Potential Spinoff Makes Shares Attractive For the Long-Run But Rich on Current Valuation

The Madison Square Garden Company (NASDAQ: MSG) is a New York based sports and entertainment holding company which owns and operates iconic, world famous venues in tourism-rich New York City and other big cities, and leverages traditional and new media to deliver original content to paying subscribers. The company has three operating segments: MSG Sports, MSG Entertainment and MSG Media.


 

Potential Spinoff to Improve Focus for Each Core Business

On October 27, 2014, management announced plans to explore a possible spinoff that would separate its live entertainment division from its media and sports segments to create two publicly-traded companies, each focused on its core business. The entertainment company would focus on premier live event and venue management services while the sports and media company would focus on live sporting events and related broadcast and content distribution. Each company will have its own capital structure and capital return policy so investors get more transparency.

Additionally, the entertainment spinoff will be growth-oriented while the sports and content business will focus on steady cash flow generation and enhancing shareholder returns through dividends and buybacks.

According to the company’s most recent earnings release, MSG Entertainment had quarterly revenue of $65.2 million while MSG Media and Sports had combined quarterly revenue of $196.2 million.


The spinoff will be structured as a tax-free transaction with existing MSG shareholders receiving shares in each of the newly formed companies. Details of the split had not been worked out when news of a potential split was announced.

Management Has Delivered 270% Share Price Appreciation in Four Years

Since being spun-off from television company Cablevision Systems Corporation (CVC) in 2010, Madison Square Garden shares have appreciated over 270%. The company’s shares recently closed at $75.76 (10/31/2014), close to the company’s 52-week high of $76.45 and well above its 200-day moving average of $60.42.


At $75.76 per share, Madison Square Garden has a market capitalization of $5.85 billion, roughly 13% more than its top competitor Live Nation Entertainment (LYV). With earnings of $1.47 per share for the trailing twelve months, the company has a price-to-earnings ratio of 51.5x and trades at a rather rich 35x cash flow multiple. The company is well capitalized, with zero debt.


The company does not pay dividends.

Analysts Upgrade Shares on Spinoff Upside

On October 28, 2014, Madison Square Garden shares were upgraded from Hold to Buy with a price target of $85 per share by investment management firm Maxim Group. The same day, analysts at ISI Group upgraded MSG shares from Hold to Buy and increased target share price from $66 to $74 per share. Earlier in the month, JPMorgan Chase (JPM) initiated coverage with a Neutral rating and price target of $70 per share.

As of 10/31/2014, shares were up about 25% on news of a possible split.

Activist Board Channels Management on Shareholder Value

On pressure from hedge fund manager JAT Capital Management, which owns a 9% stake in Madison Square Garden, the company added financiers Nelson Peltz and Scott Sperling to its Board as independent directors. Peltz is the CEO of activist investment firm Trian Fund Management LP and Sperling is Co-President of private equity firm Thomas H. Lee Partners LP. The two are widely believed to be behind the Board’s recent decision to explore splitting the company into two independent publicly-traded entities..

The Board also approved a $500 million share repurchase plan for its Class A common shares to increase shareholder value. The company had approximately 64 million Class A common shares outstanding as of October 24, 2014.

MSG Sports Capitalizes on New York City Team Sports, Sporting Events

MSG Sports owns and operates
several sports franchises including the New York Knicks (NBA), New York Rangers (NHL) and New York Liberty (WNBA). In addition, the business promotes and produces live sporting events for college basketball, tennis, boxing, wrestling, bull riding, college hockey, kickboxing and college wrestling.


 

MSG Entertainment Hosts Iconic Events for a Global Audience in New York City

MSG Entertainment produces, presents and hosts over 1,000 concerts, shows, performing arts and special events at its portfolio of world-famous venues including Madison Square Garden, Radio City Music Hall, the Beacon Theatre, The Forum (in CA) and the Chicago Theatre (in IL).


