| 2020 | 2021 | ||||||
| Price: | 152.89 | EPS | 0 | 0 | |||
| Shares Out. (in M): | 24 | P/E | 0 | 0 | |||
| Market Cap (in $M): | 3,669 | P/FCF | 0 | 0 | |||
| Net Debt (in $M): | 990 | EBIT | 0 | 0 | |||
| TEV (in $M): | 4,659 | TEV/EBIT | 0 | 0 | |||
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CERTAIN STATEMENTS CONTAINED HEREIN REFLECT THE OPINION OF THE AUTHOR AS OF THE DATE WRITTEN.NO INVESTMENT DECISIONS SHOULD BE BASED IN ANY MANNER ON THE INFORMATION AND OPINIONS SET FORTH IN THIS REPORT. YOU SHOULD VERIFY ALL CLAIMS, DO YOUR OWN DUE DILIGENCE AND/OR SEEK ADVICE FROM YOUR OWN PROFESSIONAL ADVISOR(S) AND CONSIDER THE INVESTMENT OBJECTIVES AND RISKS AND YOUR OWN NEEDS AND GOALS BEFORE INVESTING IN ANY SECURITIES MENTIONED. Please see additional Important Disclaimers at the end of this analysis.
Investment Pitch
Madison Square Garden Sports (NYSE: MSGS) likely trades at a discount to the sum of its parts. Its two main assets are the New York Knicks NBA basketball team and New York Rangers NHL hockey team. The most recent estimated value of these teams by Forbes put the Knicks value at $4.6 billion (2/11/20)[i]and the Rangers value at $1.15 billion (12/11/19).[ii]Thus the combined sum-of-the-parts value based on Forbes estimates is $5.75 billion, which compares favorably to MSGS’ current enterprise value of $4.7 billion and $3.7 billion market cap as of 9/28/2020.
Why Invest in the NBA
Out of all the major U.S. sports, the NBA has the greatest global appeal, particularly to the largest growing foreign market, China.[iii]A majority of the league’s and team’s revenues and profits are based on national and local media rights as opposed to in-stadium revenue. An investment in a NBA team should benefit from the growing global popularity of the sport and league. At the end of the day, I believe the NBA produces compelling content that can be increasingly distributed to more people across the globe thanks to a growing installed base of smart-phones connected to the Internet.
At the end of the 2024-2025 NBA season, the NBA’s U.S. national media rights will be up for bid. Last time they were up for renewal, these rights jumped in value from $925 million for the 2016-2017 season to an average of $2.67 billion from the 2017-2018 through the 2024-2025 season.[iv]The value of these rights will likely increase due to the growing popularity of the sport coupled with more potential distributors to bid on these rights than ever before. For example, with the massive growth of Amazon Prime, it would not be surprising to see AMZN in the mix along with current traditional players such as Disney’s ABC/ESPN and AT&T’s Turner Network.
Why Invest in the Knicks (and Rangers)
The $2.5 billion premium the New York Knicks is estimated to be worth relative to the estimated $2.123 billion average NBA team value according to Forbes is entirely based on New York being the largest metro market in the U.S. with the most amount of household wealth. Essentially it largely comes down to the local media rights payments MSGS receives from MSG Networks (NYSE: MSGN) for broadcasting many of the Knicks regular season games. Assuming a full 82 game regular season schedule is played in the 2020-2021 season, MSGS will receive ~$160 million (of which ~$123 million is for the Knicks) in local media rights payments from MSGN.[v]There are 15 years remaining on the contract, which has 4% annual escalators.[vi]MSGN generates its revenue from affiliate fees paid by video distributors such as Altice to carry the MSG Network as well as from selling valuable advertising during games. The bottom line is an investment in MSGS is a long-term bet that the New York metro area remains a popular place to live and post-pandemic, New Yorkers will have a continued interest to watch and attend Knicks and Rangers games.
Conclusion
Currently, through an investment in MSGS, one can buy into the New York Knicks and Rangers with the potential for ~30% upside based on the aforementioned Forbes estimated team values. While I think James Dolan has done a poor job overseeing the Knicks, the value of the team has increased nicely despite this.
