Many sports fans would love to own a piece of a team. But given the expense, it’s a pipe dream for almost all of us.
There are exceptions, however. A few sports teams are publicly traded, giving you the opportunity to gain a small equity stake at a cheap price. One company that has soared in value recently is Madison Square Garden Sports Corp. (NYSE: MSGS), owner of the New York Knicks basketball team and the New York Rangers hockey team.
Last week, the company’s board announced that MSGS is exploring the idea of splitting the company into two publicly-traded entities. One would include the Knicks and its minor league affiliate, the Westchester Knicks. And one would include the Rangers and its minor league affiliate, the Hartford Wolf Pack.
Activist investor Boyar Value Group has pushed for this move since June. That was when the Los Angeles Lakers were sold at a valuation of $10 billion, leading Boyar president Jonathan Boyar to conclude that MSG Sports’ stock was extremely undervalued.
Even after a 59% surge by the shares over the past year, and an 11% gain since the Feb. 18 announcement, MSGS is still arguably undervalued. That’s because it has a market capitalization of $7.8 billion, far below Sportico’s combined valuation of $13.5 billion for the teams.
Third in NBA, second in NHL
The sports business information service puts the Knicks valuation at $9.85 billion, third in the NBA after the Golden State Warriors and the Lakers. And it assigns the Rangers a valuation of $3.65 billion, second highest in the NHL after the Toronto Maple Leafs.
The disparity between the market cap and third-party valuations is known as the “Dolan gap.” It’s so named because Knicks and Rangers controlling owners James Dolan, who is CEO, and his family have expressed a strong unwillingness to sell.
But now they’re changing their tune. As for a breakup, “we believe this proposed transaction would provide each company with enhanced strategic flexibility, its own defined business focus, and clear characteristics for investors,” Dolan said in a statement.
Investment firm Silver Lake Management owns a 10% stake in MSG Sports. And there’s talk a Middle Eastern investor such as Abu Dhabi’s Sheikh Mansour Bin Zayed Al Nahyan may be interested in a piece as well, Bloomberg reports.
To be sure, an argument could be made that MSG Sports shares aren’t undervalued. The company has a price-to-sales ratio of 7.4, compared to 3.4 for the S&P 500. Sports teams often are light on revenue. So the investment rationale is that team values will rise, as they have during the past 40 years, on scarcity value.
That’s certainly a valid thought, but it may be tested if the economy faces a severe recession. If not, MSGS may represent a winning play.
The author owns shares of MSGS.
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