MSG Spins Off
Investors will get a chance to bet directly on the fortunes of the New York Knicks and Rangers and their home arena, Madison Square Garden, beginning Tuesday.
Cablevision Systems Corp. is splitting into two, returning the company to its roots as mainly a provider of subscription TV. The newly separate Madison Square Garden Inc. will include the arena, the basketball and hockey teams, regional sports channels and famed theaters such as Radio City Music Hall.
The move also figures to make it easier for 83-year-old Cablevision founder Charles Dolan or his heirs to eventually sell either company. Members of the Dolan family will own about one-fifth of Madison Square Garden but control 70 percent of the shareholder votes — similar to their stake in Cablevision.
Dolan began Cablevision in 1973, delivering cable TV to 1,500 subscribers on Long Island, N.Y. Since then Cablevision has picked up a slew of assets, including the Newsday daily newspaper and cable channels such as AMC, IFC and Sundance.
The Madison Square Garden assets haven’t been steadily profitable. They’ve seesawed with renovations at the arena, a slump in entertainment ticket sales in the recession and the up-and-down fortunes of the Knicks and Rangers. MSG’s operating income was $3.4 million in the first nine months of 2009, after a $23.6 million operating loss in the same period of 2008. The company made money in 2007 and lost money in 2006.
In contrast, Cablevision’s operating income for its TV, Internet, phone and advertising businesses has been rising steadily for years. In the nine months ended Sept. 30, operating income was $975.7 million, up 18 percent from the same period the year before.
By separating Madison Square Garden, investors who initially bought Cablevision for the steady cash flow of a cable TV company will get what they wanted.
On Tuesday, shareholders will get one share of Madison Square Garden for every four Cablevision shares they own.
Separating the businesses could make it easier for the cable TV operations to be sold. While son James Dolan remains Cablevision’s CEO after the spinoff, he is widely believed in the industry to have a special interest in MSG, where he will be executive chairman. The other five children aren’t believed to want to run the cable TV company.
“If (James Dolan) had his sports business he’d be happy,” said Todd Mitchell, an analyst at Kaufman Bros. The cable TV business “is not his puppy.”
Cablevision executives declined to be interviewed.
Time Warner Cable Inc. seems to be the likeliest buyer of the cable TV, Internet and phone operations. Time Warner Cable CEO Glenn Britt has said he would be interested in acquiring Cablevision’s cable systems, among others, if a deal made financial sense.
Cablevision serves more than 3 million customers in and around New York City, particularly Long Island, and parts of Connecticut and Northern New Jersey. Time Warner Cable serves Manhattan and nearby regions.
The company has been whittling down debt it piled on to pay a special $10.9 billion dividend to separate from Time Warner Inc. And Time Warner Cable’s shares have been on a roll since the split last March, giving it more valuable currency with which to buy Cablevision.
Tuna Amobi, an analyst at Standard & Poor’s, surmises that the Dolans also could try to spin off or sell Cablevision’s cable channels, most of which will remain under a group called Rainbow Media Holdings. It halted a spinoff plan in 2004.
While MSG’s profit growth has sputtered, the cable channels’ earnings have been steadily growing for the most part. For the nine months ended Sept. 30, Rainbow operating income rose 62 percent to $141.3 million.
In the meantime, investors can get a closer look at Madison Square Garden as a separate company, which ends up without any debt except for a five-year, $375 million credit line it can tap when needed.
Robert Routh, equity research director at Wedge Partners, said the new company appears to be available cheaply. In advance of its official debut Tuesday on the Nasdaq, Madison Square Garden stock has been trading around $18, giving the company a market value of about $1.4 billion.
“The assets are worth significantly higher,” Routh said. “It’s a steal.”
The Knicks and Rangers could be worth several hundred million each. The NBA’s Seattle SuperSonics sold for $350 million in 2006.
And Madison Square Garden Inc. will include two regional sports channels and the Fuse cable music network, which are worth about $2 billion in the estimate of Dan Martino, manager of the T. Rowe Price Media and Telecommunications fund. That is Cablevision’s largest shareholder outside of the Dolans.