Madison Square Garden: Spin-Off Prospects Remain Attractive

03/05/2020 5:00 am EST

Focus: STRATEGIES

Richard Howe

CEO, Stock Spin-off Investing

Among spin-offs, the transaction that I’m most anticipating is Madison Square Garden (MSG) and the spin-off of its entertainment business, explains Richard Howe, editor of Stock Spin-Off Investing.

The entertainment business will own Madison Square Garden (the arena) and focus on live entertainment. It will have a very strong balance sheet (~$1.0bn of net cash).

The remaining business will be focused on sports. Its assets will include the New York Knicks franchise, the New York Rangers, and some other less valuable assets. I believe fair value for MSG is ~$414 and the stock trades at $263, a 36% discount.

The primary reason for the discount is because James Dolan (the CEO) has a poor reputation with investors. Nonetheless, the spin-off could go a long way towards shrinking the discount to fair value.

Further, MSG fair value should likely grow over time given the scarcity value of the professional sports franchises and growing revenue.

This week, MSG sold off sharply. The logic being that people are not going to want to gather in crowds to watch the Knicks and Rangers due to coronavirus fears.

While I think this certainly could be an issue in the near term, I don’t think it negatively impacts the long term value of MSG’s assets. While MSG has not indicated it will delay the spin-off, it could be a possibility.

If Knicks and Rangers attendance is going to fall sharply, MSG Sports would benefit from having a large cash balance (currently $1.1BN). If the spin-off were to be delayed, I think the stock would trade down but believe it would be a buying opportunity as ultimately, the spin-off will happen.

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