Madison Square Garden Seems Significantly Undervalued

| About: The Madison (MSG)
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Madison Square Garden (NASDAQ:MSG) is a recent spinoff of Dolan family-controlled Cablevision (NYSE:CVC). I believe that it is significantly undervalued on a sum of the parts basis, and this value will be uncovered over the course of the next few quarters and through more widespread analyst coverage. I'm sorry about the timing of this post as they report Thursday morning for the first time as a public company but, assuming the report is positive, the valuation gap shouldn't close immediately.

The company reports in 3 operating segments:

MSG Media - regional sports networks (MSG, MSG+) that cover 7 New York area sports teams along with college sports events (Pac-10, ACC, Big East). Also, Fuse Networks which provides music programming that leverages insider access to events at MSG.

MSG Sports - owns and operates sports franchises, including the NY Knicks [NBA], the NY Rangers [NHL], the NY Liberty [WNBA], and the Hartford Wolf Pack [AHL]. This business also includes live sporting events such as the yearly Big East tournament, the NIT, the Jimmy V Classic [NCAA BB], track and field, boxing, and tennis.

MSG Entertainment - creates and produces live events, most notably the Radio City Christmas Spectacular. Also, presents concerts, shows (think Sesame Street), awards shows, and theatrical productions. Venues include MSG, Radio City Music Hall, The Theater at MSG, The Beacon Theatre, The Wang Theatre (Boston), and The Chicago Theatre.

Each of these assets is AAA (despite the fact that the Knicks have been making grown men cry for years.) The synergies between the RSNs and the sports teams are significant (i.e. a better Knicks team next year will not only lead to better ticket sales but also better advertising rates for MSG and MSG+). I mention the Knicks specifically because they will have around $30mm dollars to spend on one of the great free agent shopping sprees ever this summer. Even if they don't land Lebron, they can end up with a 2-3 superstar team (think Celtics in 2008). Basketball might actually be fun again. I digress.

RSNs have historically been acquired at very high $/subscriber rates (think $50-$100 per sub). With almost 16 million subs in arguably the best market in the country, you can get 800mm-1.6B in value here. No value ascribed to FUSE.

The Dolan's purchased the Knicks (300mm) and the Rangers (195mm) in 1997. They are carried at historical cost on the balance sheet. Forbes believes the Knicks are worth 586mm and the Rangers 416mm, as of Winter 2009. Frankly, it's unlikely they are up for sale any time soon, but there is some hidden asset value there. Not giving any value to the Liberty or Wolf Pack and ignoring all other events.

I view the entertainment segment as a free option. They are trying to grow this business but it's really all about the Radio City Christmas Spectacular. Let's say it's worth about 2x EBITDA and give it a value of 100mm. Ignore all concerts and any success they have with their ticketing / venue business.

You can add up the low end of my estimates and come up with 800 + (give the franchises a 50% haircut) 500 + 100 = 1.4B in EV.

Valuation: I will keep it relatively simple as I've always felt that the more numbers you need, the less likely it is that you have a real winner.

You can add up the low end of my estimates and come up with 800 + (give the franchises a 50% haircut) 500 + 100 = 1.4B in EV. Or take the high end and get 1.6B + 1B + 100m = 2.7B in EV = $40. I think you have a large margin of safety with some pretty good upside.

They are owed a 190mm cash receivable from Cablevision due by June 1, 2010 and will probably have about 100mm in cash as of 12/31/09. No debt. Market cap of 1.5B. EV = 1.21B

To look another way (sanity check):
There is quite a bit of seasonality in their numbers and Q4 is generally the strongest. I expect them to generate about 100mm in EBITDA for 2009 and for this number to go up to at least 150mm in 2010. Using a maintenance capex number of 50mm, I expect FCF of 130mm, to be conservative, after adding 30mm for their deferred tax liability. (They get some serious tax breaks from NYC) So, I have them at less than 10x a conservative FCF number ex-cash.

I expect the MSG capex program (almost 775MM) to be funded mostly internally over the next few years and for the program to have decent rates of return for shareholders.

Meanwhile, all these assets are a pretty good inflation hedge and should grow in value at rates above CPI over time.


  • More eyes on the company
  • Improvements at the Knicks and the RSNs
  • A standalone business that can focus on growth

Disclosure: Long MSG