Morgan Stanley: MSG Spin-Off Details Support The Bull Case

In a report published Tuesday, Morgan Stanley analysts maintained an Overweight rating on The Madison Square Garden Co (NASDAQ: MSG), with a price target of $94.During the company's C1Q15 call Vice Chairman Gregg Seibert drew parallels with the spin-off of AMC Networks Inc (NASDAQ: AMCX) by Cablevision Systems Corporation (NYSE: CVC) in 2011. Following the spinout, AMCX's strong FCF generation and steady growth initially supported 5.4x turns of financial leverage. In the report Morgan Stanley noted, "We believe ~5x leverage on post-spin Media segment is reasonable, given low borrowing costs and Media's mid to high single digit EBITDA growth outlook, and should lead to better valuation support…Furthermore, we continue to believe the spin could lead to a tax efficient asset sale down the road, creating the potential for further valuation upside."Before the planned spinout, Madison Square Garden is likely to formalize the rights fees paid by the cable nets to the teams. While these payments could be value-neutral, the higher rights fees could "depress post-spin Media's valuation," the analysts said. "We expect proceeds from a Media debt raise to be distributed to the Sports/Ent. Spin Co, where capital will be used to support both growth and return of capital to shareholders. Of the two post spin entities, we believe Sports/Ent. is more at risk of trading at a discount to private market value, so continuing MSG's buyback at that entity is the superior option, in our view," the analysts added.