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Top Picks 2020: Madison Square Garden (MSG)

01/13/2020 5:00 am EST

Focus: REAL ESTATE

Richard Howe

CEO, Stock Spin-off Investing

Madison Square Garden (MSG) is expected to spin off its entertainment business in the first quarter of 2020; this is the spin-off transaction that I’m most anticipating for the new year, notes Richard Howe, editor of specialty advisory service, Stock Spin-Off Investing.

To understand why, you just need to know basic arithmetic. You see, MSG is very easy to value. It owns the New York Knicks franchise (valued at $4.0 billion according to Forbes), the New York Rangers franchise (valued at $1.55 billion according to Forbes), $1.0 billion of cash, and the Madison Square Garden arena (valued at $1.2 billion according to its tax assessment).

Further, MSG owns a bunch of other assets including Madison Square Garden air rights, The Forum in Los Angeles, a piece of the Tao Group, and the Christmas Spectacular show. Add all these pieces up and you get a $1.0BN of additional value.

In total, MSG is worth $8.75BN or $366 per share, a 20% premium to MSG’s current share price. What is even more interesting is that Forbes professional sports franchise values have historically proven incredibly conservative.

For instance, the median NBA franchise over the past 10 years has been sold at a 38% premium to the last Forbes valuation. Similarly, the median NHL franchise over the past 10 years has been sold at a 19% premium to the last Forbes valuation. Therefore, our $366 per share valuation is arguably, very conservative.

Other encouraging things to note:

1) Importantly, professional sports are defensive. For instance, NHL and NBA revenue grew during the Great Financial Crisis. 

2) There is significant upside optionality associated with the Knicks. The Knicks have the worst record of any NBA team over the past 20 years. If the Knicks improve, revenue and the Knicks’ valuation will follow suit. As an example, the significantly improved Toronto Raptors have experienced a 42% increase in revenue over the past two years.

The spin-off of MSG’s entertainment business, scheduled for the first quarter of 2020, will shine light on the value of MSG’s previously obscure sports assets. 

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