East 72 Holdings – Madison Square Garden Sports: A US Sports Team We Hold

The following segment was excerpted from this fund letter.

Madison Square Garden Sports (NYSE:MSGS)

In May 2019, in an investment presentation, we espoused the virtues of what was then called Madison Square Garden Company. In the intervening three plus years, MSG has split into two pieces – the sport teams (MSGS: NY Knicks and NY Rangers) + MSGS, being the arena itself and associated other assets, Tao Group Hospitality, and the controversial “Spheres” project in Las Vegas. In July 2021, MSGE completed the re-acquisition of MSG Networks, the broadcaster, which had previously been spun out.

A potted history of MSG

NY Rangers were founded in 1926 as an initiative of the then owner of MSG, Tex Rickard, who observed the popularity of the ice-hockey team then playing at MSG; by founding his own team (Tex’s Rangers) he intrinsically connected the team with the arena virtually ever since. When the Knicks were formed in 1946, the eleven basketball franchises forming the new Basketball Association of America were required to have common ownership between team and arena, thus cementing MSG’s ownership of its two major sports teams.

Madison Square Garden is in its fourth incarnation, the original having been built in 1879. The genesis of the current building above Penn Station goes back to Irving Mitchell Felt, who in the late 1940’s and early 1950’s took control of Graham-Paige (G-P), previously an automotive manufacturer. G-P was redirected into real estate (and stock) investment and having acquired the Roosevelt Raceway harness track on Long Island, in 1959 acquired 40% of Madison Square Garden for $4 million.

G-P changed its name to Madison Square Garden in 1962 as the ((old)) Madison Square Garden had redeemed a further 36% of its shares – later the subject of a complex tax case – to give G-P over an 80% stake, which it moved to 100% via an issue of preference shares.

Felt was the driving force behind relocating MSG to its present location, constantly attempting to gain tax breaks from the City of New York, but finally overseeing the erection of the present arena which opened on 14 February 1968.

A year later, Gulf + Western (G+W) – a conglomerate run by Charles Bluhdorn, which started when he acquired Michigan Bumper Company in 1956, and which expanded into media through the acquisition of Paramount in 1966 – started acquiring MSG shares. The process of acquiring the company ran a full eight years until an acrimonious meeting on 19 August 1977 when G+W squeezed out the remaining 19% of shareholders at an implied valuation of $48 million (plus $130m of assumed debt).

G+W were in turn acquired by Viacom in 1994; as part of the emphasis on media, Viacom sold MSG (and related assets) to a 50-50 venture of ITT (ITT) and Cablevision (OTC:CVHSY) for $1 billion; in 1997, Cablevision acquired ITT’s stake for $600 million giving it full ownership.

Cablevision was one of the great media success stories of the 1970’s and 1980’s, founded in 1973 by Charles Dolan (still living today at 95yo and who also created Home Box Office) to provide cable television subscriptions to Long Islanders, but expanding over the years supplying subscriptions to 3 million NY area cable customers. Cablevision publicly floated in 1986 and span off two businesses – Madison Square Garden Company in February 2010 and AMC Networks (AMCX) in July 2011. The residual Cablevision business was acquired by Altice (ATUS) in 2015 for $17 billion (including debt).

In September 2015, Madison Square Garden Company spun off the venue (+ associated assets) and the two teams into a new company, with the old company being renamed MSG Networks. The new MSG Company perpetrated another spin in August 2020 with the venue assets once again moving to a new company (MSG Entertainment – MSGE) and the continuing company housing the two sports teams as MSGS.

All of the Dolan entities have split voting structures of single vote “A” common shares entitled to elect 25% of the respective company board and “B” common shares with ten votes entitled to elect 75% of the board of directors. The Dolan family own all of the “B” shares in the respective entities.

Why are we revisiting “MSG”?

In May 2019, the old MSG (now MSGS) traded at $302 a share. The combination of the MSGE “SpinCo” at $44.09 and MSGS at $136.66 adds to $180.75, a decline of 40%. But there is no plausible way the sports team valuations have declined over the past three and a half years, despite COVID, and there are moves afoot to enhance the value of the “arena company”.

The arena company will undergo another spin, this time of the arena itself, and MSG Networks, leaving the $2 billion “MSG Sphere” project at the Venetian in Las Vegas and Tao Hospitality in the erstwhile parent. As MSGE has mulled this restructure over, the Mayor of New York, Eric Adams, has reopened the possibility of relocating Madison Square Garden for a fifth time, given the constraints it enforces Penn Station below it.

So where does this leave the publicly traded MSGS? Whilst underpinned by positive economics, owning stock in the team is held back by a family-controlled structure and past erratic attitudes towards the team((s)). To some extent, the main (only?) investment thesis is a sale of the teams – a factor reflected in the share prices. MSGS has only 24.77m shares issued trading at $136.66. Accounting in sports teams is arcane due to deferred revenues sat on the balance sheet often leading to upfront cash and hefty seasonality. Whilst MSGS net debt at $160 million is low, on our estimates there is around $320m of negative working capital.

The whole collection of assets is valued by the equity market at ~$3.2 billion including debt but before full completion of MSG Sphere. Considering that MSGE also owns the air-rights above Madison Square Garden, this appears to us to be extremely cheap, especially looking out to mid 2023. Despite an initially positive reaction to the spin-out proposal the shares have been very weak of late, in line with rising bond yields, which have impacted other property related exposures around the world.