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Podcast #85: Chris McIntyre thinks $MSGE is a cheap stock
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Transcript begins below
Andrew: All right. Hello, and welcome to the Yet Another Value Podcast. I'm your host, Andrew Walker. And with me today, I'm happy to have on for the second time, Chris McIntyre. Chris is the founder of the McIntyre Partnerships. Chris, how's it going?
Chris: Good, good. Thanks for having me back. I appreciate it.
Andrew: Perfect. Well, hey, let me start this podcast the way I do every podcast. First, with the disclaimer, everyone should remember nothing on here is investing advice. Everyone should do their own diligence, consult their own financial advisors. And then second, with the pitch for you, my guest, you know, people can go listen to our first podcast for the full pitch. But you're exactly the type of guest I had. You run a concentrated book, you do deep work on all the stuff you buy, and sometimes, rarely, we even get you to put up a website on the stuff that you buy, which I know is about to happen for the stock we're going to talk about today. So that all out the way, let's talk about the company today. The ticker is MSGE, Madison Square Garden Entertainment. I believe the website, it might be up when this podcast comes out or maybe a day later, but it'll be MSGEisacheapstock.com.
Andrew: So, I'll flip it over to you. What is MSGE and why is it a cheap stock?
Chris: Sure. And do you want me to just go straight into the thesis or do you want-- because I know you had a podcast before, so I wanted to know and make sure I am hitting on the note [crosstalk]
Andrew: Why don't you give a general overview, just so people know the assets were talking about 'cause the story's changed a little bit and people just might not know it, you know, the last episode was 40 episodes ago. [crosstalk]
Andrew: He's referring to-- I did a podcast with John Boyer on MSGN and MSGE which merged now, are just MSGE. But, go ahead Chris.
Chris: Yeah. So, MSGE is a-- let's skip right to the where it's at now and not going to give the whole history because there's plenty of that [inaudible]. So, MSGE is a Holdco. It's basically the Dolan family's entertainment assets that are not the Knicks and the Rangers, which is ticker MSGS.
Chris: So, MSGE is basically four different business lines structured as a holding company. So, some of the reason I highlight that is some of the debt is bankruptcy remote, and some of the assets are owned on an unlevered basis and so simply looking at the balance sheet will not tell the whole story of what you're actually buying when you're purchasing the share of MSGE. I lump it into four different buckets. There is the Madison Square Garden Arena, there is an entertainment asset business, which is mainly the... depending on how you want to actually think about it, it's the shows that are not at the-- it's reported as the entertainment segment. So sorry, I'm stuttering over it. But like it's for our [inaudible] right now so I don't spin out of control. It is the other entertainment assets that they have like the Rockettes...
Chris: The Beacon Theater, and then Chicago Theater. And then the third business bucket, and also in that bucket, sorry, excuse me, I also would include sort of like the TAO and the other thing which are actually reported separately in segments, but conceptually I think, you should think about them as like, the entertainment, dining, clubs or live assets that are not Madison Square Garden.
Andrew: These are the assets that have been closed for the past 18 months basically.
Chris: Yeah, yeah. These are your not good COVID place. And then, the third basket would be the Sphere, which is probably the most debated and sort of hot topic kind of item in the story, which is a large new construction in Las Vegas, located on the Strip. This taking roughly about $1.9 billion round up to whatever. On a new, should be state-of-the-art iconic, hopefully, you know, asset in Vegas, that is a large concert venue basically, that will have state-of-the-art sound and all this other stuff which we'll get into. And then they also own the Regional Sports Networks, MSG networks for the Knicks and Rangers along. They also have a hockey package that has like the Islanders and Devils and stuff. And so, that is a very much a different business than the rest of it, even though they were all kind of connected to being live entertainment asset, you know, New York Sports, you know, things. And so they own that which is somewhat connected to the fact that they own the Knicks and Rangers and so. We'll talk about that asset after this. That's basically what you own. You own the Garden Arena, you own a live entertainment business outside of the Arena specifically in heavily weighted towards TAO and LAVO and these sort of like clubby restaurants that are in New York and Vegas and other places. You own the Sphere and then you own the Regional Sports Network.
Andrew: Perfect. So, there are puts and takes to all of those different assets, right? But I'm going to start with the most obvious question. I think the question, you know, I come to this company with a lot of history. Anyone in New York-- I know you live in New York too, anyone in New York comes to anything the Dolans control with a lot of history and angst, right? But I think the most obvious question be, right now the enterprise value of MSGE is $2.7, $2.8 billion as you and I are speaking, right? I don't think there's any person in the world who would look at all of the assets that the company owns and say that the sum total of them is not worth more than $2.8 billion, right? The Madison Square Garden itself, which they own, might--a $2.8 billion is pushing it, but it's a big majority of that thing, right? So, I think this would fall into the bucket of what I think of as companies that are always undervalued. It's clear that their assets are worth more. But when people look at them, people say they're run by bad managers who are going to light money on fire, you know. So we'll dive into some more of the lighting money on fire and everything going forward. But as just a first take, what would your response to my pushback, that their pushback be?
Chris: It's funny. Just pause here for a second. If what will be on the website as my slide that I'm pitching it on, as I lay out the thesis and all that stuff, and before I get into details, I actually pause and I'm like, "Okay, the Dolans are not as bad as you think they are".
Andrew: You know, I said this, so MSG before it spun everything off, was one of my largest positions for a long time. And I would always say, "The Dolans are not as bad as you think they are". And then the Sphere and some of the other stuff they've done recently has kind of got me on the 'The Dolans are as bad as you think they are' train, but go ahead, go ahead.
Chris: So the way I would counter it is we could talk about what the Dolans have specifically done here. If you follow like the Twitter Sphere and like, you know, certain write-ups on Bad Investors Club, all that kind of stuff. I think an underappreciated detail of the story is like they're building the Sphere, right? And so this business is massively cash flow negative. It has $1.3 billion in cash on the balance sheets so that's not an issue, right? But you know, they're burning cash right now, but once the Sphere is done, underneath this are like real cash flow positive businesses. And the Dolans have bought back stock, they've bought back tons of stock at MSGN, right? Where we can talk about whether it was a good idea, bad idea, right? If current prices looks bad, doesn't mean that was probabilistically a bad decision to make in the past, right? But like, I think it's an underappreciated detail of the story. Once this is done, this business is going to throw off cash and the Dolans buy back stock. And so we can talk about how to value it, we can talk about what their multiple is, we got out portfolio discounts. I'd argue if the Sphere is a success, everybody's going to tell me how great the Dolans are and how it takes a rare mind to take a multi-year contract. You know what I mean?
Andrew: Just to back your point up. There are two recent investments that the Dolans made. One was buying The Forum out in Los Angeles and revamping that. And two, was actually in 2010, they did a big... I can't remember exactly how much they spent on, but it was well into the nine figures if I remember correctly. Remodel of the garden itself. And in both cases, analysts were saying you guys are destroying so much value. These are the dumbest things we've ever seen. And with The Forum, they made multiples of their money on that investment. And with the garden, the return on investment, they say, I think it's like 15% on leverage or something. I don't know. But everyone at this point acknowledges it was a great use of money. So, you know, when Sphere first started up I was like you can doubt them at your own peril because their history of buying, renovating buildings, stadiums actually really good. But now, I kind of fall into a different camp. To your point on valuation, they put their projections in the proxy, right? 2025 MSGN plus MSG, they say the whole company will do 435 million in after-tax cash flow. This is under a $3 billion enterprise value, like that would be all worth a lot of money.
Chris: Yeah. And the company is basically, there's the term loan on... and it's like also anything about that [inaudible]. The company has very conservative leverage. There's a term loan that's on the MSGN piece that they bought, because they basically just bought the stock of MSGN for 10 million shares, roughly speaking.
Chris: And so that term loan basically done doesn't, hasn't changed at all, right? But if you think about it, depending on what you think of cash flow generation, and the next year or two. But, if you think construction cost come in roughly where they model them, right? And then you kind of just model you out, you're basically saying the end 2023 like X the term loan that is only on the MSGN piece. This is an unlevered asset that's going to be yielding, you know, I would think that probably it says it's like 110 to 120 million or whatever of like the cash flow coming from the end piece. 'Cause like 300 million of like unlevered cash flow on like... at that price depending on what you want to value the end piece, you know, it's quite cheap and like these are frankly like very leverageable assets, I would say.
