MSGN - MSG Networks

[Gregmal]

https://www.businesswire.com/news/home/20190829005683/en/

 

So there's been a bit of discussion on this one in the other thread, but I think this cements the value status.

 

MSGN currently trades at half the EV of YES. Its not a hard argument that in terms of asset desirability, basketball games are more valuable than baseball. And then perhaps hockey and baseball are on par. MSGN figure has ~150 pro games a year, as does YES, so that is a wash. "Other content" Id say is equally meh as well.

 

MSGN currently trades at a little over 3x EBITDA, but people seem overly concerned with sub declines. At first I bought into this as well. But when you take this a step further, that is really not relevant for two reasons.

 

1) You just had basically every type of RSN under the sun go to market so you have a range in terms of current market values. MSGN has to be near or at the top in terms of desirability.

 

2) Imagine over the next several years subs go to zero, but the pay down the debt... not unreasonable(well maybe subs going to 0 is unreasonable but picture it anyway). First that means there is NO Knicks or Rangers games on TV,.. yea right, and two... you still have to ask yourself, what are the rights to broadcast this worth? Even without any subs, its worth a lot.

 

The big question is Dolan, but there are several issues at play. One, Dolan is very well connected(and dare I say even. respected) in the media biz. John Malone is said to have inquired about MSGN during the DIS process, as did Sinclair, who is apparently still shopping for more. It is well documented Dolan's desire to liquidate this and it was said that this was the main reason it was spun out from MSG in the first place.

 

Further, the company has commented on previous calls, and recently at an investor event, that it wouldn't be unreasonable to see substantial dividends and buybacks implemented once down to 2 turns on the debt. This should be accomplished in the next 12 months.

 

After the earnings drop and market overreaction Ive quickly made this about a 6% position. I am curious how others see this and if there are any other perspectives in the market besides simply "sub decline" issues, which as Ive said, to me, arent really important anymore given the market activity of late. Or what others think this is worth. Conservatively I think a 2.75B EV is  your sale figure, which gives you nearly 100% upside

[Gregmal]

Motherfucker...30 seconds after posting...

 

https://snapshot.fidelity.com/fidresearch/snapshot/landing.jhtml#/news?symbol=MSGN&storyid=201908291644PRIMZONEFULLFEED7700769&provider=PRIMZONE&product=FULLFEED

 

 

[BG2008]

Motherfucker...30 seconds after posting...

 

https://snapshot.fidelity.com/fidresearch/snapshot/landing.jhtml#/news?symbol=MSGN&storyid=201908291644PRIMZONEFULLFEED7700769&provider=PRIMZONE&product=FULLFEED

 

What is the second link?  Couldn't see it.

[Gregmal]

https://seekingalpha.com/news/3495849-msg-networks-plus-3_4-percent-bigger-buyback-share-tender

 

Upped buybacks $300M to ~$430M(vs 1.03B mc), concurrent with dutch tender for up to $250M between $15-$17.50

 

Stocks now at 16.3 AH, stock is still compelling here IMO.

[SHDL]

Lol, you really have a good nose for these things.  I should have bought more.

 

Not much to add other than if they’re going to sell to someone like Sinclair they should probably hurry up and make a move before the regulatory climate changes. 

[Gregmal]

Yea IDK lol sometimes the spider senses just start tingling.

 

Seriously though, I think Sinclair is clearly hungry but Ive always thought, and heard that Bezos would be a natural fit. Not necessarily Amazon, although they could be the acquirer, and perfectly seam this into their Prime offering. Displaced NYers are all over the country(and world) so there is an extended market for this that there really isn't for any other RSN. But I wouldn't be shocked if Jeff personally tried to acquire MSGN and the Knicks as a personal asset. It fits in with the type of shit Ive been told he's been looking at the past couple years(not to mention his prowling NY as well).

[BG2008]

Lol, you really have a good nose for these things.  I should have bought more.

 

Not much to add other than if they’re going to sell to someone like Sinclair they should probably hurry up and make a move before the regulatory climate changes.

 

Gregmal,

 

Put your spidey sense to work on my portfolio.  Start buying my stocks!!!

[Gregmal]

I do appreciate the flattery, but lets all make some money!

 

Here's roughly $10B worth of RSN's..

