Madison Square Garden Sports Corp. (NYSE: MSGS) owns two of the most iconic franchises in sports: the New York Knicks and the New York Rangers. Over the past four years, the Knicks and Rangers have risen 65% and 61%, respectively, according to Forbes. But despite that surge, MSGS stock is up just 26%, compared to about 65% for the S&P 500. While it’s not quite a triple-digit performance, the stock’s underperformance, along with its valuable asset ownership and asset value, is a huge boost in third-party valuations of professional sports franchises, giving investors the opportunity to make a big profit.
A unique moment in the world of sports
The combined valuations of the Knicks and Rangers add up to $9.25 billion, well above MSGS’s current value of about $5 billion. Essentially, at the current stock price, investors would buy the Knicks at a discount and get the New York Rangers for free. This unique opportunity is why MSGS now has a relevant spot in the MAPFRE US Forgotten Value Fund.
Historically, their tax advantages have made them attractive investments.
The Dolan family controls MSGS with a 21% financial interest and 71% voting rights. They have been publicly criticized, as have other analysts, for not taking the necessary steps to close the gap between the private market value of their sports franchises and their public market value. Unsurprisingly, the market remains skeptical. Additionally, MSGS has been blamed for the so-called “Dolan discount,” which has historically affected other companies controlled by the family.
Additionally, both the Knicks and Rangers have performed well recently and gone far in the playoffs, which has boosted MSGS’ finances and increased the prestige associated with owning these trophy assets.
High score: The increasing value of professional teams and broadcast rights
The market for professional sports teams is strong. For example, in 2023, the Washington Commanders football team was sold for $6.1 billion, the highest price ever paid for a professional sports team in the United States. Meanwhile, Jim Ratcliffe just acquired a stake in Manchester United in a deal that valued the franchise at around $6.4 billion. Even during times of economic stress like the COVID-19 pandemic, there has been strong interest in professional sports franchises, with the New York Mets professional baseball team selling for around $2.4 billion, the highest price ever paid for an MLB franchise at the time.
Large sports franchises are a rare commodity, and their favorable tax characteristics have historically made them attractive investments.
Large sports franchises (especially in top-tier markets like New York City) are naturally a rare commodity, and their favorable tax profiles have historically made them attractive investments. Now that recent changes to the NBA’s ownership rules have allowed institutional investors to own passive stakes, the increased demand for these assets is evident with private equity firms like Arctos Sports Partners and Dyal Capital Partners, which have invested in several sports franchises.
In addition, the sports broadcasting rights market is booming, indicating that the value of live sports content is increasing. This trend is expected to continue, driven by the growing demand for live sports as a key component of the content offerings of traditional broadcasters and streaming platforms.
A means of unlocking value for shareholders.
There are several ways to help bridge the valuation gap between MSGS’s market price and its intrinsic value. First, the NBA’s recent broadcast rights agreement, which will go into effect in the 2025/26 season, will significantly increase NBA teams’ revenue. With annual estimates of between $7 billion and $8 billion, that represents a significant increase from the current figure of about $2.7 billion per year.
Another potential improvement is selling minority stakes in the Knicks or Rangers. The Dolans have not ruled out this possibility, and such a sale could provide a clear benchmark value for these assets. One alternative is for the Dolans to sell the Knicks and Rangers outright, or spin them off into separate publicly traded entities, which could unlock value in both, allowing for direct investment in these franchises while paving the way for future sales with tax benefits. The Dolans have done spinoffs before, and splitting these teams would help address the apparent discrepancy in valuation.
The origin of the cup with untapped potential
With its unique assets and a significant valuation discount, Madison Square Garden Sports Corp. presents an attractive investment opportunity. Their largest assets, the Knicks and Rangers, are among the most valuable franchises in their respective leagues. Additionally, whether through a new NBA broadcast rights deal, a minority stake sale, or a division split, the Dolans have multiple ways to unlock value for shareholders.
The market may be (rightfully) skeptical of the Dolan family in the absence of significant shareholder-friendly moves, but MSGS offers patient investors the opportunity to invest long-term in two top-tier sports franchises at a significant discount to intrinsic value. Any action the Dolans take to unlock value could lead to a significant upside for MSGS stock. With all of this in mind, we expect MSGS to deliver performance worthy of its iconic assets.
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