As the well-chronicled Donald Sterling saga continues to unfold and play out in the media, one thing has remained abundantly clear throughout the last few weeks - countless celebrity and private equity suitors were chomping at the bit to have the opportunity to own an NBA franchise in the valuable Los Angeles market. Since reports surfaced that Shelly Sterling had begun the process of soliciting bids for the LA Clippers, the potential valuation of the team continued to skyrocket. With pundits initially calling for a sale in the range of $1.0-1.3 billion, former Microsoft CEO Steve Ballmer has apparently won the bidding war with a $2 billion price tag for the team. This lofty valuation should be reason for shareholders of the Madison Square Garden Company (SYMBOL: MSG) to celebrate.
MSG, which was spun off of Cablevision and went public in January 2010, provides a rare opportunity for retail investors and sports fans alike to own a piece of the NY Knicks and NY Rangers. In addition to the franchises, MSG is made up of the successful regional sports network, countless concerts, shows and live entertainment events at its arenas (which includes not only Madison Square Garden and the accompanying theatre but also Radio City Music Hall, the Beacon Theatre and the revamped Forum in Los Angeles) and $226 million in cash that is coming its way thanks to a sale of Fuse Network last month to Jennifer Lopez's SiTV. At MSG's recent closing price of ~$55 a share, MSG has a market cap of $4.2 billion. Thus, a sum-of-the-parts valuation in light of the forthcoming Clippers sale makes the stock look amazingly cheap.
While sports franchises are incredibly difficult to value, both financial and sports columnists alike routinely rely on Forbes yearly franchise valuation report as the most comprehensive and accurate measurement of franchise value. In the case of MSG, a publicly-traded entity, traders often use the Forbes list as a means to gauge the fair market value of MSG as a whole.
In its most recent valuation of NBA franchises, which came out in January of this year, the NY Knicks took top honors with a valuation of $1.4 billion (a 27% increase from 2013), while the LA Clippers ranked #13 with a valuation of $575 million (a 34% increase from 2013). With the Clippers now expected to be sold for $2B, are we to believe that the Clippers will leapfrog from the thirteenth most valuable NBA franchise to the first? Or, rather, is it more likely that in light of the Clippers sale, Forbes (and the public at large) will realize that the value attributed to marquee NBA franchises has dramatically risen and Forbes' 2015 publication will see the Knicks tagged with a valuation in excess of $2 billion?
In addition to the Knicks, this past November, Forbes ranked the Rangers as the second most valuable NHL team (behind the Toronto Maple Leafs) at an estimated value of $850 million. With soaring ticket prices, NHL TV ratings at an all-time high, and an unlikely run to the Stanley Cup Finals for the first time since 1994, the Rangers are surely to see their valuation rise as well.
In light of the upcoming Clippers sale, stock market analysts surely must be revising their MSG valuation and the stock flying higher as a result, right? Not so. In fact, after disappointing earnings earlier this month stemming mainly from increased arena expenses, a delay in a Rockettes production and a sub-par Knicks season, short-term investors successfully drove MSG stock to its lowest level in a year.
These short-term investors and Wall Street analysts however fail to understand that MSG is not meant to be measured on a quarter-by-quarter basis. Good or bad seasons with varying amounts of revenue generating playoff games and merchandise sales will come and go. This upcoming Clippers sale however should be a reminder that sports franchises are trophy assets that are valuable vanity buys for the billionaire who has everything. As such, they must be valued on an asset basis, not by their income or P/E ratio. Once Wall Street catches on, MSG's share price will soar. If you don't believe me, just ask Steve Ballmer.
Disclosure: I am long MSG. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.