Andrew: Yeah, something like a... outside of COVID, something like Madison Square Garden, you know, it's always going to be sold out. It should be a very infrastructure-like asset, right? So, let's dive into the different pieces here. I think the first and the most controversial piece, MSGN might be approaching there cause the deal was kind of cheap, but I think the most controversial piece for MSG is the Sphere, right? And I can go through the history or I'll let you go through the history of the Sphere. But let's talk about what the Sphere is, what they're doing, why it's so controversial?
Chris: Sure. So the history of the Sphere is-- something about history it's funny because only, like, three years of development or whatever. I mean, I haven't thought about it--
Andrew: A rocky 3 years though, right?
Chris: Yeah. Where do you want to start with like the controversions, be like, how much they're gonna spend? Or what actually is the asset, or what do you wanna?
Andrew: Whatever you think is most important. Why don't you give an overview of what the Sphere is? And then we can go into the controversy.
Chris: Okay. So Sphere is a, I would point this out anything about, like the company, it's basically, an unlevered real estate development. Right? So there's a big detail in the story that people miss. [inaudible] Very rarely do you see someone saying $2 billion into a real estate. It's a theater so, it's not like it's on condos, but like, we constructed a large building and we did it on an unlevered basis. It's not a very common thing and it's why I think people might associate more risk to it than if they thought about on levered versus unlevered types terms in these investments.
Chris: So the Sphere is a, it's basically a concert venue located in the middle of the Strip. It's connected to The Venetian and we gave them the land actually. And it's also going to be connected at the Sands Expo Center and all that kind of stuff. There's a sky bridge also. What it's supposed to be is basically a state-of-the-art, it's a concert venue and what they're saying is, the concert venue has not been reimagined in a very long time. And so we are going to build a state-of-the-art concert venue with state-of-the-art electronics. Incredible sound beamforming technology, which is this type of sound thing that we're talking about and all of this like, super high-tech, kind of stuff. And so the kind of pitch is like-- Are you like an EDM fan at all by any chance?
Andrew: I'm not really, but I've heard it before.
Chris: So the pitch is like you go to these EDM concerts just to sort of like zoom out and put a user experience kind of like perspective. Yeah, you got to EDM, and I don't really go to that many EDM concerts, but like you go to them and like I saw like Diplo at the Brooklyn Mirage.
Chris: In like, September or something. During the concert, they project stuff all over the walls, like there's like imagery and it's like it's not as much about like watching a, you know, Hendrix hit a ridiculous, note on a guitar. But the whole crowd, it's more like this is an experience, this is a very like DJ pre-recorded kind of music. It's not quite as in the moment with the instruments. And so it becomes a lot of experiences. So there's a lot of like, you know, stuff projects on a lot of walls. There might be a lot of people there on some substances that are enjoying those walls more than what otherwise. But like it has this very kind of thing. And so if you go look, like on YouTube, look at Ultra Music Festival or like Electric Zoo, or some of these things that you see these huge displays of all these lights and stuff like that. And they're like, "That doesn't exist in-stadium" because like you have to bring all that kind of stuff. You can't really, you have to like knock out all the seats, you know it doesn't really make any sense. And so part of the concept on the Sphere is so they're also going to have like--we'll talk more about what they would actually have, but like, what they've built is a stadium. Stadium seating, right? Very normal sort of thing, interesting shape, but nothing's going to blow your mind. There's a stage, and there's deets and yada yada. It's an interesting shape. And then they have connected basically a giant like-- TV, right? It's basically-- it is three football fields of screens. Basically, the same quality as your iPhone for scale that's about 70 times, this is the size of an IMAX. [crosstalk] So it's a massive screen. It's going to have these super high, it has this technology called, I believe it's called informing technology to be very specific.
Andrew: That's right. Yup.
Chris: Yeah, and so instead of having a speaker upfront in the stadium that you just blast really loud so it's a really loud in the front, and like really faint in the back, right? They individually target a speaker basically, at all the seats. So everyone can hear it all at the same sound quality, right? I'm not sure how much some of this technology is really perfect going to work, which is a fair criticism of the project. But like you're going to be able to like smell stuff. The stuff will vibrate a little bit. And so this is really immersive world you can create. And so what can you do with that kind of technology? Do want to jump in or do you want me to keep going?
Andrew: No, No. Actually, yes. Let me jump in. So I think I get where you're headed, right, like their pitches, and what you're saying, and I don't disagree, the Sphere is going to be unique. It is going to be, if you are a concert-goer, they are saying it will be the best concert experience in the entire world. And that's going to be the draw. Am I kind of summing that up correctly?
Chris: Yeah, yeah. I think that is basic about right.
Andrew: So I think the pushback would be great. But people including myself, are worried that they are lighting money on fire with the Sphere. And there are all sorts of interesting things to the Sphere. But what I point to, and I put this in my tweet thread when I was prepping for the show notes if anybody wants to look at it. You know, when they announced the project about three years ago, they said "This project is going to cost us $1.2 billion and we're going to make a double-digit return on it". And a couple years later they come out and they say, "Hey our contractor thinks it's going to cost 1.7. But that's just the contractor. They get paid on cost. We think it's 1.2 we're going to push them back". And then a couple months later go by, they fire the contractor. A couple months later go by, they say, "It's going to be 1.8". Today, you know, what was supposed to open in 2021 and cost $1.2 billion when they originally projected it. Today, they're saying it's going to cost I think it's almost 1.9 billion and it's going to open in 2023. Now, part of the delay is Covid, but, you know, we're two years behind schedule. The money keeps going up and up and up, and I think people are worried. James Dolan famously, he loves music. He tours. MSG has been involved in music stuff before. He loves music and I think people including me are worried that this is a passion project that is being done at no expenses spared. And it's not necessarily, not only is it not the best use of shareholder money, it's lighting money on fire. So what would you say to people including me, with those criticisms?
Chris: I'd say the most important thing to do facing those criticisms is look down not up at what you're actually buying at the current price. Right? Like this is not price for [inaudible]. So I should have read and probably better job on this before. But like, you own a garden on an unlevered basis. So you own on an unlevered basis, right? So it's 2.7 billion EB, right? So how much are we really paying conceptually for the Sphere anyway? All right, so it's gonna have cost overruns. Maybe there are-- maybe it's a pet project yada yada yada. And I want to talk about the cost overrun part in a second. But, look, I make this point all the time. But, like, do you know that UBS Arena?
Andrew: I don't think so.
Chris: Okay. UBS is paying like $23 million a year for you to know it. That is the Islanders new arena on Queens, Long Island wherever exactly is. The rumor is it's about $23 million. Crypto. comes with 700 million for 19 years, right? [crosstalk] I think you might have tweeted it at some-- or do we talk, or you would talk about. Look, this is an asset in the middle of the Strip. Like, they're gonna get like 30, 50 million of like marketing revenue out of this thing. No matter what I think, I think that's a very simple bet. And then you're like, "All right. What else do I get out of this asset?", right, I don't know, 100 million bucks. Garden rents for something like $500,000 I think roughly speaking is a good number for a night whatever. You know, how many concerts-- What? We're going to do 100 shows a year? You know what I mean? Like you get to $100 million I think pretty convincingly. Is it a fair thing to say the thing only makes $100 million, it's a bust of a development project? Yeah. That's like the lousy use of $2 billion over with the six-year of development time frame. Like that's a terrible use of money, right? But that doesn't mean that like, it's a terrible buy for me.
Chris: You know? And also, let's put it right there. So, let's put it right there in the like, the cost side of the thing, right? Or do you want to stop for that or anything?
Andrew: No, that was perfect. That was perfect.
