“We can say without reservation that, in investing, spinoffs are the closest thing you can find to a sure thing. It all comes down to the incentives when companies spin off a subsidiary or division and hand out shares to their shareholders. Study after study has shown that after an initial adjustment period of a few months, spinoffs tend to outperform groups of comparable stocks for several years….” Pat McKeough shows how spinoffs and other “special situations” can create windfalls for informed investors.
MADISON SQUARE GARDEN CO. $268(New York symbol MSG; Shares outstanding: 23.8 million; Market cap: $6.4 billion; No dividend paid; Takeover Target Rating: Lowest; www.msg.com) is a sports and entertainment company that owns the New York Rangers hockey team, the NBA’s New York Knicks and several other sports franchises. It also owns or operates several entertainment venues, including Madison Square Garden and Radio City Music Hall.
In 2010, Cablevision Systems Corp. (New York symbol CVC) set up its sports teams and their related cable TV operations as a separate firm called The Madison Square Garden Company.
Later, in 2015, the new firm spun off its media operations as MSG Networks Inc. (New York symbol MSGN). Madison Square Garden shareholders then received one MSGN share for every three MSG shares they held.
Madison Square Garden’s revenue rose 52.2%, from $1.07 billion in 2015 to $1.63 billion in 2019 (fiscal years end June 30). Those gains are partly due to acquisitions, including the January 2017 purchase of 62.5% of TAO Group for $181 million. TAO operates 25 entertainment dining and nightlife venues in New York, Las Vegas, and Sydney, Australia.
Due to a writedown, the company’s losses worsened from $1.63 a share (or $40.7 million) in 2015 to $3.12 a share (or $77.3 million) in 2016. The purchase of TAO helped cut overall losses to $3.05 a share (or $72.7 million) in 2017.
In 2018, Madison Square Garden’s earnings jumped to $5.94 a share (or $141.6 million). The gain was due to a $116.9 million tax benefit from new U.S. tax rules. Overall earnings then fell to $0.48 a share (or $11.5 million) in 2019.
The company’s balance sheet is very strong. As of June 30, 2019, it held cash and investments of $1.19 billion, or $50.29 a share. Its total debt is just $54.6 million.
In June 2018, Madison Square Garden announced that it would separate its sports franchises from its entertainment group. The deal is to be structured as a tax-free distribution to all Madison Square Garden shareholders. They should receive 66.67% of the pure-play sports business. The former parent company—which will continue to hold the remaining live entertainment business—will hang onto the remaining 33.33%.
The spinoff should add value, as it lets investors evaluate both businesses more easily. As well, separating the two divisions lets each focus on its own business strategies.
The Dolan family, through its ownership of Madison Square Garden’s Class B shares (about 70% voting power), will retain control of both companies.
Madison Square Garden originally expected to complete the spinoff in June 2019. However, it has now put off the transaction until early 2020.
The delay may be related to rising development costs for its MGM Sphere concert hall in Las Vegas; Madison Square Garden now expects the project to cost $1.7 billion, up from its initial estimate of $1.2 billion. The extra costs could hurt the appeal of the new entertainment company. However, its long-term outlook is still strong.
We think the outlook for the Madison Square Garden’s sports spinoff is also positive. While most sports teams lose money, which diminishes their appeal as investments, the company’s hockey and basketball teams operate under league-wide salary caps. That helps to keep player salaries manageable. The expansion of legal sports betting in the U.S. should also enhance the spinoff’s value.
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