Terms of the MSG Spinoff Cablevision (CVC) announced on July 30th that its board of directors approved the spinoff of the Madison Square Garden (MSG) business to CVC shareholders. The transaction is expected to be finalized in the 1Q of 2010. MSG will assume 375 mm senior Revolving Credit Facility for 5 years to fund working capital needs, capital expenditures related to the renovation of the Madison Square Garden Arena and general corporate purposes. An important note is that MSG is expecting 190 mm from Rainbow Media Holdings, another subsidiary of CVC, as a repayment of demand loan (non-interest bearing). CVC announced that once MSG is spun off, the loan will be repaid.  The new MSG’s assets will include:

  • Media Properties, including MSG, MSG Plus, and Fuse Network
  • Sport Teams like New York Knicks of the NBA, New York Rangers of the NHL
  • A live entertainment portfolio, including proprietary radio as well as concerts, shows and events.
  • Leading venues, highlighted by the Madison Square Garden and Radio Music City Hall.

Valuation Its unsure how much cash MSG will have once it will operate as a standalone entity, but after reading the last three10K and the latest 8K reports of CVC, we can get an interpretation of how much MSG could be valued. Let’s start with the assumptions.

  • MSG will have 290 mm in cash on hand as a standalone company, comprised of 190 mm from the repayment of the inter-company loan and 100 mm on hand.
  • Capital expenditures for renovating the Madison Square Garden Arena will be 800 mm over three years with 60 mm accounted before the end of 2009 as pre construction expenditure. After 2012, once the renovation is expected to be completed, capital expenditures will be reduced to the historical levels of 55 mm per year.
  • The Revolving Credit Facility will be fully drawn in 2011 and will be refinanced with a 700 mm new Term Loan in 2014. Each Loan will bear 600 bps interest rate
  • EBITDA will drop 5% each year from the previous year in 2010 and 2011, as renovation will prevent full access to the Madison Square Garden Arena. Upon completion of the renovations, EBITDA will grow at 25% rate y o y under the conservative scenario and at a 50% rate y o y under the aggressive scenario.  

Post MSG spin off analysis The valuation is the same under both scenarios up to 2012, which is when the renovations are expected to be terminated. Beyond that point, if you believe a 50% growth in EBITDA, you will end up in 2014 with 33 mm in cash and 76 mm in FCFE and. If you believe in a 25% growth in EBITDA, then you will end up with no cash and 11 mm in FCFE. In both cases, leverage doesn’t seem to be an issue, but it looks like the Company is using a lot of borrowed capital to improve assets without generating enough return. This seems to be the problem that MSG always had, the Company has valuable assets but the margins are thin and have been shrinking as higher expenses and competition eroded returns over time. Also, my valuation is fairly generous; as it assumed a small amount in working capital needs and conservative capital expenditures. The Company estimated that renovation costs can total 850 mm. In addition, it will be important to know the covenants of the Revolving Credit Facility, especially minimum EBITDA and liquidity levels for the next 5 years.

Conclusion The MSG spin off will benefit Cablevision more that MSG itself, as the transaction will remove potential negative cash flows and high capital expenditures from the parent. I am not confident about the earning potential of MSG, as the media industry doesn’t seem to be recovering from the economic downturn. The Company has planned to make a lot of capital expenditures, but will EBITDA growth be enough in the years to come to justify them? I highly doubt that. Remember that the Entertainment and Sport segment of MSG use the Garden Arena to conduct their business, which amounts to 65% of the total revenue based on 2008 numbers. We will continue coverage once the spinoff is concluded.