 

Fox Sports Arizona

Fox Sports Detroit

Fox Sports Florida

Fox Sports Sun

Fox Sports North

Fox Sports Wisconsin

Fox Sports Ohio

SportsTime Ohio

Fox Sports South

Fox Sports Carolina

Fox Sports Tennessee

Fox Sports Southeast

Fox Sports Southwest

Fox Sports Oklahoma

Fox Sports New Orleans

Fox Sports Midwest

Fox Sports Kansas City

Fox Sports Indiana

Fox Sports San Diego

Fox Sports West

Prime Ticket

Fox College Sports

 

 

Then there is YES which is ~3.5B

 

 

Which of those most closely compares to MSG Networks?

 

 

Assuming a $16 price tomorrow... that's an EV of ~1.8-1.9B

 

Now, here's whats changed. You have the debt actively being cleaned up, another $125M mandatory pay down this year, as much as 40% of the market cap(as of todays close) dedicated to repurchases, and like I said above, about $300M in EBITDA...Oh yea, and, a pretty freaking remarkable statement made today answering the question of "are they aligned with shareholders?"

 

I don't have a crystal ball in terms of what its eventually going to be sold for, but I think that is a matter of when, not if, and I think the current price, at the, least, represents a pretty decent risk to reward setup...

 

 

[Cardboard]

As Bruce Buffer would say: "IT'SSSSS TIME!!!!!!"

 

 

[SHDL]

So Fox bought their 80% stake in YES at an EV in the $3-4bn range during 2012-2014:

 

https://www.hollywoodreporter.com/news/sinclair-amazon-back-35b-yankees-deal-take-full-control-yes-network-1193246

 

and they then passed on MSGN in 2017 when it had a $3bn EV:

 

https://nypost.com/2017/07/18/no-one-wants-to-buy-james-dolans-tv-networks/

 

Given this and the fact that YES just went for $3.5bn (i.e., basically no price appreciation since Fox bought their stake), $3bn is probably a reasonable ceiling for MSGN — unless there is a reason to believe the network has become more valuable over time.  The only question then is how close can we get to that ceiling...

 

But in any case if their cash flows hold up, they use the cash to reduce debt and/or repurchase shares for a few years, and then the whole thing sells for anything close to $3bn, shareholders should to do very well.

[SHDL]

Also Bloomberg had some estimates for YES’s EBITDA multiple:

 

https://www.bloomberg.com/opinion/articles/2019-03-14/amazon-s-cheap-yankees-deal-for-yes-network-is-hollywood-lesson

 

If we use their range of 7.4-9x to value MSGN, we get a per share value of around $20-28.  So plenty of upside left.  (Unless you guys bid up the price tomorrow morning, that is. ;))

[hillfronter83]

YES valued around $3.47b EV.

 

https://www.prnewswire.com/news-releases/sinclair-acquires-20-interest-in-yes-network-300909204.html

[scorpioncapital]

Is this a run-off type business on cable while they onboard to streaming? Similar to Discovery Inc I would think?

 

 

[Gregmal]

Further;

 

Typically, companies hold 4-6 prescheduled board meetings per year. Any corporate action, specifically, buybacks, are predetermined based upon prevailing market prices or expected corporate events. Here, what we have, is a proactive board, not more than a week after an earnings release, taking it upon themselves to move to this action. In other words, entirely unsolicited and REACTIVE, to events that likely transpired since their most recent board meeting, and events that did transpire since the most recent earnings. Yea, lets put to bed the notion that they don't give a f** about you.

 

Second, in relation to sub declines. Lets look at CVC, DTV, DISH, CHTR, T, etc or whatever. These are the driving forces behind much of the MSGN subscriber base. BUT, why I decided I give zero a hoot about sub declines is this. All of those companies offer packages. Many people subscribe to packages because they want specific items. For instance, one may very well pay for a package of 35 channels, for just a couple networks. So yes, cord cutting is effecting MSG Networks, but the cancellations or declines, IMO are hardly related to peoples desire for sports, and more of a macro trend. Losing subs, is likely because people dont feel the need to pay $55 for Cablevision's 150 channels. Not because they won't pay a $5-$10 a month for their sports fix. So MSG Networks issue, is not so much sub declines, but rather the method by which they distribute their product. I have long thought these guys could make MORE money, distributing the content through alternative mediums. AGAIN, does anyone think we ever see a scenario where Knicks and Ranger games are not on TV AT ALL? Nope.

 

Lastly, I'd highlight the announced actions. The company chose to increase their buyback authorization from $136M or so to the following. $250M tender for shares between $15-17.50, AND concurrently, a total authorization of $436M. So, what this means, is that they have determined their intrinsic value, AND concluded they are willing to buy $250M worth of stock at 17.50,WHILE STILL REPURCHASING ANOTHER ~$184M IN STOCK!

 

Sometimes investments are easy....

