Matt Franz : Zealous For Knowledge

Madison Square Garden

I recently came across Andrew Walker’s sum-of-the-parts valuation of Madison Square Garden (see more here). It’s very straight forward and points to an intrinsic value well above the current market. Below, I borrow his framework and line of thinking, with a few subtle deviations. Credit goes to him for this one.

Andrew’s thesis is that the bulk of MSG’s intrinsic value is in four assets:

  1. The New York Knicks
  2. The New York Rangers
  3. Madison Square Garden Arena
  4. Net Cash And Investments

Each year Forbes values the world’s most valuable sports franchises. Currently they valued the Knicks at $3.3 billion and the Rangers at $1.25 billion.

The Madison Square Garden arena was assessed at $1.2 billion for tax purposes in 2014. A few years ago the company renovated the arena, bringing its total construction costs to $1.07 billion,. This is a good lower bound estimate of replacement cost.

The most recent financials  show cash and equivalents of $1.16 billion, and debt, pension, and other post-retirement liabilities of $0.15 billion. Let’s call net cash $1.0 billion.

In total, we have $3.30 billion for the Knicks, $1.25 for the Rangers, $1.20 for the arena, and $1.00 in cash. That’s $6.75 billion total. Diluted shares outstanding are 23,567,000 which puts intrinsic value around $286 per share. Today shares trade for $228, which implies 25% upside.

MSG also owns many other assets, though none nearly as valuable as those already discussed. They list these on page 6 of their 2017 Q3 10-Q:

It’s difficult to say exactly what all of these are worth, but it’s safe to say that they’re worth something.

In 2016 the MSG Entertainment segment showed a $21.970 million operating profit (Source: 2016 10-K Page 45). This segment includes TAO Group, Boston Calling, The Forum, and The Chicago Theater, among other assets. Applying a 10x multiple yields an additional $9 per share of value, bringing the intrinsic value estimate to $295. This implies 30% upside.

All recent sports transactions have occurred at a premium to their Forbes value. It’s not unreasonable to think that the Knicks or Rangers would sell at a premium too.

In a November 2016 presentation (slide 29) Liberty Braves broke down recent transactions relative to their Forbes valuation.

The minimum premium was 17%, the average 83% and the median 60%. Excluding the Clippers, the average premium was 50%.

The closest transaction to Forbes value was a 17% premium. Adjusting the Knicks higher by 17% puts its value at $3.86 billion and adds $23 to the intrinsic value of the whole company, bringing it to $318. This is 40% higher than the current market price.

As you can see, even a modest premium to the Forbes valuation can quickly juice an intrinsic value estimate higher. However I’m hesitant to seriously consider anything above a 17% premium since: 1. valuing sports teams is outside of my circle of competence, and 2. I never want an investment thesis to hinge on the greater fool theory.

Regardless, I think it’s clear that MSG is trading at a discount to its asset value, which I estimate to be between $286 and $318 per share. At a 25% discount to the lower bound of intrinsic value, I think there is a sufficient margin of safety present for long-term investors to avoid losing money on MSG.

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