MSGN - MSG Networks

[Lance]

Gregmal, the beer is on me next time I’m in NY.  Agree that Dolan’s a weird cat, but don’t see how he can screw this up.

 

Regarding FOX, thoughts on the two share classes?  Noticed they reacted differently during after hours yesterday.

 

Thanks

Lance

[Gregmal]

A little more brainstorming and thesis murdering attempts on my part the past few days have yielded the following:

 

Knicks/Rangers contracts are of no worry to me period, but to everyone else, you've got until 2035. Islanders are after 2030, Devils are 2024. However, for those concerned about Dolan negotiating with....Dolan, 15+ years from now, I suggest you look up the history with the Buffalo Sabres. Long story short(its a weekend, I don't feel like writing the entire novel, nor would the wife allow it lol), the Sabres were always seen as the largest risk to exit. Additionally, they are owned by an ambitious, entrepreneurial fellow named Terry Pegula. Pegula has long sought to own or create his own RSN. He also owns the Buffalo Bills. The contract was up sometime around mid 2016. After MSGN split from MSG. What happened? The team at MSGN not only extended the Sabres on a longer term than the previous deal, but also walked away gaining the rights to much valued Buffalo Bills content.... Not bad.

 

Separately, I always wondered, but didn't care or find it integral to my investment enough, to track the exact allocating of the previous MSGn authorized buyback of $150M. This was deployed after the stock briefly turned south of $20 in late 2017. The stock to my recollection very quickly rebounded to levels north of $20, and that was that. I did the back of the enveloped on the math and it appears the company was not willing to execute very much of that, which is why their total authorization is currently way higher than the $300M new announcement. What can I infer?

 

1)That under $20, the company is willing to buyback a lot of stock, but they are very disciplined over that number.

2) That the company in 2017 verified running a brief strategic review in order to feel out the market and potentially sell. So the same board that authorized that plan, and the same one that just promptly and proactively launched this one, are doing so based on informed and fairly current knowledge of EXACTLY WHAT THE PRIVATE MARKET IS FOR THE COMPANY. In addition to that, I dont think its a coincidence they made this announcement half an hour after the YES deal closed. I think they were very involved in the ongoings of the major RSN deals that took place between FOX and Disney, and have their finger on the pulse of the market for their assets.

 

So.... all the more reason to look at $16 as kind of no brainer territory. But that's just my opinion. Hopefully this insight is helpful for those interested here.

[no_free_lunch]

I am in on this one.  My biggest concern, and what is keeping it a medium sized position, is that it seems you can get really burned in a deflationary environment.  The fees to parent go up by 3% each year I have read, what happens if we get into a deflationary environment?  It has 16 years left on the contract IIRC, that can be quite the hurdle to overcome if you can't raise rates.  This is before we even get into a discussion on the subs.

[Stuart D]

This has been a fun post to read! At $17.05, it still seems cheap  :)

 

Is anyone concerned about the $900m due 2021?

[scorpioncapital]

In today's world, most companies believe they can roll over their debt forever. Just like you and I we can refinance a mortgage until we die and never have to pay it back, sell the asset at that point by the estate.. ...but this assumption is dangerous. In the short term maybe less so but eventually, if debt had no consequences and could be imprudently accumulated, what would be the point of lending on the creditor side?

[UK]

I am afraid this sport content inflation Vs general low inflation or even deflation (because of macro or ongoing sector disruption) is a very real and big risk. If I remember correctly, Malone also pointed to this risk some time ago, while commenting on ESPN future. But probably this will revert to the normal valuation before answer is clear:)

[Spekulatius]

I am afraid this sport content inflation Vs general low inflation or even deflation (because of macro or ongoing sector disruption) is a very real and big risk. If I remember correctly, Malone also pointed to this risk some time ago, while commenting on ESPN future. But probably this will revert to the normal valuation before answer is clear:)

 

I think the bigger risk for ESPN ( and other sports content) is to get squeezed in the middle between consumer or the team (content provider) because they provide little value add, especially when streaming becomes the prevalent method of distribution.

[Gregmal]

This has been a fun post to read! At $17.05, it still seems cheap  :)

 

Is anyone concerned about the $900m due 2021?

