MSGN - MSG Networks

[SHDL]

Conventional wisdom would say that you are protected from anything onerous simply because you're investing alongside the same guy.

I agree.  I think this was one reason why the Yankees held on to a partial stake in the YES Network when it was first sold to Fox a few years ago and then increased their stake a bit as it was sold to Sinclair/Amazon/others just recently.  If I were to ever buy an RSN I would certainly want my financial interests to be aligned with the team owners…

[Gregmal]

Conventional wisdom would say that you are protected from anything onerous simply because you're investing alongside the same guy.

I agree.  I think this was one reason why the Yankees held on to a partial stake in the YES Network when it was first sold to Fox a few years ago and then increased their stake a bit as it was sold to Sinclair/Amazon/others just recently.  If I were to ever buy an RSN I would certainly want my financial interests to be aligned with the team owners…

Right. Which is perhaps the only thing I can think of in terms of negative impacts on valuation in a potential sale scenario. A buyer may want something more concrete, which from what Ive heard, Dolan would be fine doing for the right price.

[Cardboard]

I bought some in the low $16's today. Small position for now and hopefully it trades lower in coming days. I wish Gregmal had written his original post one day earlier. It was pretty much enough to convince me to step in after some hesitation earlier.

Price is highly compelling IMO and despite this talk of melting cube, revenues have still been going up. It was up 3.5% last year while EBITDA was down 1.6%. So sure, there is some pressure but, not to justify such low multiple on a business that is zero capital intensive, with such high margins and strong franchise.

Current price despite being quite a bit higher than yesterday remains a little weird to me. Almost like Mr. Market decided to price it right at the middle of the modified Dutch auction range. However, at current price of $16.30, they would buy back 15.3 million shares. That is right around 25% of existing class A shares which is a very significant percentage.

I doubt very much that shares availability will be that high and they will probably need to pay $17.50 to acquire that many shares IMO and may not reach $250 million. I could be wrong but, considering that there is also $186 million waiting to buy even more shares under any weakness, I would assume that most holders will stick around. Has to be a lot of patient holders, value type, in this name.

So if one tenders at $17.50, that is a respectable 7.4% return from the $16.30 mark in a very short period of time. Almost a gift IMO and pretty low risk for smaller holders looking for some arbitrage.

The only thing that I am wondering about the business still is this mention of a potential IRS challenge on the distribution of MSG. Is this just normal disclosure or it is a true risk?

Cardboard

[Gregmal]

My recollection is that this has been a disclosed risk since prior to the spin off in 2016 or whenever it was. Its somewhat standard verbiage in those situations. Unless something new came out which I am not aware of. In either event I would think it really would only be the problem of shareholders of record on the spin date.

[Spekulatius]

I think the IRS clause is pretty much in any spinoff filing. It seems like standard boilerplate. I am not in MSGN, but I add a bit in MSG. I think Dolan will come to his sense on the Spheres. MSG is ultimate where I think the value is, but MSG has a long duration contract with MSG they guarantees them a profit, unless ones assumes doomsday scenarios. After the contract expires, the value of MSG is very much in question.

I think the idea with the whole spinoff was to put some debt into a cash flowing entity (MSGN) then put the cash into an asset entity (MSG), so it can develop Dolan’s toy project (the Spheres) without risking the store. I don’t think the arrangement doesn’t make all that much sense unless something else happens (the sport team get spun off too) and if the Spheres don’t happen, what is the $1B in cash for on MSG balance sheet. Maybe other assets/arenas? Anyways, added a bit more MSG on Thursday, but feel I need to understand this better before going in knee deep.

FWIW, Murdoch agrees that FOX is too cheap as well and just bought $16M personally.

[Lance]

Gregmal, the beer is on me next time I’m in NY.  Agree that Dolan’s a weird cat, but don’t see how he can screw this up.

Regarding FOX, thoughts on the two share classes?  Noticed they reacted differently during after hours yesterday.

Thanks
Lance

[Gregmal]

A little more brainstorming and thesis murdering attempts on my part the past few days have yielded the following:

Knicks/Rangers contracts are of no worry to me period, but to everyone else, you've got until 2035. Islanders are after 2030, Devils are 2024. However, for those concerned about Dolan negotiating with....Dolan, 15+ years from now, I suggest you look up the history with the Buffalo Sabres. Long story short(its a weekend, I don't feel like writing the entire novel, nor would the wife allow it lol), the Sabres were always seen as the largest risk to exit. Additionally, they are owned by an ambitious, entrepreneurial fellow named Terry Pegula. Pegula has long sought to own or create his own RSN. He also owns the Buffalo Bills. The contract was up sometime around mid 2016. After MSGN split from MSG. What happened? The team at MSGN not only extended the Sabres on a longer term than the previous deal, but also walked away gaining the rights to much valued Buffalo Bills content.... Not bad.

Separately, I always wondered, but didn't care or find it integral to my investment enough, to track the exact allocating of the previous MSGn authorized buyback of $150M. This was deployed after the stock briefly turned south of $20 in late 2017. The stock to my recollection very quickly rebounded to levels north of $20, and that was that. I did the back of the enveloped on the math and it appears the company was not willing to execute very much of that, which is why their total authorization is currently way higher than the $300M new announcement. What can I infer?

1)That under $20, the company is willing to buyback a lot of stock, but they are very disciplined over that number.
2) That the company in 2017 verified running a brief strategic review in order to feel out the market and potentially sell. So the same board that authorized that plan, and the same one that just promptly and proactively launched this one, are doing so based on informed and fairly current knowledge of EXACTLY WHAT THE PRIVATE MARKET IS FOR THE COMPANY. In addition to that, I dont think its a coincidence they made this announcement half an hour after the YES deal closed. I think they were very involved in the ongoings of the major RSN deals that took place between FOX and Disney, and have their finger on the pulse of the market for their assets.

So.... all the more reason to look at $16 as kind of no brainer territory. But that's just my opinion. Hopefully this insight is helpful for those interested here.

[no_free_lunch]

I am in on this one.  My biggest concern, and what is keeping it a medium sized position, is that it seems you can get really burned in a deflationary environment.  The fees to parent go up by 3% each year I have read, what happens if we get into a deflationary environment?   It has 16 years left on the contract IIRC, that can be quite the hurdle to overcome if you can't raise rates.  This is before we even get into a discussion on the subs.

[Stuart D]

This has been a fun post to read! At $17.05, it still seems cheap 

Is anyone concerned about the $900m due 2021?

[scorpioncapital]

In today's world, most companies believe they can roll over their debt forever. Just like you and I we can refinance a mortgage until we die and never have to pay it back, sell the asset at that point by the estate.. ...but this assumption is dangerous. In the short term maybe less so but eventually, if debt had no consequences and could be imprudently accumulated, what would be the point of lending on the creditor side?