriss. Several New York billionaires probably would love to buy either team if one or both came up for sale.
Boyar says one of the main knocks against MSG is that there is no “catalyst” to unlock value because the controlling shareholders, the Dolan family, appear wedded to the company. James Dolan, the MSG chairman and son of family patriarch Charles Dolan, relishes his role as boss of the Knicks and Rangers. The Dolans own 4.5 million shares of class B supervoting stock; there are a total of 24.6 million of class A and B shares outstanding.
“While we value MSG on a private-market-value basis, we recognize that the asset values are potentially locked up indefinitely,” wrote JPMorgan analyst Alexia Quadrani in a May note. “At this time, management has expressed no interest in selling the sports or owned venues.” She has an Overweight rating and price target of $210 a share, a nearly 25% discount from her private-market value of $260.
ONE CATALYST, says Gabelli’s Harriss, could be the sale of air rights above Madison Square Garden. The company is saying very little about them, including even how many square feet it holds. Investors estimate the total at 2.25 to three million square feet. New York air rights allow the buyer to put up a larger building than zoning laws would otherwise allow. MSG executives declined to speak with Barron’s.
Harriss assumes a value of $725 million for the air rights, or about $325 per square foot. His estimate may be conservative. A 2015 sale of Manhattan air rights over a Hudson River pier reportedly netted $500 per square foot. The logical buyer of the MSG air rights is Vornado Realty Trust (VNO), the big real estate investment trust that is the leading property owner and developer around the Garden.
MSG also owns the Forum arena near Los Angeles, which it has turned into a concert venue, and it leases Manhattan’s Radio City Music Hall, where it showcases the Rockettes in a lucrative annual Christmas show. The Forum investment of $120 million has turned into a winner. MSG is seeking to duplicate that success in a recent deal with Las Vegas Sands (LVS) to build a 17,500-seat concert arena in Las Vegas. Analysts have estimated it will involve a $300 million investment by MSG.
MSG HAS A STRONG balance sheet with nearly $1.5 billion, or about $60 per share, of cash, and no debt, reflecting a payment from MSG Networks at the time of the spinoff. The company has earmarked $525 million for share repurchases. So far, it has bought back $78 million of stock at an average cost of $151 a share—a pace that has disappointed some investors. The company pays no dividend.
MSG is asset-rich but doesn’t generate much annual income, reflecting in part the high cost of player salaries in both the NBA and NHL. MSG inked a favorable cable deal with MSG Networks prior to the spinoff that results in annual payments of $130 million, with annual escalators.
Harriss estimates MSG’s earnings before interest, taxes, depreciation, and amortization at about $150 million in the current fiscal year, ending in June 2017. Free cash flow may be closer to $100 million, with little reported net income, reflecting noncash depreciation and amortization.
One big investor tells Barron’s he’s happy to be patient, watch the company repurchase stock, and wait for the gap to close between the share price and what he views as an increasingly valuable group of assets. Someday, the Dolans probably will monetize MSG, and when that happens, there could be a big investor payoff.
E-mail: editors@barrons.com
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Madison Square Garden, owner of the Knicks, Rangers, and New York real estate, looks sharply undervalued.
By ANDREW BARY / BARRON'S
July 16, 2016
N.Y. Rangers Oscar Lindberg, left, and Dominic Moore. Photo: David Hahn/AP
Madison Square Garden holds a group of trophy assets, notably the New York Knicks and New York Rangers sports teams, and the Manhattan venue in which they play, Madison Square Garden.
The company (ticker: MSG) was formed last fall when Madison Square Garden separated its sports teams, arena, and other assets from its regional cable network, now MSG Networks (MSGN), which carries the Knicks and Rangers games. As one of only two public owners of major U.S. sports teams, MSG looks undervalued at a recent share price of $175, based on the company’s estimated asset value of $275 a share. This calculation is from Brett Harriss, an analyst at Gabelli, one of MSG’s largest shareholders. The other sports-team play is Liberty Braves Group (BATRK), a tracking stock for the Atlanta Braves issued by Liberty Media Group (LMCA) earlier this year.