 

I wouldn't be. But Im also not worried about the Knicks/Rangers renewal in 2035...some are.

 

But in regards to the debt, the company when spun off in late 2015 I believe had something like $1.3B net debt. So in 3 years they've paid down to ~$700m in net debt. The $900M face, also requires a mandatory $120M pay down this coming year. So by 2021, even if spending the entire buyback authorization you should still see that debt number no higher than maybe $650M, and EBITDA is around $300M. They've also mentioned they are currently working on refi options.

[Gregmal]

This has been a fun post to read! At $17.05, it still seems cheap  :)

 

Is anyone concerned about the $900m due 2021?

 

Just my opinion, but I think it's easy money until about $17.50-$18. Then its still cheap, but if you're conservative about it, just take the company any their word on what their willing to pay...and do the same.

[Gregmal]

Since the announcement, a total of ~7.5M shares have traded. The company is potentially looking to repurchase north of 15M shares at 17.50. Yea, don't think it's happening. Volume has totally dried up.

[vince]

A little more brainstorming and thesis murdering attempts on my part the past few days have yielded the following:

 

Knicks/Rangers contracts are of no worry to me period, but to everyone else, you've got until 2035. Islanders are after 2030, Devils are 2024. However, for those concerned about Dolan negotiating with....Dolan, 15+ years from now, I suggest you look up the history with the Buffalo Sabres. Long story short(its a weekend, I don't feel like writing the entire novel, nor would the wife allow it lol), the Sabres were always seen as the largest risk to exit. Additionally, they are owned by an ambitious, entrepreneurial fellow named Terry Pegula. Pegula has long sought to own or create his own RSN. He also owns the Buffalo Bills. The contract was up sometime around mid 2016. After MSGN split from MSG. What happened? The team at MSGN not only extended the Sabres on a longer term than the previous deal, but also walked away gaining the rights to much valued Buffalo Bills content.... Not bad.

 

Separately, I always wondered, but didn't care or find it integral to my investment enough, to track the exact allocating of the previous MSGn authorized buyback of $150M. This was deployed after the stock briefly turned south of $20 in late 2017. The stock to my recollection very quickly rebounded to levels north of $20, and that was that. I did the back of the enveloped on the math and it appears the company was not willing to execute very much of that, which is why their total authorization is currently way higher than the $300M new announcement. What can I infer?

 

1)That under $20, the company is willing to buyback a lot of stock, but they are very disciplined over that number.

2) That the company in 2017 verified running a brief strategic review in order to feel out the market and potentially sell. So the same board that authorized that plan, and the same one that just promptly and proactively launched this one, are doing so based on informed and fairly current knowledge of EXACTLY WHAT THE PRIVATE MARKET IS FOR THE COMPANY. In addition to that, I dont think its a coincidence they made this announcement half an hour after the YES deal closed. I think they were very involved in the ongoings of the major RSN deals that took place between FOX and Disney, and have their finger on the pulse of the market for their assets.

 

So.... all the more reason to look at $16 as kind of no brainer territory. But that's just my opinion. Hopefully this insight is helpful for those interested here.

 

I dont think you can compare the stock price over that 2 year span, at least not on an equal basis.  They have paid off debt and bought back stock which means market cap and EV are different for the same stock price (which you obviously know already).  This stock is an absolute no brainer because their earning power looks reasonably constant (based on all the factors that everyone already knows), the fcf/earnings yield is ridiculous (especially with low interest rates and pretty stable earnings that stay stable even with some subscriber losses), an aggressive buyback at those ridiculous yields and as a default, the creation of a dollar of value for every dollar retained to pay down debt.  If earnings dont start falling pretty rapidly soon, it's mathematically impossible to lose money here assuming mgmt is aligned and not brain dead.  PRAY TO GOD that the stock price doesnt go up for a couple years, so we can feel like it's 1974 again buying good businesses at 2-3 times earnings.  Like Gregmal said, sometimes it really is easy.

[Stuart D]

This has been a fun post to read! At $17.05, it still seems cheap  :)

 

Is anyone concerned about the $900m due 2021?

 

I wouldn't be. But Im also not worried about the Knicks/Rangers renewal in 2035...some are.

