MSGS - Madison Square Garden Sports: Recent Comparable Transaction Supports Bull Case

Summary

• MSGS provides an opportunity to own two of the most valuable trophy assets (NY Knicks and NY Rangers) in the world.
• Using a sum-of-the-parts analysis, we estimate the fair value of MSGS at $334, indicating ~80% upside.
• The recent announced sale of the Phoenix Suns indicates this valuation may be too conservative.
• For long-term value investors, we view this discrepancy as an attractive opportunity to take advantage of the Street’s short-sighted nature.

Thesis Snapshot

The recently announced sale of the Phoenix Suns for approximately $4.0 billion is a significant positive for Madison Square Garden Sports Corp. (NYSE: MSGS ), owner of the NY Knicks and NY Rangers.

According to Forbes, the Knicks are one of the most valuable NBA teams, worth $6.1 billion in enterprise value. Similarly, the Rangers are the NHL’s prized franchise with a value of $2.2 billion . In total, based on the Forbes methodology, the two teams are worth $8.3 billion or approximately $334 per share (after accounting for estimated net debt) versus the MSGS trading price of $181.

However, the Suns' transaction may indicate that the Forbes' valuation approach is too conservative. In October 2022, the firm estimated the Phoenix franchise was worth $2.7 billion , only two-thirds of the reported transaction value, less than 90 days later.

Background

In April 2020, The Madison Square Garden Company (MSG) spun-off its entertainment businesses from its portfolio of sports assets. Upon completion of the transaction, MSG became a pure-play sports company and changed its name to Madison Square Garden Sports Corp. The newly formed entertainment company is appropriately called Madison Square Garden Entertainment Corp. ( MSGE ).

MSGS is home to a collection of the most valuable franchises in professional sports, including the New York Knicks and the New York Rangers.

Other MSGS assets include two development league teams – the Westchester Knicks, which serve as the exclusive G-League affiliate of the Knicks, and the Hartford Wolf Pack, the player development team for the Rangers playing in the American Hockey League.

In addition, the Company has an established presence in the emerging world of e-sports through Counter Logic Gaming ( CLG ), a North American e-sports organization, and Knicks Gaming, an NBA 2K League franchise.

Finally, MSGS operates two performance centers. The Madison Square Garden Training Center in Greenburgh, NY, is a 16-acre facility that offers the Knicks, Rangers, and Westchester Knicks a specialized training environment, with dedicated equipment for each team.

The CLG Performance Center in Los Angeles, CA, includes unique competition spaces tailored to the Company’s e-sports game franchises, as well as a studio and editing bay for video productions and outdoor areas that can be used to hold fan events.

Recent Updates

In October , Forbes increased its appraisal of the Knicks from $5.8 billion to $6.1 billion. Likewise, in December , Forbes raised its fair value estimate of the Rangers from $2.0 billion to $2.2 billion.

In total, the revised enterprise value of the two New York teams is $8.3 billion. After accounting for net debt, the consolidated equity value is $8.1 billion, or $334 per share.

As it relates to the appraisals of professional sports teams, historically, Forbes’ estimates carried credibility. For example, in September 2020, the New York Mets sold for $2.42 billion, within 1% of the $2.4 billion valuation Forbes placed on the franchise.

However, recent NBA transactions indicate the Forbes' approach may be too conservative. For example, in October 2022, the firm estimated the Phoenix franchise was worth $2.7 billion . Less than 90 days later, in December, the Suns sold for a reported $4 billion.

The Valuation Gap

Based on the Forbes methodology, the two teams are worth $8.3 billion or approximately $334 per share versus the recent MSGS trading price of $181. And with the most recent comparable transaction, the $334 may be understating the true value of MSGS.

The stock suffers from the "Dolan discount," a reference to the Dolan family, the company's controlling shareholder, and its much maligned leader James Dolan.

Mr. Dolan has a mixed corporate track record, including a history of hits and misses related to mergers, acquisitions, and divestitures across his business empire.

Further, his unwillingness to sell the New York franchises highlights the material gap between the value of control versus minority ownership.

From our perspective, there are three scenarios that would close the valuation gap.

1. Sell the teams (least likely). An announcement that the Dolan family is considering a transaction or two to divest both teams is the holy grail and best opportunity for shareholders to realize fair value. Unfortunately, Mr. Dolan has stated on numerous occasions the teams are not for sale.
2. Partner with a minority owner. Allowing a minority investor into one or both of the teams would create a very attractive price discovery exercise, as well as, provide substantial proceeds to MSGS which could be utilized to buyback a meaningful number of shares and/or pay a dividend.
3. Buyback shares with free cash flow (most likely). In 2022, MSGS has focused on paying down debt with free cash flow. Going forward, a pivot towards a material share repurchasing program would reward shareholders (acquiring stock well below fair value).

Valuation and Risks

MSGS provides an opportunity to own a stake in two of the most valuable trophy assets in the world.

As noted below, Forbes values the Knicks and Rangers at $8.3 billion. Adjusting for an estimated net debt of $170 million provides an enterprise value of $8.1 billion or approximately $334 per share, an ~80% premium to current trading.

We also illustrated an upside scenario where the Knicks receive a 25% premium to account for the potential that Forbes is too conservative when valuing NBA franchises.

For skeptics, we provide a downside scenario which allocates a 25% discount to the Forbes appraisals for both teams, indicating a $249 value per share.

Risks to our thesis and valuation include:

• A professional sports transaction occurs at a value that is materially lower than the Forbes assessment – creating a credibility argument for the Forbes methodology;
• Interruption of the NBA or NHL seasons and / or inability for fans to attend NBA or NHL games (event that negatively impacts long-term revenue generation); and
• Any material, negative change to team performance, league agreements, and/or relationship with the player unions.

Conclusion

Professional sports teams are rare and valuable. MSGS owns "best of breed" franchises in both the NBA and NHL.

Despite the quality of the assets, MSGS trades at just 54% of fair market value due to limited optimism for a near-term catalyst.

For long-term value investors, we view this discrepancy as an attractive opportunity to take advantage of the Street’s short-sighted nature.

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