Madison Square Garden Sports: Evaluating A Potential Selling Opportunity

Company Overview and Corporate Governance

Madison Square Garden Sports Corporation (NYSE:MSGS) is the operating company holding both the New York Knicks of the National Basketball Association (NBA) and the New York Rangers of the National Hockey League (NHL). The company’s financial performance hinges upon its strong brand value, sponsorship deals, media rights, and licensing agreements with MSG Entertainment to play home games at Madison Square Garden. The company derives revenue from merchandising opportunities and ticket sales, but the main driver of these teams’ sales is through media and networks.

The company is largely owned by the Dolan Family Group, and the sports franchises are headed by James Dolan. The ownership structure of the company is split into two tranches of common shares, with Class A common stock entitled to one vote per share and collectively elects 25% of the Board of Directors, while Class B common stock is entitled to ten votes per share and has the right to elect the remaining 75% of the Board of Directors. Overall, the Dolan family owns all of the Class B stock, 3.2% of Class A stock, and holds 70.7% of the total voting power of the company. Additionally, the Dolan family holds 8 of the 17 seats on the Board of Directors for MSGS. This corporate governance is significant because shareholder returns for sports franchises are driven by selling the team. When looking to purchase MSGS stock, it is vital to consider this, as the company’s upside potential is largely dictated by the Dolan family. However, there has been a recent wave of sports franchises being sold, and the family could be enticed by the large premium associated with these transactions.

Recent Team Sales

In 2021, private equity firms invested nearly $2 billion in stakes of sports franchises. Teams have seen a surging interest in sports ownership, and many incumbent owners were inclined to sell their teams due to public outcry or to realize returns. Over the past five years, 4 NBA, 2 NFL, 3 NHL, and 5 Champions League soccer franchises have been sold. Additionally, 2022 has been an unprecedented year for pro team returns, as Chelsea FC of the English Premier League sold for $3.2 billion, the Phoenix Suns sold for $4 billion, and the Denver Broncos were bought by Rob Walton for $4.65 billion, setting price records. This has prompted many franchise owners to explore potential sale opportunities, including the Premier League’s Liverpool FC, the NFL’s Washington Commanders, and the MLB’s Washington Nationals and Los Angeles Angels. However, one team situation is very similar to that of MSGS, and that is Manchester United (MANU).

Manchester United is owned by the Glazers, an American family that also owns the Tampa Bay Buccaneers. Their ownership of the Premier League club has been met with strong protest from the beginning, as the tenure has been met with fan protests, high debt, and poor team performance. Malcolm Glazer took ownership of the club in 2005 when he performed a $955 million leveraged buyout of the franchise, most of which was financed using debt. This resulted in a high level of indebtedness for Man United, as well as uproar from fans. This was compounded by a lack of performance from the team, which has not won a trophy since 2017. This is surprising because Manchester United is the most valuable club in the UK and has the 3rd highest value in the world according to Forbes. Recently, the Glazers have explored selling the club due to the combination of fan scrutiny and chasing returns. Seeing that a Premier League peer sold for a premium of over 70%, the Glazers are more motivated than ever to complete the sale and realize their returns.

MSGS is in a similar position, as fans of both the Knicks and the Rangers have been in conflict with the Dolan family for some time. In the early 2000s, both the Knicks and the Rangers had less than satisfactory performance. The Knicks made the playoffs twice in the first decade of the 2000s and went nine years without a winning record, while the Rangers missed the playoffs for the first four years of the decade. Additionally, fans and even former NBA Commissioner David Stern criticized James Dolan’s management of the Knicks. This has included questionable contracts and personnel decisions, as well as the treatment of fans and even Knicks legend Charles Oakley. James Dolan has repeatedly gotten into arguments with the audience at games, with nearly all resulting in his opposition being removed from the arena. This has drawn the ire of the fan base as a whole, and they have been pushing him to sell the team. However, MSG representatives have said there are no plans to sell either team. While this is not the optimal scenario for the fan base, this could be worse for the Dolan family as well, considering the high price tags associated with top-tier sports franchises. NBA franchises in larger markets have sold for high premiums, including the Phoenix Suns at 48% over market value, the Brooklyn Nets in 2019 at 40.4%, and even the Houston Rockets in 2017 sold for an over 30% premium. The current MSGS owners could see high returns if exploring sales opportunities, and considering the market opportunity in New York, there will likely be no shortage of potential buyer interest.

Valuation

Taking an optimistic approach that involves the Dolan’s selling the two franchises, it would be important to find the combined value of the teams to find total enterprise value. This was done by computing the intrinsic value of the Knicks and Rangers separately, then taking the sum of the two for the total value of the firm.

The Knicks account for the majority of the overall company value, as the team has higher cash flows and is in a much larger market. The NBA’s total revenue is 2.75x higher than that of the NHL, which explains the difference in value between the two franchises, despite the Rangers having more success in their league, reaching the Eastern Conference Finals this past season.

Overall, the combined value of the two franchises is equal to $7.73 billion using an exit multiple, and $5.96 billion with the perpetuity growth method. In practice, exit multiples are generally used to value these companies, and buyers tend to spend significantly more per dollar of EBITDA for sports franchises than they would in other industries. If the Dolan’s explored sale opportunities, the franchises could be sold for a 47% premium over the current enterprise value of MSGS. Considering precedent transactions and the extremely large market that the Knicks and the Rangers benefit from, this price point would be likely.

Conclusion

Madison Square Garden Sports is an unconventional firm with an interesting ownership structure while being in an industry with very few public competitors. The most optimistic upside opportunity lies in the company being sold, as many franchises have realized a high premium in recent years. The Dolan family would benefit from selling the two teams as they would evade public scrutiny as well as capture high returns, realizing a 47% premium over the firm’s current enterprise value. However, the family has said that they are not exploring these selling opportunities, which puts MSGS investors in a bind, as they would have to rely solely on the financial performance of the two franchises. It is encouraging for MSGS shareholders to consider the parallels between Manchester United and the New York franchises, as a way to hold hope that the company may be sold.