Madison Square Garden Could Spinoff Sooner Than Originally Thought

After the market closed on Friday, The Madison Square Garden Co MSG released further details regarding its split. In a report published Sunday, Stifel analysts Benjamin E. Mogil and Kevin Lee Hon Siong noted that, “The increased disclosures likely leads the spin to be an early calendar fourth quarter one rather than towards the end of the year.”

The company received a favorable private letter IRS ruling on the tax-free nature of the split. Consequently, the analysts think the financials proforma continue to support a $1.2 billion recapitalization, and more than $600 million in shareholder capital return. They maintained a Buy rating and $100.00 target price on the stock.

Financial Details

The report continues to take a closer look at the financial details of the split. There are two new deals between the RSN (MSG Networks, or MSGN) and Sports/Entertainment (MSG) segments. The first one is stipulates that MSGN will pay $130 million to MSG for twenty year of local broadcast rights.

“The second deal moves the advertising for MSGN to MSG where the broadcast ad inventory can be sold along with venue ad/sponsorship opportunities: This move is around $12mn in transferred revenue and around $5mn in incremental AOCF,” Stifel analysts explained.

In aggregate, when combined with incremental SG&A of $10 million at MSGN, AOCF of around $300 million should easily support the aforementioned recapitalization of at least $1.2 billion. Moreover, the analysts continue to see “the split at that level of recapitalization of around 50/50 towards shareholders and to MSG.”

Further Thoughts

While the analysts have no knowledge of any M&A discussions going on, they still believe MSGN could be a buyout candidate. They note that, while the buyers' focus of buyers has been largely put on Twenty-First Century Fox Inc FOXA, with its ownership in YES, there are other logical potential buyers. Another possible scenario would be a merger with Scripps Networks Interactive, Inc. SNI.