 

But in regards to the debt, the company when spun off in late 2015 I believe had something like $1.3B net debt. So in 3 years they've paid down to ~$700m in net debt. The $900M face, also requires a mandatory $120M pay down this coming year. So by 2021, even if spending the entire buyback authorization you should still see that debt number no higher than maybe $650M, and EBITDA is around $300M. They've also mentioned they are currently working on refi options.

 

Thanks @Gregmal, that makes sense.

[vince]

I was basing my market cap language on 62 million shares outstanding but I believe thats a mistake as it looks like its closer to 75 million.  Don't know why I had that number in my head or where I saw it.  Can anyone confirm?

[SHDL]

I was basing my market cap language on 62 million shares outstanding but I believe thats a mistake as it looks like its closer to 75 million.  Don't know why I had that number in my head or where I saw it.  Can anyone confirm?

 

75m is about right.  You might have missed the Class B shares the first time you looked.

[Cardboard]

And the Bills win! Every bit helps when it comes to viewership.

 

Cardboard

 

 

[dwy000]

If you like MSG you should look at SBGI.  They just bought all the Fox sports networks from Disney including YES Network. They also have the leverage with their network stations to negotiate better carriage deals.  The stock is at $43 while they are indicating they will earn $12-13 per share of free cash flow (not earnings, free cash flow).  More diversity, better negotiating leverage and better valuation.

[vince]

If you like MSG you should look at SBGI.  They just bought all the Fox sports networks from Disney including YES Network. They also have the leverage with their network stations to negotiate better carriage deals.  The stock is at $43 while they are indicating they will earn $12-13 per share of free cash flow (not earnings, free cash flow).  More diversity, better negotiating leverage and better valuation.

 

Tell us more including any negatives please

[Stuart D]

Link below to their investor presentation:

 

http://sbgi.net/wp-content/uploads/2019/05/20190505-Slider-Investor-Relations-Deck_vSENT.pdf

 

Looks as though it will be cheap on a P/FCF basis, but I'm not sure of exactly how much debt the company will have after the RSN acquisition. Slide 16 shows: $8.2b in new debt; and $1.08b in preferred equity. Slide 5 says the total EV of the transaction was $10.6b.

 

Also Sinclair's pre-consolidated 10-q shows $3.7b in debt.

 

So perhaps total EV = 10.6b (new company) + 3.7b (debt at existing company) + $1.1b (preferred)- $1b (cash) = $14.4b

 

Am I on the right track here @dwy000?

 

 

 

[dwy000]

Yes, you are absolutely right, it is highly levered right now (although on a consolidated basis it is not out of line with historical norms for the industry).  I'd also note that the debt taken on to acquire the RSN's is largely non recourse to Sinclair.  Also, Sinclair has the right to buy out the prefs in the next (I believe it is) 18 months and fully intends to do so.

 

The next year being an election year they should have enormous cash flow to pay down some of that debt.

 

Also, they have started up the Chicago Cubs RSN whichwill come online next year.

[dwy000]

Sorry, forgot to add that the presentation was prior to acquisition of YES Network too.  They dont own the whole thing but will manage the asset and get paid for it.

[Cardboard]

Tempted to buy more here.

 

I looked at Sinclair and I am having a hard time understanding their web. I can see the value but, it is complicated and I don't like the amount of debt.

 

This story is much simpler, low leverage vs free cash flow and with MSG now moving up, their tender offer, I am having a hard time seeing how one loses.

[Stuart D]

I like this idea, so I've been doing some further reading.

 

The 2016 VIC post (for MSGN) brought up the contract renewal of Cablevision/Altice at the end of 2019 being a potential risk (albeit minimal as MSGN potentially is adding more value to Cablevision, than the other way around).

 

Quote from the 2016 VIC write up below. Any thoughts on this?

 

Top Customer (Cablevision) is Being Acquired by Aggressive Cost Cutter – The proposed acquisition of Cablevision by Altice has also created some uncertainty, but I believe that concerns are overblown. Altice has gained a reputation as an aggressive cost cutter and there is the potential that it could end up scrutinizing its programming expenses to achieve their lofty cost reduction targets for Cablevision. With Cablevision representing ~40% of MSG’s RSN subs, the prospect that Altice drops the networks or demands a meaningful rate reduction could have a material negative impact on MSGN’s results. However, I believe that it is unlikely Altice would drop the networks and MSGN should have good leverage in 2019 when Cablevision’s current affiliate fee agreement comes up for renewal. The risk of not carrying MSGN’s RSNs would likely have a significant impact on Cablevision’s results due to the potential loss of a large number of highly profitable broadband subscribers.

