Madison Square Garden Spinoff Could Reveal How Much Knicks, Rangers Are Worth

The Madison Square Garden Co. announced on Tuesday it is exploring splitting its business into two separate companies, which would spin off the New York Knicks and Rangers from MSG's entertainment unit. The reasoning for the split could be largely driven by investors who want to unlock the full value of the sports franchises following the recent $2 billion dollar sale of the National Basketball Association’s Los Angeles Clippers to former Microsoft CEO Steve Ballmer.

“This is a play on leveraging the valuation of the sports franchises that MSG owns,” said Adam Sarhan, CEO of Sarhan Capital. “The activist investors know there is a ton a value locked up, and the best way to extract that value is by breaking the company into two.”

Representatives for MSG didn't reply to requests for comment.

Following the announcement, shares of The Madison Square Garden Co. soared over 10 percent on Tuesday to close at $72.99 on the Nasdaq.

The possible breakup would move the company's cable networks and sports franchises into one unit while the other would house its real estate assets and its concert and entertainment business. The company said its entertainment unit would host live events and concerts while its sports and media sector would include the New York Knicks and Rangers, along with MSG’s regional sports TV networks.

Currently, The Madison Square Garden Co. is run as three divisions, including MSG Media, which consists of the company’s regional sports networks; MSG Sports, which owns and operates the National Basketball Association’s Knicks, the National Hockey League’s Rangers, the Women’s National Basketball Association’s New York Liberty and the American Hockey League’s Hartford Wolf Pack; and MSG Entertainment, which hosts concerts and events at MSG’s venues. In addition to the Madison Square Garden Arena, MSG Entertainment owns the rights to operate Radio City Music Hall, the Beacon Theatre, the Chicago Theatre and the Forum in Inglewood, California.

One logical reasoning for the split is that MSG's current market cap of $5.6 billion does not properly reflect what the sports franchises are actually worth.

“I think that all of these splits are driven by a quest for value,” said Laura Martin, senior analyst at Needham & Company, LLC. “If these entities were traded separately as they’re discussing, it would add 20 percent market cap to the combined company after the spinoff.”

Adding 20 percent to MSG’s market cap would add nearly $1 billion to the value of the company’s assets, bringing the total value to around $6 billion, once the two companies are separated, Martin said.

Forbes estimates the Knicks are valued at $1.4 million and the New York Rangers at $850 million -- but the Forbes numbers embed the value of the regional sports network, or RSN. “That’s one of the problems. You end up with a number in the Forbes valuation and you don’t know what’s comprising it effectively,” said Ben Mogil, managing director at Stifel Nicolaus.

Excluding television rights, the value of the Knicks is estimated at $900 million, while the Rangers are valued at $400 million, according to Brett Harriss, analyst at Gabelli & Company. But the teams would still be under a shared umbrella; it's not clear whether they could or would be sold separately as the Clippers were.

Meanwhile, MSG's Media unit is valued at $3.9 million, MSG's Entertainment unit is valued at 270 million, excluding the value of the Chicago Theatre property, and the MSG Sports unit, including both the Knicks ($880 million) and Rangers ($410 million), is valued at $1.29 million, according to estimates from Gabelli & Company.

“I think it’s a terrific idea,” said Martin.“It’s great for shareholders that would be unwilling to buy the conglomerate, but would instead prefer to invest in either in the real estate portion of the asset [the Madison square garden venue] or the sports.”

The company did not announce a timetable for the spinoff, which will be subject to regulatory conditions and approvals. MSG's board of directors also authorized a buyback of up to $500 million of stock.