Harriss’ calculation could prove conservative, since he assigns a value of $1.75 billion to the Knicks, below the $3 billion estimate from Forbes magazine and less than the $2 billion that former Microsoft (MSFT) CEO Steve Ballmer paid for the Los Angeles Clippers in 2014. The Clippers were the No. 2 National Basketball Association franchise in Los Angeles, behind the Lakers, while the Knicks are one of basketball’s premier teams, even though they have done poorly on the court in the past few seasons.
As one of the original six National Hockey League teams, and with a passionate fan base, the Rangers, too, are valuable. Harriss’ estimate of $800 million looks conservative, given that financier Bill Foley recently agreed to pay the NHL $500 million to put a new team in Las Vegas—hardly a hockey town. The Garden itself is a bigger draw following a $1 billion renovation completed in 2013, and both teams have sold out the arena for many seasons.
“Who wouldn’t want to own the Knicks and Rangers and the world’s most famous arena?” asks Mark Boyar, president of Boyar Asset Management. He values MSG similarly to Harriss. Several New York billionaires probably would love to buy either team if one or both came up for sale.
Boyar says one of the main knocks against MSG is that there is no “catalyst” to unlock value because the controlling shareholders, the Dolan family, appear wedded to the company. James Dolan, the MSG chairman and son of family patriarch Charles Dolan, relishes his role as boss of the Knicks and Rangers. The Dolans own 4.5 million shares of class B supervoting stock; there are a total of 24.6 million of class A and B shares outstanding.
“While we value MSG on a private-market-value basis, we recognize that the asset values are potentially locked up indefinitely,” wrote JPMorgan analyst Alexia Quadrani in a May note. “At this time, management has expressed no interest in selling the sports or owned venues.” She has an Overweight rating and price target of $210 a share, a nearly 25% discount from her private-market value of $260.
ONE CATALYST, says Gabelli’s Harriss, could be the sale of air rights above Madison Square Garden. The company is saying very little about them, including even how many square feet it holds. Investors estimate the total at 2.25 to three million square feet. New York air rights allow the buyer to put up a larger building than zoning laws would otherwise allow. MSG executives declined to speak with Barron’s.
Harriss assumes a value of $725 million for the air rights, or about $325 per square foot. His estimate may be conservative. A 2015 sale of Manhattan air rights over a Hudson River pier reportedly netted $500 per square foot. The logical buyer of the MSG air rights is Vornado Realty Trust (VNO), the big real estate investment trust that is the leading property owner and developer around the Garden.
MSG also owns the Forum arena near Los Angeles, which it has turned into a concert venue, and it leases Manhattan’s Radio City Music Hall, where it showcases the Rockettes in a lucrative annual Christmas show. The Forum investment of $120 million has turned into a winner. MSG is seeking to duplicate that success in a recent deal with Las Vegas Sands (LVS) to build a 17,500-seat concert arena in Las Vegas. Analysts have estimated it will involve a $300 million investment by MSG.
MSG HAS A STRONG balance sheet with nearly $1.5 billion, or about $60 per share, of cash, and no debt, reflecting a payment from MSG Networks at the time of the spinoff. The company has earmarked $525 million for share repurchases. So far, it has bought back $78 million of stock at an average cost of $151 a share—a pace that has disappointed some investors. The company pays no dividend.
MSG is asset-rich but doesn’t generate much annual income, reflecting in part the high cost of player salaries in both the NBA and NHL. MSG inked a favorable cable deal with MSG Networks prior to the spinoff that results in annual payments of $130 million, with annual escalators.
Harriss estimates MSG’s earnings before interest, taxes, depreciation, and amortization at about $150 million in the current fiscal year, ending in June 2017. Free cash flow may be closer to $100 million, with little reported net income, reflecting noncash depreciation and amortization.
One big investor tells Barron’s he’s happy to be patient, watch the company repurchase stock, and wait for the gap to close between the share price and what he views as an increasingly valuable group of assets. Someday, the Dolans probably will monetize MSG, and when that happens, there could be a big investor payoff.
E-mail: editors@barrons.com
Follow Barron’s on Twitter