MSG: A $900M Play On The Future Of Sports Betting

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Friends,

Madison Square Garden Entertainment Corp. agreed to acquire media operator MSG Networks Inc. for about $900 million last week, a recombination of two Dolan-family-controlled companies.

MSG Networks is a regional cable, satellite, and radio service owned by the Madison Square Garden Company, which shows games of New York sports teams like the NY Knicks, NY Rangers, NY Giants, and more. In comparison, MSG Entertainment owns prominent sports and concert venues, including Madison Square Garden and Radio City Music Hall.

The merger will be a tax-free event for both companies and their shareholders, but investors don’t seem happy about the purchase price.

The all-stock transaction gives MSG Networks an acquisition price of $16.16 per share, a 7% discount to where shares closed the night before the announcement. MSG says it was intended to be a 4% premium, but after media reports “speculated on a potential transaction,” the stock ran up before the announcement (Source).

Still, with investors presumably expecting the typical 20%-plus premium that accompanies a transaction like this, both stocks tanked on the news. MSG Entertainment ($MSGE) closed Friday down 9.9% at $84.67, and MSG Networks tumbled 7.6% to $16.06.

As for MSG Sports?

The third publicly-traded Madison Square Garden entity, which owns professional sports teams like the NY Knicks and NY Rangers, was not included in the deal.

While investors don’t seem happy about the acquisition price now, I actually think it will end up being a good deal in the long-run.

Here’s why…

Due to the impact of COVID-19 on the economy, New York expects state-wide revenue could fall by as much as $15 billion — a massive increase from the previous $7 billion estimate they provided last summer.

Their solution?

Mobile sports betting.

Here is what NY State Governor Andrew Cuomo told the New York Daily News earlier this year:

With a population of almost 20 million, New York would instantly become the largest state to legalize sports betting. Furthermore, it’s already happening — New York is just being taken advantage of.

In February of 2020, an Eilers & Krejcik Gaming report estimated that New Yorkers crossed state lines to wager more than $800 million in New Jersey during 2019, indicating they control about 20% of the state’s total handle.

If that percentage held in 2020, that would mean New Yorkers wagered more than $1 billion on sports in New Jersey — without the state of New York receiving a dime of the tax revenue.

When you combine the realization that it’s already happening, whether you legalize it or not, with a $15 billion revenue shortfall, it appears to be only a matter of time before online sports betting becomes legal in New York.

So what does this all have to do with Madison Square Garden?

MSG executives expect that the combined company’s media, digital, and venue assets will create and maximize additional revenue streams from the potential expansion of legalized sports betting in NY State.

In simple terms, MSG wants to use its strategic advantage of vertical integration (ownership of networks, venues, and teams) to create new revenue streams for its collection of professional sports assets.

Shareholders have to trust that not only will New York State legalize online sports betting soon, but that MSG executives can effectively execute their plan. Still, given MSG is one of the most vertically integrated professional sports holding companies globally, I wouldn’t bet against this move.

As more details come out, I’ll make sure to keep you updated.

Have a great day, and we’ll talk tomorrow.

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