Chris: So, on the cost side of things and what do I actually think? What do I actually think on like downside on this field looks like from here, right? It's like--I think we can get to $100 million pretty easily. I don't think that's really rocket science, math, right? If it does $100 million what do I think? Do I think everyone would just be cool with that? No, I bet you we end up [inaudible] some more money into the project. You know what I mean? We have instead of a cost overrun, we have operational overrun, where like [inaudible]. I totally get this is sort of a distraction and potential waste of time thing, right? But like, still you be talking about like $100 million of the EBITDA should be reasonable with pretty minimal cap X, right? Whatever kind of way you want to conceptualize it. On the cost side of it though, and I actually think you can get paid in the investment before it even ever works when the cost basically kind of come in. And so, one of my points I make to people is like someone was like, "Don't you know, like steel prices are up?" and you're like they're done, steels' already there. Who cares, right? Like this building had a topping off, so they have something called in construction, a topping off ceremony, which is the highest placed beam in a building being placed. [crosstalk] They like cut ribbon, and whatever. You know? They did that in June. Like it's pretty far along. This thing is 70-80% complete probably by now, right? And then, all right, so where am I going to hit my cost overruns? The steels' in, concrete's poured. Where is the cost part, right? But we have all this like high-tech technology that you know, I'm sure there's a lot of semiconductors and I'm not sure if you've heard there's apparently some issues with semiconductor in Pasadena. Yeah, there's some weird stuff. But then I was talking it over with a friend who was a, whatever exactly his title is like, when Moynihan Hall was developed, he also did some stuff at the World Trade Center. The Moynihan Hall is relevant because they have like, a lot of screens. And he was like, like a scoreboard for a stadium like, is like 6 months minimum. Like more like 12 months lead time to actually get LG or Samsung whoever actually contracting with to like do it. This is a state-of-the-art three football fie-- it's like the largest scoreboard in the world to overly simplify it, right? They've already done the bids on it. They likely have down payments on it. Heck, it's probably already like 1/3 constructed or a lot of the parts are made, you know what I mean?They are much further along in this project. People talk about like the SoFi Stadium sort of these things. These things are massively overrun. You're like, they didn't massively overrun once everything was already poured, right? Like obviously, you have to think and I don't necessarily think this is fair to talk about here because they're kind of vague and--or whatever. A lot of the times in these things that have big overruns like, there's like a scope expansion.
Chris: Right, like there's the SoFi Stadium but there's also like, you know, like 5,000 square feet of like right now like, you know, office space associated with it, that's not like the stadium. That's like part of this big thing you're trying to do to redevelop this neighborhood. And so, I think, at this point farther along, I think it's much more reasonable to think about, almost all this stuff is contracted and like fairly decently along the line. I think the concept that something that's 80% completed is going to have a 100% cost overrun on the contractors installing the hand dryers, I think is wildly--that's not happening.
Andrew: It's tough to get a contractor to install a hand dryer. Hey, but there's [crosstalk]
Chris: Yeah, yeah go ahead. Just to finish, I think of 10-20% of cost overrun here as probably like a realistic, I don't want to say max, but like a realistic like and maybe we're adding the things kind of come in at the end, right? [crosstalk] And I think the more realistic scenario than like a big kind of thing is like, it doesn't hit the EBIT targets you want and so you end up staking more money in it down the line. But again, like almost you're talking about, I think like, $100 million checks not like billion-dollar checks.
Andrew: When they first announced the Sphere it was actually going to be two Spheres, right? There were going to be one in Vegas and then they were also concurrently going to do one in London. And they had such big dreams at the time. They were saying, "These are just the first of two, the first two, and we're going to build them over the world", right? They were talking about, they were gonna have a Sphere franchise. I think that's on the backroom now. But London, they kind of say they had issues with the permitting. They had issues with everything. I haven't heard a lot about London recently. Is London off the table right now? Or do you think they're going to do London at some point?
Chris: I think the way I think about it is, and I'm pretty sure it's the way they think about it is, let's see how the Sphere does. See that sort of...
Andrew: Yeah, I just think that the bear case, one of the-- bear case was hey, you know, yes the Sphere, it's not the end of the world if it comes in at $2 billion versus the original projections, and it comes in way under target. But I think a lot of people were worried they're gonna go do London after this. And you know, let's say they do a $2 billion Sphere and it ends up the Sphere's only worth a billion or something. So they lit a billion dollars on fire. I think the worry was they're going to go do another 2 billion one in London and light another billion dollars on fire. And then they'll do one in Chicago and light another billion dollars on fire. But it sounds like they're going to wait and see at this point.
Chris: I think that is a much more real--I think if it opens and it's a dud, I think is very unlikely that they would just go sink another 2 billion. You know what I mean? Make the commitment, like, you'd have to sell assets to do it. You know what I mean? It's not, they don't have $2 billion to sink on another Sphere without figuring something out, right? [crosstalk]
Andrew: Originally, they were going to do in concurrent, right? And if you think that this has come way over budget and they're burning money like, doing them concurrent would have been, two X is bad, right?
Chris: Yeah, I mean like the way they budgeted this, I think if I compare this a lot to like, you know, I don't know the specifics of exactly how Disney World was built, but like I'm sure at some point someone was like "We're going to make an amusement park [inaudible]." You know what I mean? What is this thing? And you're like, you know, it's like the [inaudible] of dreams like you build it and they will come. Right?
Chris: To me, I think there's a healthy degree of skepticism I think in any investment is important. I think that you know, this is that entrepreneurial build-it attitude, right? And like sometimes it works, sometimes it doesn't, you know? But I think like, I think they're much more reasonably like cost- disciplined than people think. I think this is like a big giant thing that they're doing, right? And I get that like, you know, it overlaps with like, you know, James Dolan's music interests and things like that. And you're worried that some people who are very wealthy take their hobbies to the next level. And, you know, I like the guitar too, but I'm not building any stadiums at the moment.
Andrew: Once MSGE goes to your NAV target though, maybe. Who knows? [crosstalk]
Chris: Take a spec and a crypto at the same time.
Andrew: One other thing I wanted to add on here, we'll probably discuss it when we talk the Garden too. But you mentioned rights, right? Like at some point this Sphere, it's going to be, you know, it's probably gonna be the most popular venue in Vegas. At some point somebody's going to pay top dollar to name the Sphere, I would guess. And I also love the Sphere. It's, you know, it's a Sphere shape, right, but they're putting LED lights on the outside and they're gonna sell advertising. And when you're flying into Vegas, you'll be able to see because it's so big and they'll have the lights. You'll be able to see the advertisements on it. And I think, I mean, I don't know what that will generate, but I could see that going for trophy because not only are you getting people as they fly into Vegas, but every aerial shot of Vegas is going to have that and everything. I just think that's pretty cool. I think that's cool.
Chris: I think the Sphere probably will be really really cool and probably work pretty well. And we can figure out, debate whether or not they're gonna make $300 million a year out of the asset. Like you gotta own a lot of content, you're gonna have shows that, you know, like they're going to develop in-house. There's like Sphere Ventures, or not Sphere Ventures but MSGE Ventures or Sphere Ventures. Can't remember what they call it. But like they're hiring people. I believe they hired someone who worked at the illumination, whatever Disney calls the people that work on rides there. They're building it, you can go see it on YouTube. Like if it works and they had like build an iconic show, it's, you know, they're gonna kill it. And to me, like the portfolio bet of the company is you own the garden unlevered, right? The Sphere is basically unlevered, effectively unlevered construction project, right? [crosstalk] balance sheet for, right? And so I don't give them any credit for the cash because it's going to the Sphere, but like, that's that. And you're just like, look if the Spheres a bust, I don't know, the stock's probably flat. If the Sphere hits it like this thing could be doing 250. You see their projections, right? It could come in better, like who knows, right? If this thing's doing 250 million of EBIT and they can open one in London that's already planned, and by the way, we could sell some licensing rights, to open one in like [inaudible] or we could put one in-- so whoever wants it, right? Like if it becomes something like that, the point is like, there's definitely going to be the pitch no matter what. That's what's going to happen here, right? These things gonna trade 20 times EBIT and like, 20 times 250 is 5 billion. There's just no way this thing is worth $2.5 billion with $1.5 billion unlevered asset. Like...
