MSGS: The Knicks Are About To Get Marked To Market
Phoenix Suns for Sale, New TV Rights Deal on the Horizon
Madison Square Garden Sports Corp MSGS 0.00%↑ is the holding company for the NBA's New York Knicks and the NHL's New York Rangers. It also represents one of two publicly traded stocks of North American sports franchises, the other being Liberty Braves BATRA 0.00%↑ which owns the Atlanta Braves and real estate assets.
The simple bull case for MSGS goes like this: Forbes’ latest estimated franchise values has the Knicks franchise value pegged at $5.8 billion and the Rangers at $2 billion, both the highest in their respective leagues. Teams typically trade for a premium to the latest Forbes value. You can buy MSGS right now for an enterprise value of ~$4.5 billion, or a 42% discount to the Forbes value, which itself probably undervalues these trophy assets.
Realizing that value, though, is another question.
After all, some version of the above sentence could have been written at any point in the last 7 years, when the stock debuted at about $110/share. The stock only has a 4.3% compound annual total return since inception vs. 11.3% for the S&P 500 over the same period, and is one of the few stocks to never have recovered its pre-pandemic highs in the 2020-2021 bubble.
source: Koyfin
To realize the full value of the assets would require a sale of the team(s), which is at best uncertain and at worst highly unlikely, despite the unpopularity of owner James Dolan and the Knicks chronic underperformance over the past 20 years. Short of a change of control transaction, MSGS shareholders need other catalysts to highlight and/or increase the value of their assets.
There are several on the horizon.
And I think it’s a good bet that shareholders that have owned the stock for the last three years through the pandemic and the current macro environment aren’t likely to sell now.
Catalyst #1: Phoenix Suns for Sale
Suns owner Robert Sarver is selling the team after coming under pressure due to allegations of racism and misogyny within the organization.
Forbes latest franchise value for the Suns is $1.8 billion, but north of $2 billion for the team seems a certainty while some in the industry have even predicted a price tag north of $4 billion.
Here’s a table of some of the most recent NBA team transactions compared to their previous Forbes franchise value.
As mentioned, franchises consistently sell for a premium to the Forbes value, and more attractive markets have tended to fetch a higher premium.
Phoenix is seen as an attractive market for its warm weather and its proximity to Vegas, LA and the rest of the California, where many potential buyers reside. Needless to say, were the Knicks ever to become available, Manhattan is the most attractive market of all.
Rumored suitors for the Suns include Jeff Bezos, Bob Iger, Larry Ellison, and Laurene Powell Jobs.
If the final sale price for the Suns exceeds all expectations, expect all franchise values to get a boost, including MSGS.
Indeed, if you go back and check the performance chart above, you’ll notice that the last time there were a couple of sales at a big premium (2017 Nets and Rockets) coincided with the best 18-month run in the stocks history, gaining 80% from Jan 2017 to June 2018.
Granted, that’s cherry-picking a period, but it’s easy to see how the market could get bulled up on MSGS if the Suns sell for more than double their Forbes value.
Catalyst #2: New TV Rights Deal
The other thing that was going on during that 2017 period? It was the first year of the then new, now current, TV rights deal.
The current deal, which runs from the 2016-2017 NBA season through 2024-2025, with ESPN and TNT is for a reported $2.6 billion per year. Already, the whisper number on the upcoming deal is 9 years, $75 billion or just north of $8 billion annually.
This revenue is shared among teams in the league equally, so with the league potentially expanding from 30 to 32 teams (more on that below) that triples the Knicks cut from about $86.67 million annually to $260 million, to go into effect in FY 2026.
The salary cap is a function of “basketball-related income” or league revenue, which the league and the players split 50/50, so the cap and thus operating expenses will go up in conjunction with the new TV deal, but teams should realize some operating leverage when the new contract kicks in.
For context, in 2021 the NFL signed new TV deals worth $110 billion over 11 years.
source: Axios
There are a few winds at the back of the NBA when it steps up to the negotiating table for their next deal.
First, the streaming tech giants are now in the market for sports rights, and they have bottomless balance sheets. Amazon Prime’s foray into sports rights with an exclusive deal for the NFL’s Thursday Night Football has been a smashing success, with its “biggest three hours for US Prime signups ever” during the first game on the platform in September.
As the exclusive provider of coveted content, it benefits the NBA to have more competitive buyers for that content. Amazon and Apple are expected to be in the mix for streaming rights, alongside the streaming properties of incumbents Disney DIS 0.00%↑ (Disney+, ESPN+ and Hulu) and Warner Bros Discovery WBD 0.00%↑ (HBO Max).
