“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. $292(New York symbol MSG; Shares outstanding: 23.7 million; Market cap: $6.9 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) spun off its sports teams and their related cable TV operations as a separate company called The Madison Square Garden Company.
Madison Square Garden Co:
Originally spun off from Cablevision Systems Corp. in February 2010
MSG spun off its regional cable TV networks and its other media businesses as a separate company (MSG Networks) in September 2015
Later, in 2015, the new firm set up its media operations as a separate company, MSG Networks Inc. (New York symbol MSGN). Madison Square Garden shareholders then received one MSGN share for every three MSG shares they held.
On a pro-forma basis, Madison Square Garden’s revenue rose 70.6%, from $913.6 million in 2014 to $1.56 billion in 2018 (fiscal years end June 30). Losses improved from $4.69 a share (or a total of $116.9 million) in 2014 to $1.63 a share (or $40.7 million) in 2015.
A writedown expanded the company’s losses to $3.12 a share (or $77.3 million) in 2016, but those losses improved to $3.05 a share (or $72.7 million) in 2017. That gain was mainly due to the January 2017 acquisition of a majority stake (62.5%) in TAO Group for $181 million. That firm operates 25 entertainment dining and nightlife venues in New York City, Las Vegas, and Sydney, Australia.
Partly due to a full year’s worth of TAO’s earnings, Madison Square Garden earned $5.94 a share (or $141.6 million) in 2018.
The company’s balance sheet is very strong. As of June 30, 2018, it held cash of $1.26 billion, or $51.79 a share. It s long-term debt is just $101.3 million.
Madison Square Garden now plans to spin off of its sports franchises from its entertainment group. The deal would be structured as a tax-free distribution for all Madison Square Garden shareholders. They would then own 66.67% of the pure-play sports business. The remaining live entertainment company will hold onto 33.33% interest.
The spinoff should add value, as it lets investors evaluate both businesses more easily. As well, separating the two would let each division better follow its own business strategies.
The Dolan family, through its ownership of Madison Square Garden’s Class B shares, will continue to retain voting control of both companies. The spinoff is expected to be completed by June 2019.
Most sports teams lose money, which diminishes their appeal as investments. However, the company’s hockey and basketball teams operate under league-wide salary caps. That helps keep player salaries manageable. Consumer interest in the sports operations should also benefit from the U.S. Supreme Court’s recent ruling that expanded legal sports betting in the U.S.
The stock has gained 10% since the company announced the spinoff. We feel the share price should move even higher.
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