MSGN: A Promising Spin Off

I purchased 119 shares of Madison Square Garden Networks today at 21.40.  MSGN currently has an earnings yield of 10.11%.

Spin Offs

I became aware of MSGN because it is a spin off.  Spin offs are when companies take divisions of their firm and spin them off to operate as a separate entity.  Companies do this for many reasons.  They may believe that the firm will receive a higher valuation if valued separately.  They may want to unload debt on the entity.  Regardless of the reason, spin offs are an attractive area to invest.  Spin offs have been proven as a group to beat the market.

The best explanation of a spin off strategy is detailed in Joel Greenblatt’s book You Can Be a Stock Market Genius.  It is a great book despite the ridiculous title.  In the book, Joel gives many real world examples of spin offs he purchased for his fund and details his rationale for doing so.  It also explains in depth the reasons that spin offs outperform better than I can.

As stated previously, spin offs outperform the market.  If you don’t feel like doing the homework involved in investigating spin offs individually, there are ETFs that specialize in owning these entities.

With this said, proceed with caution.  My belief is that the metric which best captures risk is not beta, but the debt-to-equity ratio.  As mentioned earlier, while spin offs outperform for many reasons, parent companies like to load up these entities with debt.  It’s like divorcing your significant other and then saddling them with all of your credit card balances.  I’m sure there is a more complex explanation in corporate jargon that makes this sound better.  In a downturn, this debt can become a dismal drag on performance.  One of the spin off ETFs (exchange traded fund), the Guggenheim Spin Off ETF (CSD), saw a 2/3 erosion in price during the recession in 2008.  Even despite that loss, the ETF has still outperformed the market.  While they outperform the market, spin offs will require a healthy supply of Pepto Bismol during recessions.

For those who want to investigate spin offs individually, a great list is maintained at this site.  I will frequently take a look at this list as a starting point to do research.  I’ll then do a search to read news articles about the deal and any other analysis that has been done to evaluate the opportunity.

Why MSGN?

MSGN is the cable network division of Madison Square Garden.  This was spun off from the main MSG entity about a year ago.  The primary owner of MSG is the Dolan family.

It looks like the Dolans, who sold Cablevision a year ago, wanted to hold onto the prime iconic piece of New York real estate that is Madison Square Garden but simultaneously realize that cable is a dying business and want to rid themselves of it.  Hence their sale of Cablevision.

By spinning off MSGN, they isolate the entity for a potential buyout from another firm while continuing to hold onto the property that they feel has a future.

Earlier this year, Starz was bought out for 20 times earnings.  Why wouldn’t someone pay a similar multiple for MSGN, which is at half that valuation?

Even if I am wrong, MSGN has an attractive earnings yield and I am comfortable with it in my portfolio.  The only downside is the debt load, but considering that every other company I own has a healthy balance sheet, I am comfortable with this risk.

PLEASE NOTE: The information provided on this site is not financial advice and I am not a financial professional. I am an amateur and the purpose of this site is to simply monitor my successes and failures.

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