Madison Square Garden: A Government Sanctioned Monopoly

| About: The Madison (MSG)

Summary

MSG's crown jewel assets are two pro sports teams, the Knicks and the NY Rangers.

Due to their monopoly nature pro sports franchises compound in value at above market rates.

Based on our sum of parts analysis MSG and MSGN look to be trading at attractive levels.

Madison Square Garden (NASDAQ:MSG) and Madison Square Garden Networks (NYSE:MSGN) stocks are among the few options a non-billionaire has to invest in the major league US professional sports market. Madison Square Garden's crown jewel assets are its ownership of the NBA's New York Knicks and NHL's NY York Rangers.

Professional sports teams in the US are among some of the most attractive businesses in the world due to their unique structure. The four major professional leagues (NFL, MLB, NBA, and NHL) operate as government sanctioned monopolies (as long as the players remain unionized the government allows the leagues to operate as monopolies). It is impossible for new entrants to enter the business unless the league consents and the existing owners are fiercely protective of their markets. As such, teams, especially those in major media markets, grow in value at rates well above the economy and stock market. For example, the value of the Knicks has grown from around $250M in 1997 to about $3B today for an average annual return of almost 14%. Major media market teams in the NFL grew at even higher rates and teams in the least popular league, the NHL, grew at lower rates (just under 12% CAGR from 1997 to now for the New York Rangers).

Before we go further we should note that in October of 2015 Madison Square Garden spun off their media operations into a separate company. MSG owns the actual teams themselves and MSGN owns the all important media rights to the teams. We believe, contrary to management, it is very difficult to analyze those assets separately hence we suggest simply buying shares of MSG and MSGN in proportional amounts to recreate the old pre-split MSG stock. For reference, for every one share of MSG you need to buy three shares of MSGN to recreate the old MSG stock. From here on out when we refer to "MSG" or "Madison Square Garden" we will be referring to the entire pre split company (1 share of MSG for every three shares of MSGN).

Based on our sum of parts analysis below Madison Square Garden looks to be priced attractively

Sum of Parts Valuation

It's important to note that the values for the Knicks and Rangers presented below reflect the estimate of the value of the team less the value of the stadium. The estimate of the value of the stadium (the Garden) is included in a later section of the valuation. We will walk through the valuation in the section below.

(in $M)

Conservative

Base Case

Aggressive

New York Knicks*

$2093

$2093

$2193

New York Rangers*

$842

$842

$842

NY Liberty (WNBA)

$0

$10

$15

Various other teams

$0

$0

$0

the Garden

$1265

$1265

$1265

Development rights

$600

$800

$1200

LA Forum

$75

$100

$100

Chicago Theater

$5

$15

$25

LT lease on Radio City Music Hall

$200

$200

$200

LT lease on Beacon Theatre

$75

$75

$75

Co-booking arrangement at Wang Theatre

$0

$0

$0

Residual value of MSGN

$350

$350

$385

Cash

$1680

$1680

$1680

Other investments

$134

$268

$268

Long term debt

-$1467

-$1467

-$1467

Total estimated equity value

$5877

$6231

$6781

Current equity value

$5061

Discount

16.12%

23.12%

33.99%

Click to enlarge

*Less value of stadium

Sports Teams

The value for both the Knicks and the Rangers are taken from Forbes annual valuation estimates. We subtracted out the value of the stadium because we will be dealing with the real estate assets separately. Also, the Knicks are terrible and have been terrible for several years so it is possible that a better Knicks team could increase the value of the franchise. However, the main drivers of a franchise's value are usually the size of the team's media market, stadium, and the league's licensing deals. Still we tacked on an extra $100M in our aggressive case to add a little extra value for a better Knicks team.

While the Forbes valuations might not be perfect they are pretty much the gold standard for valuing sports teams and Forbes has been compiling franchise valuation lists for years. If anything, Forbes has a history of undervaluing teams. Given the NBA's latest TV deal is very recent (2014) and the recent sale of the Clippers provides a good comparable data point we believe the Forbes values for 2015 should be accurate.

