MSG Entertainment Stock Looks Set to Rise

Assuming underwriters exercise the overallotment option, Sphere will sell more than 8 million shares, the last portion of the 17 million shares it held in April, when Sphere spun off MSGE to its holders, and retained a one third stake in MSGE.

MSGE shares were down 2% to $32.09 Monday and trade appreciably below $40, where they stood in late June, just before Sphere began to sell down its stake.

MSGE appears reasonably priced relative to its operating earnings and free cash flow, and it has a fairly predictable business. Its main asset, Madison Square Garden, is the home arena of the New York Knicks and New York Rangers, two of the most valuable—if not winningest—franchises in the NBA and NHL.

MSGE is a pure-play live-entertainment company. The Garden, which has a seating capacity of 21,000, is the highest grossing venue of its size in the world. The Knicks and Rangers signed a 35-year deal in the company’s fiscal 2021 to play their home games at the Garden with an annual escalator in the license fee of 3%.

“There is substantial free-cash-flow generation from the long-term lease with the teams, and other franchises like the Christmas Spectacular, which is well attended year in and year out,” says Chris Marangi, a portfolio manager at Gamco Investors, which holds the stock. 

MSGE has a long-term lease at Radio City in Manhattan whose signature annual event is its Christmas Spectacular featuring the Rockettes.

Marangi puts a private-market value of $44 per MSGE share.

There aren’t many sizable live-entertainment plays in the stock market, which are led by the richly valued

Live Nation Entertainment

(LYV).

Lightshed Partners analyst Brandon Ross sees MSGE generating $100 million of free cash flow in its fiscal year ending June 2024, a roughly 6% free-cash-flow yield based on MSGE’s current market capitalization of $1.6 billion. There also is about $600 million of net debt.

“MSG Entertainment stock is constructed to be the perfect boring compounder, leveraged to the steady growth of the live entertainment industry in the largest market in the country,” he wrote in a note in August.

“MSGE trades at just 12 times fiscal 2024 (June) estimated Ebitda despite expected compounding [double-digit-percentage] Ebitda growth and the optionality surrounding Penn Station,” he wrote, referring to earnings before interest, taxes, depreciation, and amortization. 

The optionality comment refers to ongoing news and speculation about the redevelopment of Penn Station in Manhattan, atop which sits Madison Square Garden. There were news reports in the spring that MSGE was in talks with a developer about a sale of the Theater, a venue that is part of the Garden complex, for $1 billion.

While $1 billion could be on the high side for any deal, a sale of the Theater even for $500 million likely would be a windfall for MSGE, representing a sizable chunk of its market value even after any taxes, and could permit a large stock buyback. On its earnings conference call in August, MSGE Chief Financial Officer David Byrnes didn’t shed much light on the potential theater sale.

“We will continue to pursue all options that make strategic and financial sense,” said Byrnes. “But on the sale, we don’t have anything specific to share today.”

One risk is that New York City forces MSGE to sell the Garden and move it to a different location to foster the redevelopment of train hub Penn Station whose cramped corridors and crowding have made it unpopular with travelers. The city recently renewed a permit for the Garden to operate on the site for five years.

“That is often construed as a risk, but it really is an opportunity,” Marangi says. “If they had to move, the government agencies would have to write them a big check. And there is no place to move.” Sites that once were talked about on the west side of Manhattan for a new Garden have already been developed. And New York has more pressing issues now than trying to move the Garden, which is centrally located in Midtown. Building a new Garden in Manhattan could cost $3 billion or more.

One bullish sign was the June purchase of about $10 million in MSGE stock by Thomas Dolan, a board member and brother of CEO and Chairman James Dolan. Thomas Dolan paid $31 a share.

The company bought back $90 million of stock as of its August earnings report, or 6% of shares outstanding, and plans to purchase another $50 million as part of the coming Sphere sale. 

MSGE was spun out of Sphere Entertainment in April in a complex deal in which Sphere kept a 33% stake in the new MSGE.

Sphere owns the Sphere concert venue in Las Vegas that opens later this month with a series of U2 concerts, and

MSG Network
,

the cable broadcaster of Knicks and Rangers games. Sphere has used the MSGE stake as a source of liquidity as it finishes the Sphere, which has cost more than $2 billion to build.

All the MSG-related companies—MSGE, Sphere and Madison Square Garden Sports (MSGS)—are controlled by the Dolan family, and led by Jim Dolan. 

Some investors are wary of the Dolans, viewing them as more interested in maintaining control than maximizing shareholder value. This has led to the phrase “Dolan discount,” applied to the stock prices. 

But the Dolans have worked to build value in their empire with such moves as the construction of the Sphere and a series of spinoffs that are designed to create purer plays that could pay off for shareholders of all three companies. 

Write to Andrew Bary at andrew.bary@barrons.com