Andrew: What you're telling me, and this makes sense, right?--Remember this podcast I was thinking this, you're basically saying, look, this is a heads I win, tails I don't lose much, right? So, it's a complete bust, you're basically paying nothing for it at current prices, right? You're saying every dollar on their balance sheet right now they light it on fire into the Sphere. The Sphere is worth zero, and we're not paying anything for it, right? We're just paying for Garden and MSGN. And then if it works, Spheres gonna generate a lot of money and that is not reflected in the surprises also. Heads, this works you win, tails, it doesn't work, break even. Let's turn to the next part. People can go listen to the podcast I did with John Boyer on the MSGE-MSGN deal. He sent a letter to the MSGN boards saying he was opposed to it. I was opposed to it. I thought it was one of the stupidest deals I've ever seen. I think that's in the past, right? It doesn't matter for future valuation at this point. But it does matter for coming back to, you say "The Dolans aren't as bad as people think they are". And I say, "Well, MSGE-MSGN deal was pretty bad". So, why don't you talk about what was the MSGE- MSGN deal just real quickly. And, you know, we can talk about why I hated it or we can talk about how to look at the company going forward.
Chris: Yeah. So MSGN-MSGE deal is basically the regional Sports networks for publicly traded entity previously called MSGN, MSG Networks. It traded basically, at the time, five times leverage, free cash flow. I forget exactly what it came out to. And EBIT does in like six probably.
Andrew: Yeah, that's about it.
Chris: And so they basically just had stock-for-stock deal at market prices. They just combine them. And so, I think it really creates the strong technical entry point because I think it disappointed both shareholder basis right. And I think it particularly disappointed the end shareholder basis.
Andrew: MSGE and MSGN were both down on the day of deal announcement. And for you to announce the deal and have both sides go down, it's pretty distressing.
Chris: So there's a variety of reasons I think that why people disliked the deal. And so very briefly like I mean, there's a whole podcast for you guys to complain about it. We must not rehash it too much, right? If you're on the networks you're like whatever the yes networks got you were hoping for that, or you think that the stream is longer than people think, and whatever you thought about it, sports betting, whatever. But you're like, I'm buying a cheap stock, five times free cash flow. There's some sort of compass should like kill it and rip it upside, right?
Chris: So, instead of getting that happen, I now own the Sphere. And so people were like, "Well, what is the point of this?". And MSGE they were like, what's this murky, the Dolans whatever. I think you need to take it from the perspective of the Dolans, right? Like these are separate entities, right? But they are all Dolan controlled at roughly the same economics. There's not very much variance between them, right? And so they're a little bit like the stocks trading with death. I think in some ways the Networks is, it certainly heading towards an operational restructuring, right? We can talk about the financing side of it, right? But certainly, there's a big change coming in this business, right? It's really not the best asset to just be drifting out there with a bunch of cash.
We're paying $20 million a year in like corporate overhead costs to keep a fictional entity that no one wants to buy publicly but who cares? There's a media tax benefits. And again, like from their perspective, like these guys, a lot of their offices are like shared. Like they have like the same coffee makers at points. That's like a thing I ask. Where do you guys get coffee? It's kind of the same room. From the Dolans perspective, like, I own it already. It's not going to change anything about how these businesses are really operating, frankly. We can like structure a legal agreement to have like a cost-share, but at the end of the day like just three office floors in Midtown Manhattan and you know what I mean? I think it's less of a big deal to them because they have the same economics and there was some cost saves.
Andrew: So, I hear you and I don't want to rehash this whole thing but I just want to push back on one point of that. You say, "Oh wasn't a big deal to them, they own them all and roughly the same side". And I get that, but you know, MSG, the whole company was altogether the networks, the sports teams and the entertainment teams, five years ago they were all together. They spun out the networks and then they split sports and entertainment. And then they decided at the height of Covid when MSGE--What, you know, they've got the cash and the balance sheet, but it's not like they were cash-rich. They've got this huge fear project. They decided at the height of covid, let's merge these two together so that we've got a casual asset with it. And I think everyone who looked at MSGN would say, "It makes no sense to marry the networks to the arena side", right? Like it would make sense to marry the networks back to the sports side. Lots of people love teaming the networks up with the sports team or just selling the networks to a strategic player. But I don't know anyone who thought the natural marriage was E with N, right? So my pushback would be, okay, let's say I buy what you're saying and they don't really care. They still did the least logical deal. The least logical deal here, you know?
Chris: It's the most logical deal for them. So, there's no tax benefit to attaching the networks to the MSGS piece because the sports teams operate at break-even [crosstalk] I think it's important when you think about the Networks, to think about, I think, the very critical detail I think that people miss when you're thinking about the Network's piece is that it's the Dolans own the teams and the thing. And so, it's a very different thing than, like, Sinclair owning the RSN in Los Angeles for the Dodgers. I think it's very different. Like the sports team, basically, what you do is you like, you give half the revenues go to the players, right? And then you run the rest of the business at break-even and it's effectively, this is like tax dodges that really rich people figure out. But like, it's basically like a Rembrandt with operating company. You're basically, I'm sure some people would disagree with this, but my opinion you're just speculating some rich person will buy it off you later, right? The value of the sports [crosstalk]
Andrew: Historically, it's been a good bet though.
Chris: Probably work but like, you know, really rich people get bored. And it's pretty cool to own a sports team, right? Steve Ballmer's having a great time in Los Angeles. You know what I mean?
Andrew: Not that I'm personally friends with sports team owner, but everyone I know who knows the sports team owner or some, or buys it, all of them say the most fun they've ever had in their life comes when they buy the sports team. You become the most important person in your community, you're nationally-known like it's way more fun owning a sports team than doing just about anything else.
Chris: Rihanna doesn't hang out with that many like 68-year-old dudes, you know what I mean? Courtside of the, you know, Clippers or Lakers, whatever.
Andrew: I think you did a nice job of covering the, okay, this is why the MSGN-MSGE deal wasn't that bad. So let's go to the next thing. I'm talking at both sides of my mouth here, right? The first thing I said was the MSGN-MSGE deal suck. The next thing I'm gonna say is since the deal went through the value of MSGN I think has definitely taken a hit, right? They got dropped from Comcast, the outlook for RSNs, it sounds crazy to say this but in the past, three or four months the outlooks for Regional Sports Networks has just gone to crap in general. It's gotten even worse, you know? We're seeing lots of blackouts again, Comcast drop MSGN. Sinclair's probably going to have to restructure their RSN so the outlooks kinda worse. How do you look at the value on you know, it's smaller, it's lower multiple, but the network's definitely, they issued a lot of shares and there is value here. So if you completely wipe this out at zero, that's a pretty big haircut.
Chris: Yeah. Let's talk about the Regional Sports Networks like business model in general, right?
Chris: So like yeah, I couldn't be more historically bearish on the Legacy RSN business model. So for people who don't know, it's distributed over cable so it's part of the bundle, right? The sneaky thing about it is, it's basically one of the most expensive parts of the bundle. And the concept of the bundle is almost every bundle in the United States historically, was purchased by a four-person household which has a man who watches Sports. And so basically, in the concept of the organism that was and remains sort of is but like let's face it, is on his way out the cable bundle. Like there are certain parts of the bundle that over monetize, right? And so like Fox News over monetizes because like, I might never watch Fox News, but someone who watches Fox News might watch it every day religiously, and they'll literally cancel their cable package over it so Fox News gets to hike price every year. That's how it works, right? And the way the sports networks works is very similar, right? If I have options, you typically only had one option which we cable and then you would also have let's say dish or satellite, right? But the reality is like if I don't get the Knicks games on Comcast, I cut off the like, the Rangers games, right? I'm a die-hard Rangers Fan. The first thing that happens is dish contacts me historically, and was like, "Do you want an introductory offer for a deal?" and then like I switch because all I give a shit about is like getting my-- you know, I'm one of this household, I care, and I want this, right? So they had great pricing power. And so, the problem is that for MSGS specifically, the networks I think they're making right now about $10 a month for some. I think that's a good number. And so you're like, okay, $10 a month for sub right now. It's not fully distributed anymore so the whole business models are different. Right, but like well, you know, I forget exactly what Disney+ charges right now like 15, 16. I forget what I'm paying for Netflix at this point, sign that that's a good business. But like, you know, like $14, right? So I get all the movies available on Netflix and all the shows and comedy specials and all that stuff, or I can watch 80 games of the Rangers, right? Like for almost the same price, you're like, well, it feels like I'm getting way less and you have his whole--So what happens is historically, they over monetize in this ecosystem. This ecosystem's dying. We have to go to market in this new ecosystem where our product is very awkwardly positioned relative to many of the players in the ecosystem. Even if the 10-year forward outlook for Disney+ is maybe it's $35 a month, right? Like, you know, maybe this thing doesn't look quite as cheap on outer ear kind of concept for what is gonna happen to this ecosystem. It's still basically facing this very difficult go-to-market, you know, how we price and package our product.