MSG also owns the NY York Liberty and various minor league teams. We valued the New York Liberty at $10M based on some very old (circa 2006) comments from former NBA Commissioner David Stern. It was also recently reported that 6 WNBA franchises are actually profitable (although not which ones) so things have improved since Stern's comment and valuations might be higher. A few million here or there is not going to materially affect the valuation so we figured a value of zero dollars for our conservative case, $10M for our base case, and $15M for our aggressive case. We valued the minor league and D-league teams MSG owns at zero across the board.

Real Estate Assets

In addition to two marquee major league sports franchises MSG also owns some valuable real estate. The chief asset is the recently renovated Madison Square Garden (the Garden). Forbes lists the value of the stadium to the Knicks and Rangers as $1.265B so we used that as our base case. The company also recently sank almost $1B into renovating the stadium so it's safe to assume its value is quite close to Forbes figure.

In addition to the stadium itself MSG also owns the development rights to land around the stadium as well as the air rights for the property. Valuing these rights is a bit tricky due to various zoning restrictions. The Garden sits atop Penn Station and some of the rights are non transferable and non usable unless Penn Station is renovated. The company does not provide a lot of disclosure about what exactly it owns but it is believed to own approximately 1M square feet of development/air rights above the Garden and an additional 2-2.5M of development/air rights that would be unlocked if Penn Station were renovated. Other estimates have put the total rights at over 5M square feet. There would be a ready buyer for these assets. The Garden also sits smack in the middle of a bunch of property owned by Vornado Realty Trust (NYSE:VNO) which has been pushing for years to get rid of the Garden so it can redevelop the area. With the Garden being recently renovated we doubt anything is going to happen for awhile however the rights still exist and do have value even if that value may only be realized far in the future. We've seen estimates for the rights range from $800M up to well over $1B.

MSG also owns the LA Forum which we valued at $100M (a combination of its renovation cost and original construction cost). We valued the Chicago Theater between $5 and $25 million based on previous renovation costs. They also hold long term leases on Radio City Music Hall and the Beacon Theatre. We valued those leases at cost with a 10% discount rate. You would assume that MSG entered into the leases with the expectation they could make a profit and their continued renewal of the leases would suggest that they are indeed profitable so one would assume there could be additional value there as well that we haven't included. Finally, MSG has a co-booking arrangement for the Wang Theatre. We have no idea what this is worth and frankly it's not material to our valuation so we said it was worth zero.

Other Assets

MSG also has $268M of investments in various media and entertainment companies on its books. For our base and aggressive case we valued them at book value. For our conservative case we wrote them down by half. We also have the issue of whether or not MSGN would have any value beyond the Knicks and the Rangers. MSG Networks has the exclusive television rights to the NY Islanders, NJ Devils, Buffalo Sabres (the deal is up in a year and the Sabres are reportedly mulling starting their own regional network), NY Red Bulls and exclusive non-game coverage of the NY Giants. So, there is some residual value not covered in the value of the Knicks and Rangers. The current TV deals with the Islanders and Devils cost MSG $27M and $24M pear year respectively with 15 and 10 years left on the contracts. We valued the deals at cost using a 10% discount rate for our base and conservative case and then threw on an extra 10% profit for our aggressive case.

Summary

According to our sum of parts analysis MSG is trading at a 16% to 34% discount to intrinsic value. We believe we used relatively conservative assumptions, including valuing many assets at just replacement cost, in even our aggressive case analysis. We also believe that MSG despite trading at a smaller discount than many other cheap stocks out there is still a much more attractive investment. After all when was the last time a pro sports team went out of business or was sold at to a new owner at a loss? Investors aren't just buying any company, they are buying two government sanctioned monopolies. We are seriously considering buying MSG for our more aggressive stock portfolio and suggest investors looking for ideas give MSG a closer look.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in MSG, MSGN over the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.