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February 15, 2023

Knicks, Rangers LP Sale Should Reduce, Won't Eliminate Valuation Gap

Madison Square Garden president and COO David Hopkinson recently

made headlines

when he said the company “would certainly not rule out the possibility of selling a minority stake in the Knicks or the Rangers.” 

Curry Baker (director, media and entertainment equity research, Guggenheim Partners) saw the public declaration as a signal to shareholders and the broader investment community that Madison Square Garden Sports (MSGS) is “flexible and willing to seriously explore any path to value creation and closing the relatively sizable discount between where the public equity trades and the teams’ fair market values.”

The private sale of an LP interest in the teams would presumably benefit shareholders, particularly if it occured at an attractive valuation relative to where the business trades publicly.

But do not expect it to fully close the gap between fair market value and the value the street ascribes to the greater enterprise, or at least the publicly traded portion of it.

MSGS shares are discounted because few investors believe executive chairman and CEO James Dolan will ever cease control or ownership of the teams, and that has not changed. Hopkinson made it clear the clubs are not for sale.

MSGS shares are up ~5% since the February 7 earnings call.

To be clear, Hopkinson’s statement does not mean an LP sale is imminent.

The company said it is not currently engaged in negotiations and is not actively shopping a piece of the teams.

Hopkinson’s comment came in response to an analyst’s question about the teams' values and the prospect of selling an LP interest as a mark. “It was more in the sense of, if the right situation came up at some point in the future, they would entertain it,” Baker said.

But that is still a change in stance for the company. “They had not publicly said that before,” Baker noted.

At least not directly to analysts and investors. Executive chairman and CEO Jim Dolan stated as much in an

October ’22 interview

with Barron’s.

Sportico

pegs the Knicks’ total valuation at

$6.58 billion

and the Rangers’ at

$2.01 billion

. “That puts the fair market value on the public equity around $350 a share,” Baker said.

And yet, MSGS currently trades at under $188 a share. The implied discount suggests the market has assigned the Knicks a valuation of less than $4 billion and the Rangers a valuation of roughly $1 billion.

MSGS is not going to get command a valuation north of $8 billion on the sale of an LP interest.

“You would expect a discount on a minority stake versus a control sale,” Baker said. “It’s [also] very rare you get the full valuation on a sum of the parts story like this in the public markets.”

The investment community isn’t particularly fond of Dolan as an owner and operator, either; and few expect he will ever sell the franchises (necessary for shareholders to maximize value).

However, MSGS should be able to get a valuation north of $5 billion.

Arctos Sports Partners bought an LP stake in the

Golden State Warriors

last April at a $5.5 billion valuation, and two months later, Mark Walter and Todd Boehly bought Philip Anschutz’s stake in the Los Angeles Lakers at a $5 billion valuation.

Selling a minority interest at a $5 billion plus valuation would serve two purposes. “In theory, it would firmly establish that the equity is discounted,” Baker said.

While most market observers assume that to be the case, a transaction would establish a definitive valuation point and announcement of the deal should drive the share price higher.

MSGS could also use a portion of the proceeds from a sale to take advantage of the discount currently reflected in the public equity markets. “If you have $500 million of cash and you’re able to buy back the equity at ~$230 or $250 a share [following the announcement], when you know the fair value either today or going forward is $350 or higher, that’s a good financial engineering mechanism for them,” Baker said.

Some reporters have tried to connect the dots between the

Phoenix Suns’ recent record sale

and MSGS’ change in stance. But Baker believes the timing has more to do with the NBA and NHL relaxing rules related to minority ownership, and the appetite known to exist for team stakes amongst sovereign wealth funds and PE investors. 

Similarly, it’s been suggested that an LP sale would provide a substantial cash infusion at a time when the company is going through a financial restructuring and Madison Square Garden Entertainment (MSGE) is over budget on its highly anticipated MSG Sphere project.

But MSGS’ willingness to explore an LP sale is unrelated to the day-to-day P&L of the business. “It would purely be to more fully realize the intrinsic value of the assets in the stock price,” Baker said.

And cost overruns on the Las Vegas Sphere are immaterial to the teams. “The sphere is an entirely separate company,” Baker reminded.

The MSG Sphere is part of MSGE along with Madison Square Garden, MSG Networks, Tao Group and several other entertainment assets (think: Radio City Music Hall, Beacon Theatre). The Knicks and Rangers reside under the MSGS umbrella.

While there are a lot of interrelated contractual agreements between the two entities, there is no comingling of the capital structure (think: cash, debt).

MSGE has taken several steps to ensure the Sphere gets fully funded and opens later this year. The company raised $275 million back in December and has made it known it will explore a sale of TAO Group.

“They are also spinning out The Garden and the entertainment assets from the Sphere, the Networks and TAO. The RemainCo will retain roughly one-third of The Garden and the entertainment businesses, which [it] could use to [further] raise liquidity and sell in the open market,” Baker said.

The restructuring is supposed to occur before the end of the first quarter.

Silver Lake is widely considered the most likely acquirer should MSGS decide to sell a piece of its franchises. The private equity firm is currently the company’s second largest shareholder.

However, it is not the only game in town. “The sports specific funds, really any private equity that has expressed interest in or invested in sports assets [could be potential buyers],” Baker said. “There are also a few sovereign wealth funds that have been interested in assets like this.”