MSGS - Madison Square Garden Sports: Patience Required But Downside Protected

• Increasing value of sports teams as TV broadcast rights increase in value.
• Sports teams are seeing an increasing pace of sales as owners are growing old or passing away.
• MSGS (with the New York Knicks) is in prime position to benefit from the new 2025 NBA TV agreement, but crystallization of value depends on a sale of the team.

After the April 2020 spin-off of its entertainment business, Madison Square Garden Sports ( MSGS ) has a collection of assets centered around the New York Knicks and the New York Rangers. With an EV of $3.9 billion, I believe that MSGS's assets are undervalued, but rightfully so given the lack of any short/medium-term catalysts.

The value of sports teams, particularly teams from the Big 3 of American sports - Basketball, Baseball, American Football, and to a certain extent Ice Hockey, has been consistently increasing for decades. According to estimates from PitchBook , the average return from 2002-2021 for an NBA, MLB and NHL team was 1,057%; 669% and 467%, respectively.

• Basketball - Jerry Buss bought the Lakers and Kings for $24 million (worth about $95.5 million in today's money). Forbes estimates the Lakers to be worth $5.5 billion today. (Source: Men's Health )
• American Football - Pat Bowlen bought the Denver Broncos for $71 million in 1984, an agreement was reached in June 2022 for the team to be sold for $4.65 billion. (Source: Business Insider )
• Baseball - Doubleday & Co. bought the Mets in 1980 for $21.1 million and was sold for $2.45 billion in 2020. (Source: CBC )

TV rights - Driver of teams' values

The value of sports teams in the US has been continuously increasing as TV rights have consistently increased, hand-in-hand. TV rights have gone up for sports as companies like ViacomCBS, Fox, Comcast, ESPN, Turner Sports and ABC are willing to pay more - Sports are among the only bright-spots in drawing in viewers and hence subscribers.

In Mar 2021, CNBC reported that the NFL had finalized its new media rights agreement lasting 11 years and is potentially worth $100 billion (amounting to teams receiving $321 million each annually). The NBA's deal expires in 2025 and CNBC is reporting that the league will attempt to secure a $75 billion media rights package, 3x its current $24 billion deal.

The exponential increase in TV rights deals is not limited to the Big 3. For example, ESPN just agreed to a new Formula 1 deal worth $75 - $90 million a year, a 16x increase from its current $5 million per year deal. Apple also just signed a $2.5 billion 10-year deal with MLS (soccer), a 5x increase from the previous deal.

Increasing frequency of sports teams' sales

The value of sports teams can only be crystallized in the case of a sale (whether partial or full) and the pace of sales has picked up. This is not surprising given the old age of many of the current owners, many bought their team decades ago. Here's a list of sales of sports teams in the last five years that sold for over $1 billion:

• Denver Broncos sold for $4.5 billion;
• Chelsea sold for $3.13 billion;
• Carolina Panthers sold for $2.3 billion;
• Houston Rockets sold for $2.2 billion;
• AC Milan sold for $1.3 billion

This is not counting the many more sales that will come in the near future (Source: CBS ).

• The New Orleans Saints' 75-year-old current owner said that the team would be sold after her death.
• The owner of both the Seattle Seahawks and Portland Trail Blazers died in 2018 and his sister, who's currently in charge of the trust that owns these teams, has made it no secret of her desire to sell the teams.
• The Chicago Bears' owner is 99 years old, and there was speculation that some family members wanted to sell the team soon.

When will the Dolan family sell?

Given the increasing value of sports teams and the upcoming new NBA TV rights agreement, MSGS (through the New York Knicks, one of the most popular teams) will certainly benefit. However, the only crystallization of this increased value is through the sale of the Knicks and/or Rangers. Thus, the million-dollar question, when will the Dolan family sell?

Should James Dolan decide to sell, there is no shortage of interest in buying the team. For example,

You hear numbers all the time," Dolan said, per Ian O'Connor of ESPN... I think people have sent feelers out but never any that were pursued. Yeah, [the feelers are] around that number [$5 billion], but those things, it's like a stock price. It's only important if you're going to buy or sell...

You have a responsibility as the guy who runs the place to deliver on that for them; that's being open and transparent. And so in that position, I could never say that I wouldn't consider selling the Knicks.

Basically, there are no short or medium-term plans to sell the Knicks or Rangers. This is especially true given James Dolan's relatively younger age (67 years old) as compared to the owners of the teams being sold now. However, while we wait, the Knicks' performance can only go up, just as the Rangers have been on an upswing recently. Improving the team's performance should increase the value of the team (e.g., the Golden State Warriors franchise was worth $450 million before Steph Curry's arrival and is now worth $4.3 billion)

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