 

 

 

 

[KJP]

 

 

Second, in relation to sub declines. Lets look at CVC, DTV, DISH, CHTR, T, etc or whatever. These are the driving forces behind much of the MSGN subscriber base. BUT, why I decided I give zero a hoot about sub declines is this. All of those companies offer packages. Many people subscribe to packages because they want specific items. For instance, one may very well pay for a package of 35 channels, for just a couple networks. So yes, cord cutting is effecting MSG Networks, but the cancellations or declines, IMO are hardly related to peoples desire for sports, and more of a macro trend. Losing subs, is likely because people dont feel the need to pay $55 for Cablevision's 150 channels. Not because they won't pay a $5-$10 a month for their sports fix. So MSG Networks issue, is not so much sub declines, but rather the method by which they distribute their product. I have long thought these guys could make MORE money, distributing the content through alternative mediums. AGAIN, does anyone think we ever see a scenario where Knicks and Ranger games are not on TV AT ALL? Nope.

 

 

Is the bolded part of your post above hypothesis or fact at this point?  Specifically, do we know yet from other sports programming examples whether the revenue generated from people willing to pay $5-$10/month for a dedicated sports channel is equal to or greater than the revenue that a sports channel like MSGN can generate from being part of a bundle to which more people subscribe?  My understanding (though I don't have source handy) is that historically sports networks negotiated very hard for mandatory carriage in basic cable packages because that would generate more revenue than being part of an add-on or premium bundle for which subscribers had to specifically elect to receive and pay for.  (In this scenario, the bundle is subsidizing sports, rather than sports subsidizing other parts of the bundle.) I'm talking about, for example, MSG back when it showed Yankee games, SportsChannel for the Mets and Yes Network today.  Am I wrong about that historic practice, or has the view changed today?

 

One empirical test (though not a perfect one) for this is ESPN.  It's per-sub fees are very high, so it's been hit by cord-cutting.  But it also offers an DTC streaming product, ESPN+.  Has the revenue from ESPN+ offset the hit from declining cable bundle subs?  I acknowledge that ESPN isn't a perfect comp, because it's provides diffuse, national coverage of many sports, rather than broadcasting essentially all of the games for specific teams.

 

Of course, none of the above undermines your other point:  Despite people's understandable concerns about Dolan, the Spheres, etc., MSGN appears to be acting in the best interests of shareholders.

[Gregmal]

Most certainly it is predominantly an opinion of mine. But I suppose I could clarify.

 

The section you highlighted moreso refers to avenues the company could take in an armageddon scenario where basically all their subs disappear. But that isn't going to happen. Nonetheless, yes, they do squeeze out additional $$ when the 42 year old single women who wants basic cable signs up for the standard package which in many case includes MSGN. But at the same time, there are avenues to extract greater per head revenue, which I think could be a great lever to pull if done right, IN COMPLEMENT, of the basic subscription options through your service provider. At some point I think it makes sense for them to shift to direct offerings in addition to the current 6M subs they have through traditional tv packaging.

 

For instance, you know how much a UFC fight costs in your man cave? $100 or something right?(Ive never watched one but this is what I hear they go for) You know what it costs for your local sports bar? Possibly as much as $10,000. So my point is basically that the content is irreplaceable and to some, as necessary as air, and for others, an integral piece of action to have access to. So the company has distribution options and ways to do some offsetting. I think they have so far held off because they haven't hit a point $$ wise where a potential disruption is warranted. Kind of like the big autos with EVs.

[KJP]

Most certainly it is predominantly an opinion of mine. But I suppose I could clarify.

 

The section you highlighted moreso refers to avenues the company could take in an armageddon scenario where basically all their subs disappear. But that isn't going to happen. Nonetheless, yes, they do squeeze out additional $$ when the 42 year old single women who wants basic cable signs up for the standard package which in many case includes MSGN. But at the same time, there are avenues to extract greater per head revenue, which I think could be a great lever to pull if done right, IN COMPLEMENT, of the basic subscription options through your service provider. At some point I think it makes sense for them to shift to direct offerings in addition to the current 6M subs they have through traditional tv packaging.

 

For instance, you know how much a UFC fight costs in your man cave? $100 or something right?(Ive never watched one but this is what I hear they go for) You know what it costs for your local sports bar? Possibly as much as $10,000. So my point is basically that the content is irreplaceable and to some, as necessary as air, and for others, an integral piece of action to have access to. So the company has distribution options and ways to do some offsetting. I think they have so far held off because they haven't hit a point $$ wise where a potential disruption is warranted. Kind of like the big autos with EVs.

