Description

Overview:

At current levels, shares of Madison Square Garden Sports Corp. (“MSGS,” or “the Company”) offer investors the opportunity to buy the proverbial dollar bill for 50 cents. Shares of MSGS have declined by about 25% from highs reached in late 2021 despite numerous recent favorable developments. Natey1015’s MSGS write-up in September 2020, which was posted after the Company’s spin off of its entertainment business (MSG Entertainment), is worth reviewing and contains valuable information. We’ll highlight a few recent developments and items that could help narrow the disconnect between the current share price and the Company’s private market value. 

Business Overview:

MSGS owns stakes in two iconic sports franchises including the New York Knicks and New York Rangers. Private equity has been active in professional sports in recent years (often paying premiums for minority stakes) though an investment in MSGS at current levels gives an investor the ability to own stakes in two trophy assets at a 50% discount to private market value sans excessive management fees. The Knicks and Rangers boast a deeply passionate fan base in one of the nation’s largest media markets.

Sponsorship Renewals and Increased Ad Inventory Should Bolster Operating Performance:

MSGS has experienced good momentum in its sponsorship/advertising revenue component with a number of multi-year renewals signed over the past year including JPMorgan Chase, Lexus, Anheuser-Busch, and Squarspace as well as new deals with Infosys and Benjamin Moore. Thanks in part to these deals, MSGS’s sponsorship revenues returned to pre-pandemic levels in early FY 2022 and have surpassed those pre-pandemic levels thanks to agreements in late last year with online sports gambling firms BetMGM and Caesars Sportsbook. There are several other items that could bolster future advertising revenues including the recent NHL decision permitting jersey sponsorship (beginning with the 2022 season), the NBA’s decision to increase the number of international sponsors, and the NHL’s new digitally enhanced dasher boards, which will enable significant incremental advertising opportunities for MSGS’s advertising partners. 

Precedent Transactions Support Team Valuations:

The NBA recently allowed institutional investors (PE firms, etc.) to take stakes in the league’s teams, which should help shed light on the valuation of the NY Knicks and potentially other professional sports franchises such as the Rangers. Following this league move, Arctos Sports Partners acquired a 5% stake in the Golden State Warriors at an implied valuation of ~$5.5 billion, representing an ~17% premium to the prevailing Forbes value. Meanwhile, Philip Anschutz sold his 27% stake in the Los Angeles Lakers in 2021 implying a value of ~$5.5 billion for the team, representing a 20% premium to the prevailing Forbes value. 

Media Rights Renewals and Online Sports Gambling Bolster Team Valuations:

The Knicks and Rangers continue to be the most valuable NBA and NHL teams, respectively according to Forbes. The most recent Forbes values for the Knicks and Rangers are $5.8 billion and $2 billion, respectively. The Forbes value estimates are well regarded in the industry and typically represent a starting point when a team owner decides to sell a team. When Qualtrics billionaire Ryan Smith was looking to purchase the Utah Jazz in 2021, he noted that he pulled up the Forbes value on his phone during the negotiation process. The Rangers’ most recent Forbes value was up 21% reflecting a new 7-year national media rights deals that was struck with Turner and ESPN and took effect this past year. The Forbes value for the Knicks was up 16% to $5.8 billion when the publication valued the team in October 2021 (vs. its February 2021 valuation for the Knicks). The NBA’s national rights deals with Disney and Warner Media run through the 2024/2025 season, but a favorable renewal is likely and should go a long way toward providing a meaningful step up in the valuation of NBA teams including the Knicks. A longtime sports media rights adviser (Lee Berke) recently stated that the NBA should double the $2.7 billion, on average, that it pulls in from its current deals, reflecting increased streaming content. We would also highlight that the MLB and NFL were able to command average annual media rights increases of ~33% and ~80% a year, respectively during their recent renewals. Although the NHL recently signed a deal for national media rights in the U.S., the league’s Canadian deal will be up for renewal in a few years (current deal runs through the 2025/2026 season), and could lead to another step-up in the Rangers’ Forbes value. 

Although media rights have been the biggest contributor to rising team valuations over the past decade (the Knicks’ most recent Forbes value of $5.8 billion compares to a 2013 Forbes value of ~$1 billion while the recent Rangers Forbes value of $2 billion compares to a 2013 Forbes value of ~$800 million), there are other factors that should continue to buoy team values. Notably, the recent approval of online sports gambling in New York has created a significant advertising opportunity for the Company. MSGS has recently reached advertising deals with three of the major online sports gambling companies (BetMGM, Caesars Sportsbook and DraftKings) that collectively account for over 50% of the online sports gambling handle in New York. With these deals, sports gambling companies now represent the MSGS’s largest advertising category on a run rate basis. Not only has online sports gambling provided a new revenue stream for the Company, it has helped boost fan engagement, which should have favorable implications for future national and local media rights deals. 

Improved Financial Position Could Portend Outsized Buybacks:

MSGS was positioned as a “return of capital” vehicle when management decided to separate its sports asset from its entertainment business. However, those “return of capital” ambitions were put on hold as the Company took on additional debt during the pandemic to bolster its liquidity. In recent quarters, MSGS has been paying down debt, but with operating conditions beginning to normalize, and following the Rangers’ successful season (reached Eastern Conference finals), which has favorable future financial implications (increased ticket prices, etc.), we would not be surprised if the Company begins to repurchase shares to help narrow the discount between the Company’s public and private market value. We would also not rule out the potential that the Company sells minority stakes in the teams to highlight the valuation disconnect with proceeds used to buy back shares. Management is cognizant of MSGS’ discounted valuation, specifically calling it out on multiple quarterly earnings calls over the past year, and we would not be surprised if they pursued a number of different avenues to narrow the discount. Silver Lake, which is MSGS’s largest outside shareholder was ostensibly interested in taking a larger stake in the teams as part of the 2020 separation, but those plans were shelved owing to tax considerations. With management highlighting a number of minority transactions recently at favorable valuations, we would not be surprised if they have been pursuing a transaction that would enable it to tax efficiently sell a minority stake in one or both of the teams. Such a transaction could provide significant capital to pursue an outsized share buyback. 

Valuation:

Applying a 30% premium, in-line with precedent sports franchise transactions, to the recent Forbes values for the Knicks and Rangers, we estimate a private market value for MSGS of over $300 a share, representing ~100% upside from current levels. Even applying no premium to the Forbes values for the teams, we estimate a private market value 50% higher than current levels. James Dolan has demonstrated an affinity for the Company’s entertainment assets and the completion of MSGE’s Sphere project in Las Vegas could provide the impetus for the sale of one or both of the teams. Based on past commentary, James Dolan could be amenable to selling the teams at the right price.

Catalyst

• Outsized share repurchases

• Potential sales of minority stakes in the Knicks and Rangers

• Improved operating performance following Rangers resurgence

• National media rights renewals for NBA and NHL