McIntyre Partnerships - Madison Square Garden: Could Double In The Next Five Years
Summary
- Madison Square Garden Entertainment Corp. completed the spin of the MSG arena and Rockettes franchise, with shares potentially doubling in the next five years.
- Sphere Entertainment Co. is considered more attractively priced, with the market valuing the Sphere at cents on the dollar before it even opens.
- Sphere's opening show with U2 sold out in days, and if consistently booked, the Sphere can generate over $1B in sales and over $200MM in operating profits.
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The following segment was excerpted from this fund letter.
Madison Square Garden (NYSE:MSGE)
After the quarter’s end, Madison Square Garden Entertainment Corp. completed the spin of the MSG arena, a catalyst I had been eagerly anticipating since it was announced in August 2022. The company separated into a SpinCo consisting of the MSG Arena and the Rockettes franchise, which assumed the ticker MSGE, and a RemainCo consisting of the Sphere development and MSG Networks, now renamed, Sphere Entertainment Co. (NYSE:SPHR).
To avoid confusion, I will refer to the company prior to the spin as “Original MSGE” and the SpinCo as “MSGE” going forward. As I anticipated, MSGE’s Form 10 included guidance and historical financials, which were far above bear concerns and matched my projected earnings. $40 vodka sodas are indeed profitable. MSGE is now trading ~$32, yielding an EV of ~$2.3B which implies ~15x 2023 EBIT of $150MM, and ~21x fully taxed levered FCF/sh. of $1.50.
While at first glance, the stock appears reasonable yet not exceptionally cheap, MSGE will pay minimal cash taxes until FY2027, allowing rapid deleveraging and share buybacks, which, along with modest MSD EBIT growth, should result in $2.50 in fully taxed FCF/sh. by 2026. Further, MSGE retains the air rights above the MSG Arena, which I value at $300-$500MM and I believe will be monetized in the next five years. Given the “hidden assets” and predictability of MSGE’s iconic holdings, I believe shares could double in the next five years, a strong return given the low-risk nature of these assets.
However, while the fund maintains a significant investment in the economics of MSGE, I believe SPHR is the more attractively priced piece. In the spin, SPHR retained a 1/3rd stake in MSGE, resulting in SPHR owning ~0.5 shares of MSGE for every one share of SPHR. At market prices of $32 for MSGE and $30 for SPHR, the market is ascribing ~$14/sh. for the remainder of SPHR, or $490MM given 35MM shares outstanding. For this $490MM investment, we get:
- the Sphere development,
- the MSG Networks equity, and
- an estimated $200MM in cash, net of the recently announced sale of Tao and further capex and start-up costs for the Sphere.
Given the $2.2B construction cost for the Sphere, not to mention OpEx already spent developing content and the ~$500MM of prime Las Vegas Strip land LVS contributed to the project, the market is effectively valuing the Sphere at cents on the dollar before it even opens. I find this even more interesting given the recent string of positive news regarding the project.
Last week, tickets for the Sphere’s opening show with U2 sold out in a matter of days. SPHR and the band are now set to open the venue in late September with a run of 17 shows for a total of ~340,000 tickets. Further, I believe the shows have an average ticket price close to, if not greater than, $500. There is an exceptionally wide gulf then between the market, which seems to discount the very viability of Sphere as anything beyond a spectacular bust, and Sphere customers, who seem excited to pack the value at prices well ahead of national averages.
To seize the opportunity, if the Sphere’s Vegas residency business is consistently booked, say three packed shows a week for 40 weeks a year, combined with just modest execution on advertising and owned attractions, I believe the Sphere can generate over $1B in sales and over $200MM in operating profits, which at 15x valuation would yield ~$100/sh. for SPHR including its MSGE stake. I believe there is room for reasonable upside to both profits and multiple if this occurs.
However, I want to acknowledge that there are modestly higher risks to SPHR than MSGE: the project has yet to be opened and the business model is not proven, the MSG Networks term loan must be renegotiated by fall 2024, there could be cost overruns getting the Sphere ready to open, etc. The elevated execution risk gives me pause and impacts our sizing, but I believe we are being very well compensated for taking these risks. Further, I believe we have strong downside protection from our “cents on the dollar” purchase price for the Sphere and SPHR’s remaining investment in the less risky MSG Arena and Rockettes businesses.
I have substantially rotated our position from MSGE to SPHR, though we retain a large investment in MSGE on a look-through basis.
| This presentation is not an offer to sell securities of any investment fund or a solicitation of offers to buy any such securities. Securities of McIntyre Partnerships, LP (the “Fund” or “McIntyre Partnerships”) managed by McIntyre Capital Management, LP (the “Investment Manager” or “McIntyre Capital”) are offered to selected investors only by means of a complete offering memorandum and related subscription materials which contain significant additional information about the terms of an investment in the Fund (such documents, the “Offering Documents”). Any decision to invest must be based solely upon the information set forth in the Offering documents, regardless of any information investors may have been otherwise furnished, including this presentation. An investment in any strategy, including the strategy described herein, involves a high degree of risk. There is no guarantee that the investment objective will be achieved. Past performance of these strategies is not necessarily indicative of future results. There is the possibility of loss and all investment involves risk including the loss of principal. Securities of the Fund are not registered with any regulatory authority, are offered pursuant to exemptions from such registration, and are subject to significant restrictions. The information in this presentation was prepared by McIntyre Capital GP, LLC, the general partner of the Fund (the “General Partner”), and is believed by the General Partner to be reliable and has been obtained from public sources believed to be reliable. General Partner makes no representation as to the accuracy or completeness of such information. Opinions, estimates and projections in this presentation constitute the current judgment of General Partner and are subject to change without notice. Any projections, forecasts and estimates contained in this presentation are necessarily speculative in nature and are based upon certain assumptions. It can be expected that some or all of such assumptions will not materialize or will vary significantly from actual results. Accordingly, any projections are only estimates and actual results will differ and may vary substantially from the projections or estimates shown. This presentation is not intended as a recommendation to purchase or sell any commodity or security. The General Partner has no obligation to update, modify or amend this presentation or to otherwise notify a reader thereof in the event that any matter stated herein, or any opinion, projection, forecast or estimate set forth herein, changes or subsequently becomes inaccurate. This presentation is strictly confidential and may not be reproduced or redistributed in whole or in part nor may its contents be disclosed to any other person without the express consent of the General Partner. |
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