Andrew: I agree with you. Can I add two more things? And I don't mean to step on you. This is just an area I spent a lot of times in. I think you hit the nail on the head. The other two issues I think they run into is one, you said MSGN charges about $10 per sub, right? Well, they charge it of all subs. But for Comcast, let's say 10, I think actually Comcast in the press release they put out said "Only 5% of our viewers watch MSGN networks with any type of consistency". So they're charging $10 per month, but what they're actually doing is the one person like, if you watch sports, they're getting $120 per month from every sub who actually watches sports. If you do that math, right? Actually, it's 200, right? 5%, 200 on. So what happens is they're in this weird thing where if they switch to direct, you know, they would technically if every person who was in the legacy bundle signed up for them to be revenue-neutral, they'd have to charge in that scenario, $200 per month, which nobody's going to pay $200 per month for. So, that's number one. And then number two, people are really nervous, you know, they've got some debt but all the payments that MSGN networks makes to the sports teams are fixed, right? So, if enough people cut the cord, you get really bad negative operating leverage [inaudible] real quick where you go from 10 million subs to 4 million subs, while your payments to the Knicks and Rangers stay the same. And your income statement can get reversed real quick. Do you want to add anything to those comments?
Chris: I think that's completely the right model for to think about why an RSN is stressed. I would actually add one more weaker argument for an RSN which is you might not technically own the streaming rights.
Andrew: And that was a big topic for MSGN and all [inaudible], but I'd encourage anyone go read the last earnings call for MSGN. Big topic at MSGN saying, "We've got the rights. Don't worry about it. We might have to pay a little bit more to solidify them. But we've got the rights. We can go direct to consumer when we need to", which was very interesting.
Chris: To me, there's two things and we'll get to the other one, obviously, which is sports betting angle for the RSNs. I think it's interesting relative to a lot of things that are declining media asset-type businesses, right? The Weather Channel, whatever you want to insert is like the clear loser of where the ecosystem's going, right? There's two really interesting things. And one is I think related to RSNs and the second thing is related specifically to MSGN. Related to the RSNs is the demand for their product is actually not down, right? Like if truly the Knicks and Rangers--I don't think anyone thinks the NBA is on its way out, right?
Chris: And so it's not really a product where, like, Jon Hamm was great on Mad Men, and that show was on AMC, which is-- But he could just be on a show on Netflix. Fundamentally, it doesn't really matter like if all the talent and production moves over to like some other network, this channel can be completely cut out of a new model, right? LeBron is not playing in the Canadian Basketball Association because like streaming--you know what I mean? There's no competing kind of thing. Knicks and Rangers tickets, right? Like, they still sell out. They take price. Like, you know what I mean? Like there's no real slow in demand for this product. It's not really an issue of disintermediation and it's not really an issue of secular decline of the asset, right? The asset is the Knicks and Rangers pin people wanting to watch those games, right? This is part of that ecosystem, right? And how it's going to market. And so it's really less of it being disintermediated, so much as we need a new business strategy to hit these sort of targets. And it's not like there's a rival technology coming in and taking market share. We run the innovators dilemma, and all these other things that people talk about to happen in these secular downturns. Yeah, so I think that's just a very different thing about the RSN business where it's much more like, we know there's demand for this product [crosstalk], right? You could very clearly see it. The Knicks games are still sold out and they take price on tickets, right? You just have to figure out how to monetize the thing. And so, I'm very open to concepts of they under monetize in the new world, right? Like it was over monetized in the past, and there's a new normal, right? But whatever that new normal is it's still probably growing, I don't know, GDP plus, probably 2x GDP for live experiences and fan engagement and whatever, right? And so I think it's not really, it's not a cutout business per se being generally, what people at home or at bars watching games, right? I do not think that there's really secular change happening in that. We're figuring out what to connect the TV to. Not really whether or not we want to watch the content.
Andrew: Yeah. No, look, I generally agree with everything. You just said I might quibble here or there, but for the purpose of the podcast, I'd say I agree with 95% of what you just said so I think that was perfect. So let's talk about MSGN, they just bought the company. We can talk about the upside from sports rights which are coming. Which also applies to the Garden side as well which we'll discuss in a second. Or we can just talk valuation outlook whatever you want to talk about. How do you think about MSGN now? The deal is done, right? The deal's done [crosstalk]
Chris: The one critical thing I just point about because--we're going to get at MSGN in one sec. But the other critical thing to think about when you're comparing it to other RSNs rep, you commented on the call that everyone was asking like, "Are you sure you have the rights? You sure you have the rights?" Because that's very relative to Sinclair which is really the only other publicly traded [inaudible] people look at, right?
Chris: Because the NLB was like, we don't think they have the rights, right? That's why it was asking.
Andrew: And it shouldn't have come as a surprise to Sinclair because when Sinclair was buying them the League also stepped in and said "You guys don't have digital rights". So, I don't know why it's a surprise to them now?
Chris: Everything's a negotiation. Here's the thing, the Dolans own the Knicks and Rangers, they don't own the Sabres. So don't get me wrong, this does not apply to the Sabres as part of the MSG networks model per se. It may or may not apply and they would be in the same sort of argument situation. But like, when they're like, "Are you sure you have the rights?" So you're like, "Who else would have the rights?". But, you're saying that MSGS has the rights? MSGS is on the call. They're the same people. They own both. Like, you know what I mean? They're like, this is what the Dolans say they say that MSGE owns the streaming rights like who else is going to have it. Adam Silver has liked conned all the owners into like something and he's going to run away with the package and like-- no, no. They're like, "Yeah, we have the rights".
Andrew: It would be a billion-esque plot, right? Adam Silver brings on a [inaudible] says, "Go tell the market that MSGE has all the rights to it. We'll buy up all MSGS stock, and then we'll say MSGS has the immediate rights to it". That would be fun.
Chris: No, no, so I think like you're getting into a restructuring with this thing. So let's talk MSGN but like financial but much more so operationally I think. And we talked about whether or not in the financial restructure.Your counterparty is the rights of the MSGS and you're basically on the same side. And so the point is like, this is very different than any restructuring where like the Dodgers do not necessarily care about what is now--you know, Fox whatever sports, Los Angeles [inaudible]. They're not necessarily on the same page. We're not just on the same page, we are literally the same page. It's the same thing, right? It's the same family. So you just have much more of a, let's figure this out, sort of thing with what's gonna happen rather than like a let's fight it to death, you know, Sinclair style.
Chris: So MSGN, the structure itself is $1 billion term loan. They actually have cash pledged against it, I'm sure. But whatever that is doesn't really matter for this discussion, just think about it as a $1 billion term loan. And then they have their EBITDA called $200 million whatever exactly you think it's going to end up looking like, inside two years. Whatever exactly you want to think and that is declining because cable subs are coming down, right?
Chris: The way I think about this business is that business model is dying. Definitely going away. If it goes away faster than we hope so that Comcast doesn't sign back up and you know, we get pushback for even [inaudible]. But you know, and so like you can have some push back around there maybe it declines faster and needs to be restructured sooner. Maybe Comcast comes back and maybe it looks a little bit better than people think whatever, right? But certainly, we need to develop a different strategy, right? And I'd also point out, when you're thinking about this, it's also really important for the League's, right? It is not good that, like, cable viewership of RSNs for, like, I think it's the under 30 demographics, down like 70. [crosstalk] There's no way kids not watching the NBA is good for the NBA in a 30-year time--
Andrew: This is a issue they've been saying it for baseball for several years. It creeps up on you and then it's sudden, right? Kids are your lifeblood and if you're not forming a connection with kids when they're 12 or probably 7 actually, 98% of the time they're not going to become fans out of nowhere when they're 25 or 30, right? You need to get them now. So if you're League it's like investing its customer acquisition costs, right? You need little kids watching your product or else you're taking away from the lifeblood of your products.
