Madison Square Garden explores splitting into two companies
Madison Square Garden Co. is exploring splitting into two publicly traded companies to unlock value in the New York Knicks and New York Rangers sports franchises and buoy its entertainment business.
MSG, controlled by the Dolan family, has been considering since July a plan to house its sports teams and cable networks in one company and move its real estate assets and its concert and entertainment business into another, according to a statement Monday.
Nelson Peltz, the co-founder of Trian Fund Management LP, and Scott Sperling, co-president of private-equity firm Thomas H. Lee Partners LP, will join the board, replacing Alan Schwartz and Vincent Tese, who were nominated by the board. Trian doesn’t own a stake in MSG, according to a person familiar with the situation who asked not to be identified discussing private information. The Dolan family owns about 69 percent of the company’s voting shares.
The $2 billion purchase of the Los Angeles Clippers by former Microsoft Corp. chief executive Steve Ballmer -- who paid almost four times the previous record amount for an NBA team -- was one of the catalysts for exploring the split, people familiar with the situation said before the company’s statement. Mario Gabelli, whose family of funds own more than 7 percent of MSG’s outstanding shares, said on Twitter in May that a buyer of MSG would get the Knicks for free, given the Clippers valuation.
MSG also announced its first ever buyback, of as much as $500 million in Class A shares. CEO Tad Smith, who took over MSG in February, said in May that he was aware that some investors wanted the company to increase its dividend or buy back shares.
John A. Thaler’s JAT Capital Management LP, which disclosed a stake in MSG in August -- and has pushed its holding to more than 9 percent of shares outstanding -- said then it may seek talks with the board or management to recommend ways to boost value. JAT later pressed the board to evaluate ways to improve shareholder value, in part leading to MSG’s decision, according to a person with knowledge of the situation.
“We are very pleased that MSG’s board of directors and management have committed to pursue a plan to enhance value for all MSG shareholders,” the fund said in an emailed statement. “We look forward to the full and timely implementation of these plans.”
A representative for Peltz declined to comment.
Three divisions
MSG is currently run as three divisions. MSG Sports owns and operates the National Basketball Association’s Knicks, the National Hockey League’s Rangers, the Women’s National Basketball Association’s New York Liberty and the American Hockey League’s Hartford Wolf Pack.
Under the plan being considered, that would be combined with MSG Media, which consists of the company’s regional sports networks that appear in most expanded basic pay-TV packages throughout the New York area.
A separate company would include MSG Entertainment, which produces and hosts concerts and shows at MSG’s real estate venues, comprising Madison Square Garden Arena, Radio City Music Hall, the Beacon Theatre, the Chicago Theatre and the Forum in Inglewood, California.
LionTree Advisors LLC is serving as MSG’s financial adviser for the spinoff.
NBA values
MSG rose as much as 14 percent to $75 a share after the close of regular trading. The stock gained 14 percent this year through Monday, before the announcement, giving it a market value of about $5 billion, while the S&P 500 Media Industry Group has added just under 4 percent.
The Knicks may be “intrinsically worth” as much as 50 percent more than the Clippers, bringing the value of MSG’s assets to about $6 billion, Albert Fried & Co. estimated in May.
Before the Clippers purchase, the most paid for an NBA team was $550 million for the Milwaukee Bucks. That franchise was sold this year to Avenue Capital’s Marc Lasry and Fortress Investment Group co-founder Wes Edens.
NBA teams are seeing their value rise as TV deals boost revenue. Under an agreement reached earlier this month, starting in 2016 Walt Disney Co. and Time Warner Inc. will pay the NBA almost three times as much to air games as under the last contract.
The media and sports company may also become an eventual target for larger companies, which have been looking to consolidate as pay-TV distributors add scale. Comcast Corp.’s deal for Time Warner Cable Inc. and AT&T Inc.’s acquisition of DirecTV are the two largest U.S.-based mergers and acquisitions this year, totaling more than $130 billion including debt.
Real estate
A newly created real estate and entertainment company could qualify as a real estate investment trust, according to one of the people familiar with the matter. The real estate itself could be a target, said John Tinker, a New York-based analyst at Maxim Group LLC.
“You don’t need for instance the team to own the stadium, so if private-equity comes in there you could easily do a sale-leaseback,” he said in a phone interview last week. “You can argue it’s part of a package, but a lot of teams don’t own their own stadiums so you don’t have to be together and as a financing tool, it could be quite a big number.”
A coalition of New York civic leaders last week released a report arguing that MSG’s namesake arena should be moved three blocks to allow for the expansion of Pennsylvania Station. MSG has nine more years on its current lease after last year completing a three-year, $1 billion renovation of the building.
Breakup mania
Company boards are increasingly turning to spinoffs as a way to boost returns for investors -- betting that the separate pieces will fetch a higher valuation in the stock market. In some cases that decision has come after pressure from activist shareholders such as JAT.
A record 76 spinoffs -- by companies from eBay Inc. to International Paper Co. -- have been announced in the United States this year, data compiled by Bloomberg show.
Cablevision Systems Corp. spun off MSG in February 2010, 16 years after it and ITT Corp. acquired it from Viacom Corp. for $1.08 billion. James Dolan, the CEO of Cablevision and son of the company’s founder, Charles Dolan, is MSG’s chairman. Cablevision also owns Newsday.
JAT Capital, based in Greenwich, Connecticut, uses a long-short strategy that seeks to profit by betting on rising and falling stocks and is focused on technology, media, telecommunications, travel and leisure companies. Its biggest investments at the end of June included CBS Corp., Time Warner Cable, Yahoo! Inc. and Twitter Inc. Each of those investments exceeded $300 million in market value.
Trian, founded by Peltz with partners Peter May and Ed Garden in 2005, manages about $10 billion. Self-described “constructivists,” Trian buys stakes in public companies they regard as underperformers and seek to work with management and boards to boost shareholder returns by improving operations, capital allocation and strategic direction.
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