Additionally, most NBA teams have sold at much higher prices than the Forbes estimated values. The LA Clippers sold for $2 billion in mid-2014 compared to the then estimated value by Forbes of $575 million.[vii]In 2017, the Houston Rockets were sold for $2.2 billion compared to the then estimated value by Forbes of $1.65 billion.[viii]Most recently the Brooklyn Nets sold for $2.35 billion in 2019 compared to the then estimated value by Forbes of $1.8 billion.[ix]
Dolan may never sell and has no desire to sell. But in December 2018, he publicly said he would consider a “bona fide offer” in the ~$5 billion range since he would have a fiduciary duty to shareholders to consider it.[x]
At the end of the day: 1) The value of the NBA should continue to increase in value over time as the global popularity of the league increases, which should result in increasing national and international media rights. 2) The value of the Knicks and Rangers should continue to increase over time. MSGS’ local media rights payments continue to increase at a ~4% annual rate for the next 15 years. 3) There are more potential billionaire buyers than ever before thanks to a rising stock market, particularly within the technology sector. So it would not be surprising to me to see a future bidding war for such scarce assets. For example, two of the three most recent NBA team sales went to tech billionaires.
Important Disclaimers
The provision of this report does not constitute (and should not be construed as) a recommendation, financial promotion, investment advice, encouragement or solicitation to buy, sell, or hold the security of the subject issuer (the “Security”), or any other securities, discussed herein. This report is for informational purposes only. All of the information contained herein is based on publicly available information with respect to the security and the author’s analysis of such information. Past performance is no guarantee, nor is it indicative, of future results.
Certain statements reflect the opinions of the author as of the date written, may be forward-looking and/or based on current expectations, projections, and/or information currently available. The author cannot assure future results and disclaims any obligation to update or alter any statistical data and/or references thereto, as well as any forward-looking statements, whether as a result of new information, future events, or otherwise. Such statements/information may not be accurate over the long-term. The views are those of the author acting in his individual capacity and not as a representative of the firm. The author’s opinions on this Security may change at any time in the future and the author will not, and disclaims any obligation to, update this report to reflect any change in opinion. The author further disclaims any obligation to respond to any comments or questions posted regarding the Security discussed herin.
NO INVESTMENT DECISIONS SHOULD BE BASED IN ANY MANNER ON THE INFORMATION AND OPINIONS SET FORTH IN THIS REPORT. YOU SHOULD VERIFY ALL CLAIMS, DO YOUR OWN DUE DILIGENCE AND/OR SEEK ADVICE FROM YOUR OWN PROFESSIONAL ADVISOR(S) AND CONSIDER THE INVESTMENT OBJECTIVES AND RISKS AND YOUR OWN NEEDS AND GOALS BEFORE INVESTING IN ANY SECURITIES MENTIONED. AN INVESTMENT IN THE SECURITY DOES NOT GUARANTEE A POSITIVE RETURN AS STOCKS ARE SUBJECT TO MARKET RISKS, INCLUDING THE POTENTIAL LOSS OF PRINCIPAL.
The author or his or her respective employer or employer’s clients, affiliates, officers, managers and directors, may or may not hold positions in the Security noted in this article. These parties may trade at any time, without notification to this community, and will not disclose this information to this community. The author and his employer disclaims any liability for investment losses that you may incur under any circumstances.
The author does not hold a position with the issuer of the Security such as employment, directorship, or consultancy.
[iv]https://www.si.com/nba/2014/10/06/nba-tv-deal-questions-answers-adam-silver-espn-turner
[v]https://www.sec.gov/ix?doc=/Archives/edgar/data/1636519/000163651920000025/msgs0630202010k.htm
[vi]The Madison Square Garden Company Presentation (page 27) 9/10/2015
[vii]https://ftw.usatoday.com/2014/08/steve-ballmer-2-billion-clippers
[ix]https://www.forbes.com/pictures/mli45fhhid/7-brooklyn-nets/#68744899671a
Possible catalysts are: Post pandemic, New York City gets back closer to its normal, vibrant self. Knicks and Rangers fans are able to attend games at Madison Square Garden. The Knicks improve a lot and make the playoffs. Some billionaire makes a "bona fide offer" for the Knicks or MSGS, which could result in a bidding war.
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