 

I agree with you that the content is very valuable and there ought to be ways to monetize it and generate alot of money.  So, if you owned the underlying intellectual property (i.e., the teams themselves), I think you're going to be fine, even if you ultimately make less money from TV than you do today. 

 

But the issue I see with MSGN is that the company doesn't own the underlying IP (i.e, the sports teams themselves); instead it has to pay MSG for right to use its IP, and those licensing fees are MSGN's biggest expense.  Those fees are also fixed, rather than a percentage royalty, and rise over time due to built-in escalators.  So, in the armageddon scenario (which I agree isn't going to happen), you still have a massive fixed expense to cover, rather than a variable expense that would decline in proportion to your revenue. Put another way, it's not enough to say that MSGN has valuable rights; you have to believe that the rights are substantially more valuable than what MSGN is paying MSG to secure those rights.  In the armageddon scenario, I doubt they would be.

 

All that being said, if I had to bet, I'd say MSGN shareholders will do well from here, but if you like MSGN, then you might also be interested in GTN or FOX, which, although not as sports focused, have similar dynamics and high FCFs.

[scorpioncapital]

I sometimes wonder why Buffett gave up the media space. Did his mental model say something about media or distribution? Albeit he does/did own some platforms.

[SHDL]

I actually share the concern that RSNs in general could be melting ice cubes, but I’m also inclined to think that the YES valuation already has that priced in (given that the risk is fairly obvious, the buyers are a sophisticated/well-informed bunch, and Disney was essentially a forced seller).  So if Mr Market is taking YES as a reference point and then applying a “melting ice cube discount” to it to value MSGN, he is basically double counting the risk. 

[Gregmal]

Most certainly it is predominantly an opinion of mine. But I suppose I could clarify.

 

The section you highlighted moreso refers to avenues the company could take in an armageddon scenario where basically all their subs disappear. But that isn't going to happen. Nonetheless, yes, they do squeeze out additional $$ when the 42 year old single women who wants basic cable signs up for the standard package which in many case includes MSGN. But at the same time, there are avenues to extract greater per head revenue, which I think could be a great lever to pull if done right, IN COMPLEMENT, of the basic subscription options through your service provider. At some point I think it makes sense for them to shift to direct offerings in addition to the current 6M subs they have through traditional tv packaging.

 

For instance, you know how much a UFC fight costs in your man cave? $100 or something right?(Ive never watched one but this is what I hear they go for) You know what it costs for your local sports bar? Possibly as much as $10,000. So my point is basically that the content is irreplaceable and to some, as necessary as air, and for others, an integral piece of action to have access to. So the company has distribution options and ways to do some offsetting. I think they have so far held off because they haven't hit a point $$ wise where a potential disruption is warranted. Kind of like the big autos with EVs.

 

I agree with you that the content is very valuable and there ought to be ways to monetize it and generate alot of money.  So, if you owned the underlying intellectual property (i.e., the teams themselves), I think you're going to be fine, even if you ultimately make less money from TV than you do today. 

 

But the issue I see with MSGN is that the company doesn't own the underlying IP (i.e, the sports teams themselves); instead it has to pay MSG for right to use its IP, and those licensing fees are MSGN's biggest expense.  Those fees are also fixed, rather than a percentage royalty, and rise over time due to built-in escalators.  So, in the armageddon scenario (which I agree isn't going to happen), you still have a massive fixed expense to cover, rather than a variable expense that would decline in proportion to your revenue. Put another way, it's not enough to say that MSGN has valuable rights; you have to believe that the rights are substantially more valuable than what MSGN is paying MSG to secure those rights.  In the armageddon scenario, I doubt they would be.

 

All that being said, if I had to bet, I'd say MSGN shareholders will do well from here, but if you like MSGN, then you might also be interested in GTN or FOX, which, although not as sports focused, have similar dynamics and high FCFs.

 

They do not "own" the rights, but they kind of do. Ive tried envisioning a scenario where they lose the Knicks and Rangers. I just can't see one. The Sabres or Devils? Maybe...but I don't really care about those anyway at this valuation. Perhaps its overlooking a big issue, but I kind of think its equivalent to worrying about whether an RMR entity will renew their manager agreements... I view the contracts as moreso a way to kick over dividends to the parent company which was only necessary because they did the spin off in 2016. Conventional wisdom would say that you are protected from anything onerous simply because you're investing alongside the same guy. Ive said it a million times, but Dolan's reputation in terms of how he treats fans, distorts the perception of his acumen for the businesses. He views fans, and even supposedly most players(if you've ever met professional athletes it's hard not to see) as total morons and entitled brats. But investors, money managers, business executives, those are his types of people and he greatly respects them.