Chris: Yeah. And so right now though thinking about is like kids are watching it. They watch it on YouTube, you get clips. You can see it on Twitter. The different channels. I don't currently pay for the out-of-market package on The NBA League Pass for the [inaudible]. I probably watched five minutes of every game this season. That's an exaggeration. I skipped plenty of the lousy games, but like, you know, I've watched plenty of Sixers basketball without paying for it, right? [crosstalk] And so, they're not necessarily not engaged even it's more just, right, so how do we figure this out? And so the point is, this is a media asset where the end market I don't think is down.
I don't even think viewership is truly down as much as people think it is. I think the distribution pay model of the previous thing is down a lot more. And so, how do we get from here to the future? And like what does it look like? So this is where I think the two obvious answers, right? Are we need a direct market OTT strategy. So, we need to figure out a way to stream it and go to market, right? And then sports betting. So let's talk about the OTT thing real quick first, even though it's what basically all we've talked about. So they used to have roughly 8 million subs in the New York area, right? I forget exactly what the math is, but like we're heading towards 4 or already at 4 something like that. It's a huge amount of like decline over a decade period. This business I think would fundamentally turn around from-- if they manage to get a DTC package together that earn them a hundred million of EBIT, and there should be pretty high drop through on revenue to EBIT just to make this argument simple here. Because they already have the apps all build-out and you're just adding a payment there. The MSG Network app is you can have it on your phone. You might have it on your phone, I don't know.
Andrew: I do have it on my phone.
Chris: Yeah. So like literally they just have to add a billing there. It's not as difficult as like starting a brand-new business, it already exists, it's just a matter of monetizing it, right? So that means there's 4 million houses that used to have it, right? People are saying that they're gonna price the depending upon which markets say $20 a month, right? More like $200 a year. And if you go look at the NBA app, NBA all-access pass, that's kind of like what they price the out-of-market stuff--
Chris: So, say 250 a year. We used to have 4 million subs, right? If you get 500,000 of those subs, right? We're already a lot of the way into turning this business fundamentally around. And you're like 4 million of them used to pay for it already. You know what I mean? Like I get that like 5% only watched it, how many of them are still? There's a relative question of how many of these people who are still on the network or really they have sports teams too. So you do have some go-to-market problems, right? But like you could also start restricting clips, you know, what are the League's want to do? Do they want to pair and have like an ESPN if there's going to be a true unbundling and sports is going to go have this OTT thing that's going to be ESPN and people are going to pay for that. And then you have add-in packages of sports teams you want to watch, whatever it is. But like, there's 20 million-plus people in the New York metro area, right? I do wonder exactly how much MSGN gets paid for the broadcast out of market for the League Pass track. I do not subscribe to Comcast Cable in Philadelphia, but I watch whatever the heck that thing is called when I sign up [crosstalk]. There is an out-of-market, local market element to what is maybe happening here. And certainly, you know, MSGN like they hire-- what's his name? Clyde Frazier-- who does the broadcast--
Andrew: It's Clyde and Mike Breen.
Chris: Yeah, yeah, yeah. So like I mean someone's got to pay them like if you want to watch, you know, this model-- this at. [crosstalk] I guess there's a lot of stress right now but like, in the next three years, I'm like, I bet you, they just kind of figure out some sort of like DTC-OTT sharing. The reality is the MSGS guys need to take a cut. They're probably gonna take a cut. So what does that restructuring look like? Right? Like when you're really paired against someone and fighting dramatically, right? Like, it can look really ugly. We're not really paired in fighting against this. Everyone, all just kind of the same and so it's much more consensual. And like--
Andrew: I just want to push back on one point, right? So you said, you laid out, right? If you think the bundles falling apart at some point this needs to be a direct to consumer business, right? And I 100% agree with what you're saying there, but I think the pushback would be, they were so over on earning in the bundle, it's going to be very difficult for them to... It's gonna be very difficult for them to make the DTC switch. So I'm just looking, right? Like I'm using 2020 numbers because that was a little bit before the--They hadn't given back all the revenues from covid and everything yet, but they did about 700 million in revenue, MSG networks. And 300 million in operating income, right? If you're going to a bundle it's hard for me to see more than a million people paying for the sports network. I mean, they don't get a million people watching every game. So, let's just say a million people paying $200 a year that's 200 million in revenue. There's expenses associated with that, right? 100 million a year goes to the sports team, it just, you know, this is a business that did 300 million in operating income and in that model, I laid out at some point earnings go down to 75 million, 100 million in that like, that's a really big decline.
Chris: It's totally huge. I'd also point out that this scenario is also, that you're laying out as you were saying like, NBA players are going to make less money in the future.
Andrew: No. Well, NBA... [crosstalk] Yeah.
Chris: Yeah, that's why I point that out is just like, you're also implying something that like, people don't actually believe, right? Like most people don't expect the best player in the NBA to make less money a decade from now, but like if there's no monetization of local sports rights, they're gonna. Like that's how it's gonna work. And so...
Andrew: Oh no, no, no. I agree with you, I agree with you. I do wanted to turn because we've got a lot more to talk about. MSGN networks, we talked the bear side, right? The bear side is revenues declining, subscribers declining, all these sort of stuff. The upside is sports betting's on the way. And you know what the best way to acquire sports betting customers, and the endgame might even be the best way to gamble. The best way to acquire, the best way to gamble, is probably to go to the people who are watching the Regional Sports Network and advertise to them, get them. I mean, I always was a big MSGN bull because I thought at some point in-game bettings going to come. And the best way to do it will be on the MSG Go app and you just say, "Hey, I bet, you know, Julius Randle is going to make a 3-pointer on the next possession or something" while you're watching the game. But why don't you just quickly talk about how sports betting could be a big turnaround for MSG Networks? And MSG as a whole?
Chris: So, if you're thinking about sports betting, so rough numbers are in England, the UK, the average person between sports betting and iGaming spends about $200 a year of gross gaming revenue, which means net out of all of their bets, they lose [inaudible]
Chris: There are 300 million people around the United States, 330, whatever it is, right? Put it all together, gets like a $70 billion market let's say. It's very [inaudible]. I'd also point out the GDP per capita is higher in the US so it's a giant market, right? In Europe, they spent about 25% and this puts and takes to this but they spent about 25% of gross gaming revenue in ads and marketing, right? That's a huge amount of money it's like, whatever that comes out to $18 billion somewhat that. So there's a bunch of ad dollars about to be spent. So I actually try to do this all the time but like if you go on your phone and you go to like the ESPN app, right? Scroll through it, basically, this is a live feed of sports stuff. It's not Regional Sports Network but is 100% a sports-focused thing, right? And like this app on my phone with all of these live sports, with all this commentary, with all this publishing, all of this stuff, video, whatever, right? But like, is being supported by this, like, banner ad for like Dos Equis, you know what I mean? And I'm like, Dos Equis is a brand-building experience supposed to think the world's most interesting man drinking Coronas on a beach, beautiful women, boats, whatever is happening in the ad, right? But like, clearly, I'm not building a brand by this little sliver of a banner ad across like this app, right? You know what that app is really valuable towards? Push this thing to bet $5 that, like, you know, with five-to-one odds that, like, you know, Giannis hits a double-double, right? The monetization--
Andrew: Yeah, the thing I always said was, do you remember in like it was 2014 or '15, when daily fantasy sports, not gambling, daily fantasy sports DraftKings and FanDuel really got. I would watch ESPN and only advertisings literally would be "Go bet DraftKings", "Go bet FanDuel", and that is a lot lower monetization than gambling. My argument was always when gambling was legalized in New York, every ad on MSGN is gonna be "Go do this". You saw with the Sinclair stuff, you can talk about it, Sinclair, re-rented all their networks, all their RSNs Bailey's. And Bailey's paid a huge sum to get that rebranding. So I think there's lots of value there. Do you want to talk about how you look at the Sinclair-Bailey's deal for MSGN?
