Madison Square Garden Sports Corp. (NYSE: MSGS) owns two of the most iconic franchises in sports: the New York Knicks and the New York Rangers. Over the past four years, the Knicks and Rangers have increased in value by 65% and 61%, respectively, according to Forbes estimates. But despite this sizable increase, MSGS stock has only risen 26%, compared to 65% for the S&P 500. While it’s not the same as hitting a three-pointer, the underperformance of this stock, coupled with the trophy assets it holds and the substantial increase in third-party valuations for professional sports franchises, gives investors the opportunity to make big gains.
A unique moment in the world of sport
The combined valuations of the Knicks and Rangers add up to $9.25 billion, well above MSGS’ current value of around $5 billion. Essentially, at the current stock price, investors would be buying the Knicks at a discount and getting the New York Rangers for free. This unique opportunity is why MSGS now has a significant position in the MAPFRE US Forgotten Value fund.
Their tax advantages have historically made them attractive investments.
The Dolan family controls MSGS with a 21% ownership stake and 71% voting power. I have publicly criticized them, as have other analysts, for failing to take steps to close the gap between the private market value of their sports franchises and their public market value. Not surprisingly, the market remains skeptical. In addition, MSGS has been blamed for the so-called “Dolan discount,” which has historically plagued other businesses controlled by this family.
Additionally, both the Knicks and Rangers have performed well recently and have made deep playoff runs, which has boosted MSGS’ finances and increased the prestige associated with owning these trophy assets.
High Score: The Rising Value of Professional Teams and Broadcasting Rights
The market for professional sports teams is robust. For example, in 2023, the Washington Commanders American football team was sold for $6.1 billion, representing the highest price ever paid for a professional sports team in the United States. Meanwhile, Jim Ratcliffe just acquired a stake in Manchester United in a deal that valued this franchise at close to $6.4 billion. Even during periods of economic stress such as those during the COVID-19 pandemic, there was strong interest in professional sports franchises and the NY Mets professional baseball team was sold for about $2.4 billion, the highest price ever paid for an MLB franchise at the time.
Major sports franchises are a rare commodity and their favorable tax characteristics have historically made them attractive investments.
Major sports franchises (particularly in top-tier markets like New York City) are a naturally scarce commodity, and their favorable tax characteristics have historically made them attractive investments. Now that recent changes to NBA ownership rules have allowed institutional investors to take passive stakes, increased demand for these assets has been evident with the involvement of private equity firms like Arctos Sports Partners and Dyal Capital Partners, which have invested in several sports franchises.
In addition, the sports broadcasting rights market is booming, demonstrating that the value of live sports content is on the rise. This trend is expected to continue, driven by the growing demand for live sports as a key component of content offerings for traditional broadcasters and streaming platforms.
Means to unlock shareholder value
There are several ways to help close the valuation gap between MSGS’s market price and its intrinsic value. First, the recent NBA broadcast rights deal, which will take effect in the 2025/2026 season, is set to significantly increase NBA teams’ revenues. At estimated annual figures of between $7 billion and $8 billion, this would represent a substantial increase from the current figure of nearly $2.7 billion per year.
Another potential impetus would be the sale of minority stakes in the Knicks or Rangers. The Dolan family has not ruled out this possibility, and such a sale could provide a clear benchmark value for these assets. One alternative is for the Dolan family to sell the Knicks and Rangers outright, or to separate them into separate publicly traded entities, which would potentially unlock value in both, allow for direct investment in these franchises, and at the same time pave the way for future tax-advantaged sales. The Dolans have done spinoffs before, and breaking up these teams would help address the clear discrepancy in valuation.
A trophy asset with untapped potential
With its unique assets and significant discount in valuation, Madison Square Garden Sports Corp. presents an attractive investment opportunity. Its core assets, the Knicks and Rangers, are among the most valuable franchises in their respective leagues. Moreover, whether through the NBA’s new broadcast rights deal, the sale of minority stakes, or the separation of the teams, the Dolans have multiple avenues to unlock value for shareholders.
The market may be skeptical (and rightly so) of the Dolan family in the absence of significant shareholder-friendly actions, but MSGS offers patient investors the opportunity to invest for the long term in two top-tier sports franchises at a significant discount to their intrinsic value. Any steps the Dolans take to unlock value could lead to significant appreciation in MSGS stock. Taking all this into account, we expect MSGS to deliver a return worthy of its iconic assets.
