Enterprise Value = $2.607 billion
Operating Income = $314.7 million
EV/Operating Income = 8.28x
Earnings Yield = 11%
Price/Revenue = 2.20x
Debt/Assets = 157%
Debt/EBITDA = 3.98x
MSG Networks is a product of a spin-off from Madison Square Gardens which occurred in 2015. The company represents the cable division, broadcasting events that occur in Madison Square Gardens. Cable networks pay MSGN fees for their content. The content includes NY sports teas like the Rangers, Knicks, Islanders, Devils. The stock is controlled by the Dolan family.
Sentiment against the cable industry and MSGN are negative. Everyone is worried about cord cutters. As cord-cutting catches on, content delivered on cable TV will become less valuable. As it becomes less valuable, cable channels will receive less revenue for the content that they distribute. When MSGN was spun off, it was also saddled with a massive amount of debt from the parent company, which is a risk.
While the market is worried about cord cutting, MSGN has a robust business that is throwing off generous amounts of free cash flow. They have been using the free cash flow to pay off debt that they were saddled with in the spin-off, thus improving their enterprise multiple valuation. They also announced a massive share buyback program recently for $150 million. That represents 10% of the existing market capitalization.
Even if cord cutting is a problem, I find it difficult to imagine a scenario where people don’t watch New York sports. Even if cord cutting catches on, it seems unlikely that MSGN’s properties won’t be valuable.
The debt is a problem. I usually avoid leverage whenever possible, but it is difficult to find spin-offs that aren’t significantly leveraged. Leverage, unfortunately, goes with the territory. When a parent unloads a smaller spin-off, they frequently use it as an opportunity to unload their debt onto the smaller firm. This is a major reason that spin-offs are neglected by the market as a whole.
Even with the debt, MSGN should continue to throw off cash flow that will service it. They are also taking the debt seriously and paying it down, thereby improving their enterprise valuation.
The cable industry is also in a state of consolidation. Disney recently purchased a significant portion of Fox. Starz was also bought out last year. MSGN is an attractive buyout candidate at its current valuation. In fact, selling the company may have been one of the reasons this was spun off in the first place: to isolate the cable entity for a potential acquirer.
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