Chris: Yeah. So like the model, if you want to do digging on it, is the Sky Bet model in the UK where Sky Bet branded with Sky TV, which is like their big Sports Network over there. And like they went from like zero to like 20% of like the market. They just killed it, right? And so it's just, you're watching the sports, you're watching them explain the odds to you, yada yada. It's just a really the CPM price of like what is happening on a sports network is direct marketing dollars for the sports betting platforms, and everything else it's just vague brand-building. Google over monetizes in search to like, you type in like 2021 like Alexis New York State Insurance, like the whole business model is like, those guys pay out through the teeth for that because like, "This is my client and I need to be there". So, in sports gaming, "These are my clients, and I need to be there" and it's what totally changed it. The way I think about it for them is we talk about whether they rebrand the networks, we can talk about whatever that is, right? Like the very simple thing that they're doing right now is they're just signing a marketing partnerships with people, right? And they like kind of say that they expected to be one of their top verticals, right? And they kind of point out that they think sports betting in general, will be a top vertical quote-unquote like one of their top relationships. And they're like, you know, they'll like tell you like look at what publicly quoted stuff for like JP Morgan is. JP Morgan has partnership to be branded. There's a section. They have suites at Madison Square Garden $30 million that should be like 80%, you know you already have the teams in place. Like how hard is it to do, right? Like right now like Caesars is partnering with them. They're gonna have a show on MSGN networks with J.B. Smoove--What's he in?
Andrew: I don't know.
Chris: Yeah, he's in one of the shops. He's partnered with Caesars generally, but he's like a Knicks guy and so like they're gonna be on the show and--
Andrew: Oh, J.B Smoove. J.B. Smoove, that's it.
Chris: Yeah, they're going to show you, he's gonna explain the odds to you. There'll be entertainment assets but it's, you know, they'll have actually some Gladiator reference because it's Caesars or whatever the heck, right? Like they're signing up these partnerships. And like you're already talking about tens of millions in very high margin revenue on [inaudible] million and in EBIT, right? And we're like, we're just getting started right? Like you don't know exactly where the New York market specifically will go with like regulation and players and how much they end up spending on marketing but like it's big and it's coming, right? And like, you point out like Bailey's or whatever like the Fox News portfolio which is now Sinclair is like 30 things. It's a big thing, but like Sinclair owns like 15% with an option to buy 15% more of the company. They gave like a third of the business to get this marketing funnel. And so it's just this huge turnaround and monetization for these assets. And so like, well ultimately the future is like, how do we go direct? I think you're talking about a realistic 30,50, you know if you think about the New York market for 20 million people-- 70 billion of like gross gaming revenue to come. Where [inaudible] percent of the U.S. population we're at like $4 billion of that like spent. So it's 25% of that's going to be spent on like sports marketing, like, yeah, football's number one, don't get me wrong. But football's only 16 games, right? Like there's lots and lots of games, you have gamblers. I think there's very few people who are high-value gaming customers who only bet football. There's only so many games, right? Versus everything else, there's a lot more. And so it's truly, I'm like the future is OTT, but in between then and now there is a huge monetization, a huge amount of ad dollars about to come to the New York market. And MSG networks, there's one of the top--there's only a couple things to really spend your money on, you know? There's really a very few and they want to spend a lot.
Andrew: And I think the same is gonna apply to MSGE as a whole at some point, you know? Especially, Madison Square Garden, I think that's got really interesting. You and I've talked about-- you mentioned earlier Staple Center got rebranded The Crypto Center or whatever. They're paying, I think it's 25 million a year or something for that partnership. [crosstalk] With MSGE, if you rebranded the Garden to Crypto Center, what would they pay for the Crypto Garden, or whatever? It would be more. We're running a little bit long here but there's a lot of other stuff I want to touch on. So, just real quickly, you know, the headliners here for value are the Garden, the Sphere, and the Networks. And we've touched on two of the three. I don't think we've talked a ton about the Garden, we'll change that in a second. But Rockettes and TAO. Rockettes I think, are underrated when people think about valuation because I view the Rockettes as annuity, a brand. They haven't been successful in expanding the brand but I view it as an annuity. I think that's great business. And then TAO I've always had trouble. I post the quote in my tweet thread, TAO's on a hundred-million-dollar EBITDA per year run rate. And it's a tough business to value because it's more hip nightclub, you know? Restaurants are never going to get a great value but I always look at something like TAO which is a little hipper and where it's more prone to [inaudible]. So, I just want to toss over you, touch on the valuation, your thoughts on TAO and Rockettes real quick.
Chris: I think one of the things I should have started over the top is to just walk through the free cash flow math on what like those businesses are for the thing, I don't think at some point. Because I think it really highlights the value because you can argue about what multiple should TAO trade be like [inaudible] a million buck, you know what I mean? Like it's a lot and we're only talking about like a 2.5 million-- you know what I mean? It's like [crosstalk] it shows up real quickly and like we're not even talking about it because it's a small part of the story. But it's real number, right? Yeah, I think the bad risk for night clubs is kind of there against which like when I first got to the city Marquee was like the hot club that I never went to that everyone had to wait in line for, still is, I don't know. It hadn't changed that much.
Andrew: My mom when she came to visit me we went to TAO and they've got the giant fortune cookies with like, kind of chocolate icing inside. And she still talks about the giant fortune cookie and it's still very popular.
Chris: You know, they do a good job. And it doesn't make sense it's part of the integrated entertainment asset, right? Because like, you know, you're going to want a high roller, whatever high-roller means in sports betting, but you know what I mean? I feel like you're gonna be able to have those packages like, people, there's a--
Andrew: I never believed in the synergies they pitch but they're probably there. What about the Rockettes? How do you look at the Rockettes?
Chris: Think Rockettes are great. So the numbers are like, I think they said 130 in revenues in 2019, right around there something like that. They do like a million tickets. It's kind of a staggering number of people going in a not covid year. [crosstalk]
Andrew: Before covid, I said annuity because they do a million tickets. They do a million tickets every year. Basically, every show is sold out. They can raise prices just about every year like I looked at it as one of the best annuities. A very secretly great asset.
Chris: [inaudible], you know, phrase it oddly, it's like owning Lady Gaga but you don't have to pay her as much. Like the Rockettes, I hope they get paid a fair wage and all that kind of stuff, but clearly an individual Rockette dancer does not demand like $4 million to like show-up on the stage, right? Like normally what happens in live entertainment acts like, you know, the Rolling Stones if you could buy the IP and like own it as, you know, whatever is like amazing. Being Mick Jagger's amazing. He has Mansions, things are great, right? But like the Rockettes are in a very different light, but they're seasonal holiday, recurring revenue. There are people who go every year. I went one time. There were people in the front row that had like
the gear like all that stuff [crosstalk] And they make probably something like depending upon how you--they don't tell you exactly but you got somewhere between like 40 to 60 million probably.
Andrew: That's what I had in my head. And I think there are old notes that suggested something similar but 40-60 [crosstalk]
Chris: 130 million in revs, and they don't tell you margins. And so you can take a stab at it. But like, I'd be shocked if it's less than 35, you know what I mean? Like--
Andrew: So, that's the whole thing, right? And you look at that again, I use the term annuity many times. But--
Chris: Yeah, it is.
Andrew: Capital light very dependable outside of a covid year. That's a business that's probably worth-- if you put that on the market I bet you somebody would pay 15 times for it.
Andrew: Yeah, and you said about 50 million earnings 15 times, that's 750. This is less than 3 billion-dollar company. The math adds it perfectly. Last piece of value I want to touch on, the Garden itself. Tax- assessed for I believe, $1.2 billion or so in 2011-2012 range. There's always debates around the air rights and the value there. There's always debates around, "Hey, what happens when Penn Station gets remodeled? Is that good? Is there forced move and stuff?". We're running quite long so I don't want to spend an enormous amount of time there. But why don't you talk to me about how you look at the Garden?
Chris: There's two real ways to look at it. I think one is I think I comp it to the Nets Arena. Real quick to just get there, so the Nets Arena has slipped somewhat fewer seats and is like a small arena and they also have the Hulu theater attached to this, right?
Andrew: MSG does not [crosstalk] Brooklyn. MSG has the Hulu Arena attached which I saw the Grinch at one Christmas, actually.
Chris: Oh, good. Nice. I saw Louis [inaudible].
Andrew: Ohh there you go.