 

Although theoretically, down the line, if the numbers stop working and its no longer economical to have the rights agreements at their current rates, they will obviously go lower when it is time to renew. I believe the 20 year(maybe it was 15, I forget exactly) was simply a mechanism to keep some cash coming over to the sports team and little thought was given to it. It really isn't even out of the question IMO for the parent company MSG to repurchase MSGN down the line if necessary. This is something that has been speculated as well.

 

In layman's terms, if you can't sell sports in NY, you're an idiot. So my bet is that they arent idiots, and that if they are, the company gets sold to someone who can make it work, at a price that's in the ballpark of what the comps suggest. In both scenarios money gets made from these levels.

[SHDL]

Conventional wisdom would say that you are protected from anything onerous simply because you're investing alongside the same guy.

 

I agree.  I think this was one reason why the Yankees held on to a partial stake in the YES Network when it was first sold to Fox a few years ago and then increased their stake a bit as it was sold to Sinclair/Amazon/others just recently.  If I were to ever buy an RSN I would certainly want my financial interests to be aligned with the team owners…

[Gregmal]

Conventional wisdom would say that you are protected from anything onerous simply because you're investing alongside the same guy.

 

I agree.  I think this was one reason why the Yankees held on to a partial stake in the YES Network when it was first sold to Fox a few years ago and then increased their stake a bit as it was sold to Sinclair/Amazon/others just recently.  If I were to ever buy an RSN I would certainly want my financial interests to be aligned with the team owners…

 

Right. Which is perhaps the only thing I can think of in terms of negative impacts on valuation in a potential sale scenario. A buyer may want something more concrete, which from what Ive heard, Dolan would be fine doing for the right price.

[Cardboard]

I bought some in the low $16's today. Small position for now and hopefully it trades lower in coming days. I wish Gregmal had written his original post one day earlier. It was pretty much enough to convince me to step in after some hesitation earlier.

 

Price is highly compelling IMO and despite this talk of melting cube, revenues have still been going up. It was up 3.5% last year while EBITDA was down 1.6%. So sure, there is some pressure but, not to justify such low multiple on a business that is zero capital intensive, with such high margins and strong franchise.

 

Current price despite being quite a bit higher than yesterday remains a little weird to me. Almost like Mr. Market decided to price it right at the middle of the modified Dutch auction range. However, at current price of $16.30, they would buy back 15.3 million shares. That is right around 25% of existing class A shares which is a very significant percentage.

 

I doubt very much that shares availability will be that high and they will probably need to pay $17.50 to acquire that many shares IMO and may not reach $250 million. I could be wrong but, considering that there is also $186 million waiting to buy even more shares under any weakness, I would assume that most holders will stick around. Has to be a lot of patient holders, value type, in this name.

 

So if one tenders at $17.50, that is a respectable 7.4% return from the $16.30 mark in a very short period of time. Almost a gift IMO and pretty low risk for smaller holders looking for some arbitrage.

 

The only thing that I am wondering about the business still is this mention of a potential IRS challenge on the distribution of MSG. Is this just normal disclosure or it is a true risk?

 

Cardboard

[Gregmal]

My recollection is that this has been a disclosed risk since prior to the spin off in 2016 or whenever it was. Its somewhat standard verbiage in those situations. Unless something new came out which I am not aware of. In either event I would think it really would only be the problem of shareholders of record on the spin date.

[Spekulatius]

I think the IRS clause is pretty much in any spinoff filing. It seems like standard boilerplate. I am not in MSGN, but I add a bit in MSG. I think Dolan will come to his sense on the Spheres. MSG is ultimate where I think the value is, but MSG has a long duration contract with MSG they guarantees them a profit, unless ones assumes doomsday scenarios. After the contract expires, the value of MSG is very much in question.

 

I think the idea with the whole spinoff was to put some debt into a cash flowing entity (MSGN) then put the cash into an asset entity (MSG), so it can develop Dolan’s toy project (the Spheres) without risking the store. I don’t think the arrangement doesn’t make all that much sense unless something else happens (the sport team get spun off too) and if the Spheres don’t happen, what is the $1B in cash for on MSG balance sheet. Maybe other assets/arenas? Anyways, added a bit more MSG on Thursday, but feel I need to understand this better before going in knee deep.

 

FWIW, Murdoch agrees that FOX is too cheap as well and just bought $16M personally.