[Stuart D]

further reading...

 

I don't know much about Basketball - it's not a huge sport in Australia. Having said that, I'd imagine that the best time to buy programming rights is when the team is on the bottom of the ladder (low subscribers) and the best time to sell is when the team is on the top (presumably high subscribers).

 

The NY Knicks are MSGN's biggest team. It seems the Knicks are currently on the bottom. They haven't made playoff since 2012-2013, 6 years straight. No team stays on the bottom forever though and there was a period where the Knicks made the playoffs each year for over a decade (1987 - 2001). A return to form could result in a large upswing for MSGN.

[dwy000]

I like this idea, so I've been doing some further reading.

 

The 2016 VIC post (for MSGN) brought up the contract renewal of Cablevision/Altice at the end of 2019 being a potential risk (albeit minimal as MSGN potentially is adding more value to Cablevision, than the other way around).

 

Quote from the 2016 VIC write up below. Any thoughts on this?

 

Top Customer (Cablevision) is Being Acquired by Aggressive Cost Cutter – The proposed acquisition of Cablevision by Altice has also created some uncertainty, but I believe that concerns are overblown. Altice has gained a reputation as an aggressive cost cutter and there is the potential that it could end up scrutinizing its programming expenses to achieve their lofty cost reduction targets for Cablevision. With Cablevision representing ~40% of MSG’s RSN subs, the prospect that Altice drops the networks or demands a meaningful rate reduction could have a material negative impact on MSGN’s results. However, I believe that it is unlikely Altice would drop the networks and MSGN should have good leverage in 2019 when Cablevision’s current affiliate fee agreement comes up for renewal. The risk of not carrying MSGN’s RSNs would likely have a significant impact on Cablevision’s results due to the potential loss of a large number of highly profitable broadband subscribers.

 

 

The loss of MSG would definitely hurt Altice (Cablevision)...but it would kill MSG.  That's a pretty big game of chicken to be playing.  Hopefully level heads prevail but Altice is already losing subs due to high costs (led by sports).

[Gregmal]

I like this idea, so I've been doing some further reading.

 

The 2016 VIC post (for MSGN) brought up the contract renewal of Cablevision/Altice at the end of 2019 being a potential risk (albeit minimal as MSGN potentially is adding more value to Cablevision, than the other way around).

 

Quote from the 2016 VIC write up below. Any thoughts on this?

 

Top Customer (Cablevision) is Being Acquired by Aggressive Cost Cutter – The proposed acquisition of Cablevision by Altice has also created some uncertainty, but I believe that concerns are overblown. Altice has gained a reputation as an aggressive cost cutter and there is the potential that it could end up scrutinizing its programming expenses to achieve their lofty cost reduction targets for Cablevision. With Cablevision representing ~40% of MSG’s RSN subs, the prospect that Altice drops the networks or demands a meaningful rate reduction could have a material negative impact on MSGN’s results. However, I believe that it is unlikely Altice would drop the networks and MSGN should have good leverage in 2019 when Cablevision’s current affiliate fee agreement comes up for renewal. The risk of not carrying MSGN’s RSNs would likely have a significant impact on Cablevision’s results due to the potential loss of a large number of highly profitable broadband subscribers.

 

 

The loss of MSG would definitely hurt Altice (Cablevision)...but it would kill MSG.  That's a pretty big game of chicken to be playing.  Hopefully level heads prevail but Altice is already losing subs due to high costs (led by sports).

 

I would give my left nut(I already have two beautiful kids and that's all I want) for Altice to drop MSGN. It would create a ridiculous short term panic that ultimately would be resolved, and I'd make an absolute fortune buying the dip. No way the tri state area ceases to have Knicks and Ranger games or sees a reduction of 40-50% in terms of households with access to it. Does anyone remember when YES was only available on satellite? People won't tolerate it.