Chris: So yeah, so the Nets Arena sold for roughly speaking a billion dollars. If you per square foot, per seat adjust depending on how you think it, you'd roughly just throw set up to like 1.5 let's say very quickly. I actually bothered to do this because we've talked about the Sixers before. So the Sixers play the Nets next Thursday, right? The cheapest ticket available on Ticketmaster right now is $30. The Nets and the Sixers are like two of three or four teams that could possibly actually make a run to make it to the championship [crosstalk] right? The Sixers play the Knicks in February as of an hour ago, when I checked the ticket prices. No offense to Julius Randle, I don't think anyone really thinks there's a chance that he's gonna hoist the trophy at the end of the year, right? The minimum ticket price is $130. [crosstalk] So my point is...
Andrew: I like the point you're making here. I do think it's a little, I think it's tough to comp Nets prices to Knicks price, right? Because the Knicks just have more fans. But that's exactly the point, right? Because MSG, it's attached to the Knicks, it's in the center of Manhattan, whereas Barclays is nice it's right off a bunch of subway lines, but it's out in Brooklyn. MSG's the only arena in the center of Manhattan. It's got the Knicks there. It's going to come in premium pricing. And the other thing is Barclays I don't believe it's like-- they do concerts and stuff there, I think, but it's nothing like, every night at MSG there's something.
Sometimes there's two things, you know, they'll have Pro-Bull Riding during the day and then they'll have a concert at night. I love the computed to get to that 1.5 billion math, but you and I both know and everyone knows MSG would command a huge premium to Barclays because of all those things we just laid out which I think is where you were going with that.
Chris: Exactly. The quote online is 320 shows in 2019. [crosstalk] individually count that up but I saw a quote on Wikipedia. But yeah, they constantly have shows, only stadium in Manhattan. When they talk about redeveloping Penn Station they throw like a 1.6 billion of just like reconstructing it down the street. Like cost estimate, which likely overshoots. Anyway, the point is like, and I really leaned in and no other way to think about it is they pay roughly 41 million to the MSGS piece, right now. They split the food and beverage revenues, and merch revenues from like games, right? And so that's probably just call another 10 million. I think that's about right. There's 20% food and beverage to ticket sales ratios. So $50 million from like that business. A lot of the value goes to MSGS but all the other assets comes to this, plus The Beacon Theater plus like, you know what I mean? I think the numbers are masked from the growth of the Sphere and the cost of it if you look at it historically, right? But like, I think MSG probably makes like a hundred million plus a year of actual to this business cash. What do I think it's worth? I don't know, 20 times it. It has some are rights that are probably worth 200 to 400 million just based upon what the grand central air rights sold for. You very conservatively get to this like $2 billion dollar number without really scratching your head too much. I think we can cut be it Holdco discount all that kinda stuff. And so the reason I highlight it so much because I think it's so important to the pitch for MSGE is it's unlevered because, by NBA rules, they're not allowed to put leverage on the stadium. And so like, you own an iconic asset with very clear pricing power, very clear demand, you know, the world's most famous arena to quote them. And you're paying like, I don't know, 20 times, probably less, you know, at like a replacement cost of value. It's very hard to see how this business, MSGE stock if you thought about it truly through all the pockets whatever really if you look whether it be worth less than the current price [crosstalk] It's very, very difficult. And so that means that if it were to sell off the new variant whatever exactly, you know, if it's down 30, you could just buy more like it will eventually have value. Like these assets are strong assets.
Andrew: I don't disagree with any of that. Though I have thought if it's down 30, you can just buy more several times in the past couple of months and seen it gone down another 30. So look, I think we've covered everything here. I want to do a walk-through, a quick sum of the parts math with you. But before we do that, are there any pieces of this thesis, I think we've covered a ton, but are there any pieces of this thesis you think we missed? You wished we had covered a little harder? Anything like that?
Chris: The only thing I'm criticizing myself for at this moment is not bring up the sum of the parts math in the front part of the thing rather than the last thing or whatever.
Andrew: I never know if I should do it in the front or the back of the show, but I thought because we settled, we said under 3 billion EV and we started off by just-- I thought we did nice. But let's talk, I've got the CAB structure and everything pulled up right here. So Garden, I think we said, ignoring air rights, I think you said $1.5 billion you want to use that as the valuation or would you--
Chris: I just used 2 as a good base level. I'm like air right, I just used like the comp to Barclays and then being like it's clearly worth more than Barclays. [crosstalk]
Andrew: 2 billion, okay. For our listeners, I'm literally plugging this into a spreadsheet as we talk. Air rights to MSG, do you just want to include that in the [crosstalk]
Chris: [crosstalk] Throw that in the Garden's working money?
Andrew: And I believe the Garden, you know, there's the Hulu theater next to it, there's value, but I don't know how to separate it. It's not big in the grand scheme of things. The Sphere, how do you want to value the Sphere?
Chris: I think the way I would value it is 1.5 billion. Let's say in like a bear case.
Andrew: 1.5 billion, perfect.
Chris: Threw in a billion before, just like to illustrate how easy this thing is to like I think, wrap your heads around why you want to own it at this price. Just throw a billion in. Let's just shave it by a 30%. [crosstalk]
Andrew: Billion dollars? MSGN networks, how much you want to value that at?
Chris: Let's say it's where they paid $1 billion for it so say, it's worth 500 million now.
Andrew: 500 million great. Rockettes?
Chris: Let's say it is worth $750 million. I think it's like--
Andrew: 750. And then TAO, 500?
Chris: Yeah, where we're saying it's like [crosstalk] they're training more like 100 million I get to pull back [crosstalk]
Andrew: They don't own all of it, right? I can't remember what the NCI on it is?
Chris: Yeah, there's a bit of-- Go 500, sure.
Andrew: 500, okay. So for everyone, the big assumptions that we made were MSGN networks, $500 million which this is a business that remember a couple years ago was doing 300 million. It is melting for sure, but there's really interesting rights. One of the things I love about MSG networks is they own the rights to the Knicks and the Rangers for the next 15 years. A lot of the RSNs that you look at only own them for the next two or three so they've got long-term rights. So we're way underpricing the networks versus what they [inaudible] at. And the Sphere which they're going to sink $2 billion of capital into almost were valued at $1 billion so that's a big haircut there. If I put all of that together my per share, sum of the parts value that I come out with is $130 per share. Is that sounding about correct to you?
Chris: Yeah, and I'm saying that all those other ones are EV calculations besides MSGN, right? Where I'm saying it's worth 500 million there's a term loan. But if you wanted to because we just did it like you would just put a zero for MSGN and say it was like a horrendous decision, right? And you would get like slightly, you got like still over $100 of shares--
Andrew: 'Cause I'd have to back out the term loan in that because they do--Yeah. So...
Chris: [crosstalk] Yeah.
Andrew: I think we've done a great job here. We walked through all the different parts. It took us almost an hour half, but we went through all the different parts, we got through the sum of the parts. I think we did a nice job. I would have loved to talk networks for another hour because I love talking networks, but I think we did a really nice job covering the bull, the bear case. Again, anything else you want to talk about before we wrap this up?
Chris: The last closing point just because of the-- these assets will have still have cash flow. And so if you're thinking about like that, like this like, when is it going to trade? Dolan [inaudible] the stuff. Like, they're going to start buying back stock probably in 2023. And so there is like a return of cash coming. It's not the family Holdco that never does anything and it just drifts. [crosstalk]
Andrew: That's how I was going to wrap this up. I was going to ask you, because once the Sphere is done in 2023, even if the Sphere isn't making a lot of money and it's kind of a bust, they'll have money coming in from every other source. And I was going to ask you, so capital allocation you feel pretty good that this is going to be a-- they were supposed to do it at MSGS but they haven't done it partly because of covid. But you think there's going to be a levered by back, "Hey, we've got this great infrastructure or annuity-like assets that throw-off tons of cash and we just buy back those shares, baby".
Chris: Yeah, I think so.
Andrew: Cool, cool. Anything else you want to talk about before we wrap this up?
Chris: No, that's perfect. Thanks for having me.
Andrew: Chris, Thank you so much for coming on. I really enjoyed this. MSGE is at cheapstock.com will be the website. I don't think it's up yet. But Chris has said it'll be up in the next couple days or two. Hopefully, before this post so l'll include a link in the show notes. I'll include a link to all the kind of quotes and stuffs I was talking about in the show notes as well. But Chris McIntyre, thanks for coming on for the second podcast, and looking forward to the third one.
Chris: Sounds good. Thanks for having me again.