Meanwhile, retaining the rights is existential for linear TV incumbents ESPN and TNT. Just three days ago it was reported that TNT had renewed deals with the entire Inside the NBA Crew, with sources saying Charles Barkley’s deal was for 10 years. This is a strong signal that TNT will be aggressive in retaining NBA rights in the next deal.
Finally, there is another player in the upcoming deal that was not present last time: sports betting companies. While DraftKings and FanDuel aren’t going to carry the same heft as Apple and Amazon, they will be additive for the league’s media rights revenue and help to drive overall engagement. I’ll also mention here that online sports betting was legalized in New York just in January 2022, so this current 2022-2023 season will be the first with a full year’s impact from revenues associated with sports betting in NY, and online sports betting is on the ballot in California this November.
Catalyst #3: Expansion
Maybe the worst kept secret in the NBA is that they are set to expand from 30 to 32 teams, bringing the Supersonics back to Seattle and adding a team in Las Vegas.
Reports were that the NBA was set to officially announce the expansion at pre-season games in the cities’ respective arenas, but with the Suns suddenly coming for sale speculation is that the NBA might be holding off until that sale is complete, to have the sale price inform the expansion fee for the two new teams.
Reports are the fee for each expansion team would be $2.5 billion. The league’s last expansion team, the Charlotte Bobcats (now Hornets) in 2004 paid $300 million.
These fees are pure profit to the existing 30 teams in the league, so at $5 billion total the Knicks would stand to make a windfall of $167 million.
Odds and Ends
While the Knicks should be better than last year, they are still 2-to-1 against to make the playoffs this year and Vegas has their win total at 38.5, squarely in no-man’s land. With the best projected draft class in decades next year, that’s a bit of worst-case scenario to be in for the franchise. However, assuming the market has that all baked in, there is upside to the Knicks either outperforming and making the playoffs, or underperforming and ending up with a high draft pick this season. And in the medium-term, the Knicks have a competitive collection of young talent and are a free agent signing or trade away from being a regular playoff team in the NBA’s Eastern conference. This matters for the stock because playoff games bring in additional gate revenue and concessions.
Management has recently signaled confidence in the future financial prospects of the franchise by declaring a $7 per share special dividend (~4.5%), the first in the stock’s history. The return of capital amounts to about $175 million and is payable on 10/31 to shareholders of record on 10/17. It’s nice to see management’s willingness to return capital to shareholders, providing some avenue for shareholders to realize some return of cash absent a sale of the team or selling their shares.
The top shareholders in MSGS include a couple of PE firms in Silver Lake and KKR that could look to increase their ownership of the teams, putting a direct mark on the asset. PE firms can own up to 20% of NBA franchises. The Bill & Melinda Gates Foundation also recently up their stake from 1.5% to 3%.
source: TIKR.com
One of the insights I had as a young investor which I was proud of at the time was that as things get more expensive, the customers for those things become more price insensitive. Hence, luxury goods. To illustrate - the difference between paying $400k or $500k for a Ferrari is less consequential for the typical person looking to buy a Ferrari than is the difference between paying $4k and $5k for a used car for the typical used car buyer. When you have half a millie to blow on a car, an extra $100k simply doesn’t matter.
Now, apply to sports franchises, the ultimate luxury goods. The ultimate non-replicable, scarce, trophy assets. If Jeff Bezos wants to own the Knicks, it makes no difference to him if he’s paying $9 billion or $10 billion to do so.
Put it all together for MSGS and you can see a path to just shy of $3 billion revenue in 2026. If you hold 2022 EBIT margin constant at 10% and put a 20x multiple on it that’s a $6 billion asset. Discount back to present at 7.5% and the stock is fairly valued today at $4.5 billion EV.
But you don’t own MSGS for the cash flows. I consider it to be more of a scarce, store-of-value trophy asset with a monetary premium that can work well in the short- and medium-term in certain environments, and in the long-term as an uncorrelated asset. Inevitably, the team will eventually be sold and all the latent value of the asset will be unlocked at once. But it could be decades between now and then, and in between I think you need to play short-term catalysts to realize above average returns.
As such, I don’t have a position today, although I do think the set-up over the next couple of years is favorable and I may take one in the future. But between I-bonds yielding almost 10%, short-duration treasuries yielding 4.5% and bitcoin sitting at what I believe to be cycle lows, I think there’s more attractive places to stick my “cash” for the time being.
However, if one were to be looking for an inflation-beating store-of-value and gold or bitcoin is not your thing, I think you could do worse than MSGS with all the catalysts and narrative potential over the next 12-24 months.
Disclaimer: nothing published in this newsletter is investment or financial advice. The author may be long or short any of the securities or assets discussed at any time before or after publishing.