Madison Square Garden in New York
Christopher Lee/BloombergA shareholder of Madison Square Garden Entertainment and MSG Networks is criticizing a merger deal between the two companies as having “absolutely no strategic rationale” and for undervaluing MSG Networks.
In a letter Monday to James Dolan, the chairman of both companies, Jonathan Boyar of the Boyar Value Group wrote that the all-stock deal unveiled on Friday “grossly undervalues” MSG Networks.
The Dolan family, which controls both MSG Entertainment (ticker: MSGE) and MSG Networks (MSGN), has managed to pull off the rare feat of upsetting shareholders on both sides of a proposed transaction.
MSG Entertainment shares were down 2.5% Monday, to $82.56, after declining about 10% on Friday. MSG Networks was off 6% Monday, to $15.10, after falling 7.5% Friday. The damage is greater because MSG Entertainment stood at $116 and MSG Networks at $19 in early March before rumors surfaced about a transaction.
The situation underscores what Wall Street has called the “Dolan discount,” or a discounted price of Dolan-controlled companies because of the family’s reputation, deserved or not, for putting their interest above those of public holders.
MSG Entertainment owns Madison Square Garden in Manhattan and is building a state-of-the-art concert venue called the Sphere in Las Vegas that is expected to cost about $1.7 billion and open in 2023. MSG Networks owns regional sports networks that carry the New York Knicks, the New York Rangers, and other teams.
Both stocks may have bottomed given the recent pullback. There is a chance that the Dolans could relent on the deal, and if it goes forward, much of the damage to the two stocks could have already occurred.
In announcing the deal, the two companies said they would have a more diversified revenue base and would have “enhanced financial flexibility to fund current growth initiatives” including the Sphere. The deal involves a fixed exchange ratio of a 0.172 share of MSG Entertainment for each share of MSG Networks.
“The combination of the companies’ media, digital, and venue assets creates a powerful platform for potential sports gaming partners, which is expected to generate significant incremental revenue in the years ahead.,” the companies said in announcing the deal. A spokesperson declined to comment further.
In his letter, Boyar wrote that the firm’s institutional research service has valued MSG Networks at $25 a share and that the proposed purchase price values MSG Networks at just five times operating earnings in fiscal 2020.
“In our view, the implied multiple of the proposed transaction is wholly inadequate, as it does not reflect MSGN’S strong fundamentals and cash-generating abilities, represents a meaningful discount to publicly traded cable network comps and precedent industry transactions, and does not adequately compensate MSGN for its increasingly valuable sports media rights, which includes local broadcast rights to both the Knicks and Rangers,” Boyar wrote.
The investor added that online sports gambling in New York, which could be legalized this year, would likely be a boon to MSG Networks because of increased ad revenues and ancillary sales.
MSG Entertainment has been viewed as a reopening play, particularly on hopes for a revival of tourism in Las Vegas. Holders of the company’s shares may not want to see that story muddied by MSG Networks, which experienced a 7.5% drop in subscribers in calendar 2020 amid cable cord-cutting.
“It seems like they totally misread the shareholder temperature here,” Boyar told Barron’s on Monday.
He said the deal also amounted to poor corporate governance since the Dolans plan to use their control of supervoting shares in both companies to assure approval. A control shareholder often allows a merger to hinge on a vote of unaffiliated shareholders, a so-called majority of the minority.
Such a move would give considerable power to Ariel Investments, the firm founded by John Rogers. Ariel owns about 10% of the low-vote public class A shares in MSG Entertainment and 23% of the low-vote public stock in MSG Networks. Ariel had no immediate comment.
In a Barron’s interview earlier this year, Rogers said was bullish on MSG Entertainment: “Everyone thinks there’s no future. The stock price is not much more than the cash on the balance sheet. I won’t be surprised if concerts are back at the Garden this summer and the Knicks are in the playoffs, and [Madison Square Garden] will surprise.”
Boyar pointed out in the letter that the Dolans had included a majority/minority provision in their attempt to take private Cablevision, their cable TV company, in 2007. That deal ran into shareholder opposition and was scuttled—to the benefit of shareholders.
“Despite Wall Street perpetually assigning the so-called ‘Dolan discount’ to entities you and your family control, we have found you to be an extraordinarily good partner to invest alongside. That is why we were extremely disappointed” in the proposed deal, Boyar wrote.
Boyar wrote that the deal makes little sense because the logical buyer of MSG Network within the Dolan empire is Madison Square Garden Sports (MSGS), which owns the Knicks and Rangers. Owning the regional sport network would make MSG Sports more valuable to a potential acquirer.
Boyar’s view is that other bidders likely would pay more for MSG Networks than how the current deal values the company. “The best thing for all shareholders would be to open the transaction to other bidders (including Madison Square Garden Sports) and let the market decide the fair price for MSGN,” he wrote.
Write to Andrew Bary at andrew.bary@barrons.com
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March 30, 2021 at 01:50AM
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