It's been several years since I've increased my Special Situations portfolio position in Madison Square Garden (NYSE:MSG), but I think it's time to add more. A sum-of-the-parts valuation makes the stock look cheap, and I still think some type of buyout transaction is the endgame for the company.
What's it all worth?
Madison Square Garden stock has been floating around the mid-$50s or so for about a year. How does that compare with what shares could be worth? Favorably, I think.
If you look at just the EBITDA or earnings multiples for MSG, the stock doesn't look particularly attractive. The best approach is using a sum-of-the-parts valuation, since you have two major divisions that should be valued on different bases. The sports teams are trophy assets that are valuable for the billionaire who has everything; they should be valued on an asset basis, not on their income. On the other hand, the cash-generating regional sports network should be valued on an income or cash flow basis. Finally, MSG owns a third division, entertainment, that is more or less breakeven, but I won't go into that here. It's worth something to somebody, but let's stick to the real value drivers here.
Forbes recently evaluated what MSG's two major franchises -- the Knicks and Rangers -- are worth. In its most recent valuation in January, the magazine ranked the basketball team in the NBA top spot with a value of $1.4 billion. In November, Forbes ranked the Rangers as the second most valuable NHL team (behind the Toronto Maple Leafs) at an estimated value of $850 million. That high ranking makes sense given that New York is the top media market in the U.S. While the Knicks' play has been something short of top-rate of late, the team still draws huge crowds.
So the two major sports franchises are worth a combined $2.25 billion, if you believe Forbes.
That compares with MSG's current enterprise value of $4.1 billion, which includes no debt and cash of $155 million. That means the market is pricing the remaining asset, the regional sports network, at $1.85 billion. That looks pretty attractive, given the EBITDA that it generates. The unit in 2013 generated $345 million in EBITDA, for a valuation of about 5.5 times EBITDA. That is way too cheap for the premium programming that sports has become in our DVR, watch-anywhere TV culture.
For a high-quality business with that type of cash flow quality, a 10 or even 12 multiple to EBITDA is a more reasonable valuation.
If you think a 12 times multiple is reasonable, then you're getting the sports business for free. Alternatively, at today's price, you're buying the teams at Forbes value and paying maybe half-price for the regional sports network. Either way, some component of this business is undervalued.
Ultimately, publicly traded sports franchises aren't public for long. So I think the endgame is still a buyout of the company. That looks even more possible with the pristine balance sheet that could be borrowed against to finance the company's sale, especially that luscious EBITDA from the programming unit.
More MSG, please
For these reasons, my Special Situations portfolio will add another $500 -- not quite a full percentage point -- to my position in Madison Square Garden. I'll have more great investment ideas in the next few days, so follow me on Twitter (@TMFRoyal) to get the latest.