 

MSG Media Distributes Original Programming through Traditional and New Media

MSG Media consists of the MSG Network which is a regional sports network that telecasts over 700 live NBA, NHL, NFL, college basketball and college football games every year, along with premium New York area NHL games and original programming on its MSG+ network.

MSG Networks recently unveiled MSG Go, a service that allows viewers to watch live television and video-on-demand on mobile devices such as smartphones and tablets; MSG Go will launch in December 2014.


 

Growth Investments, Divestments Help Optimize Business Portfolio

In March 2014, Madison Square Garden acquired a
50% stake in global media company, Tribeca Enterprises LLC. Management views the investment as a growth opportunity and has the option of gaining majority ownership over time. Tribeca Enterprises hosts the annual Tribeca film festival and was valued at $45 million at the time of the investment.

In April 2014, the company sold its music cable channel Fuse Network to SiTV Media, a cable network with English-language media marketed to Latinos. SiTV owns NuvoTV, an entertainment network aimed at Latinos. Madison Square Garden received $226 million and a 15% stake in the combined company.

Partnerships Boost Sales, Marketing and Advertising Revenues

On 10/30/2014, Madison Square Garden announced a partnership with Cablevision Systems Corporation to use their census-level audience data collection for analytics and insights that will help optimize advertisement placement and pricing, and improve marketing campaigns.

In addition, the company has marketing partnerships with JPMorgan Chase, brewer Anheuser-Busch (BUD), beverage distributor Coca-Cola (KO), Delta Air Lines (DAL), Korean automobile manufacturer Kia Motors, Japanese automobile manufacturer Lexus and technology company SAP.

Leadership Centered on Growth

Tad Smith serves as President and Chief Executive Officer of the Madison Square Garden Company, supervising and managing all aspects of the company. Smith is responsible for the overall strategy of the company. Previously, Smith served as President – Local Media for Cablevision Systems Corporation and Chief Executive Officer for publishing company Reed Elsevier PLC (ENL). He holds a B.A. and Masters of Business Administration.

James Dolan is the Executive Chairman, overseeing and managing all operations. Dolan has led many of the company’s high-profile renovation and restoration projects. He also serves as CEO of Cablevision Systems Corporation.

Sean Creamer was named Executive Vice President and Chief Financial Officer on August 5, 2014. Creamer is responsible for all strategic financial decisions and oversees all financial and accounting affairs. Previously, Creamer held senior positions with consumer research company Arbitron Inc. and educational services provider Laureate Education Inc. He holds a B.S. in Accounting, an M.S. in Taxation and is a certified public accountant.

Significant Growth in First Quarter, Net Income Up 353%

For Q1 FY2015 ended September 30, 2014, Madison Square Garden had revenues of $241.7 million (up 12%), operating income of $197.4 million (up 395%), net income of $108.1 million (up 353%) and earnings of $1.38 per diluted common share (up 345%). The newly re-opened Forum venue added to revenues that were partially offset by the loss of Fuse Network revenues after it was sold to SiTV Media.


As of September 30, 2014, the company had $320.8 million in cash and cash equivalents, $3.07 billion in total assets, $655.6 million in total current liabilities, zero debt and $1.71 billion in total stockholders’ equity. The company ended the quarter with $76.2 million (up 16%) in adjusted operating cash flow.

Summary

Madison Square Garden beat analysts’ earnings estimates in the first quarter of 2015. The company is a strong regional force in entertainment and sports with top-notch, iconic venues in New York City – one of the world’s top tourism cities, and has a diversified mix of entertainment, sports and media revenues. With activist investors on its Board, management is exploring the possibility of a spinoff to grow the entertainment business and possibly return capital to shareholders of the steady media and sports business through dividends and buybacks. In addition, management is actively trimming its portfolio to focus on core businesses and evaluating strategic partnerships to support sales. Should the company split, investors will be able to rebalance their holdings to align with their investment objectives of growth or income or both. With an activist board, investors can be reasonably assured that management will act to increase shareholder value in the years to come. However, at 51.5x earnings, shares appear rather rich so investors should wait for a drop in share price before establishing positions.

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