Cable Operators

MSG Eyeing Rate Hike?

12/19/2009 2:00 AM Eastern

Cablevision Systems set the wheels in motion for a January spin-off of its Madison Square Garden unit, and perhaps for rate increases for its regional sports networks.

Cablevision first revealed in July its plans to spin off MSG, which includes the Madison Square Garden arena, its professional sports teams, theater venues Radio City Music Hall, The Beacon Theater and the Chicago Theater, cable music channel Fuse and its regional MSG Networks sports channels. Several analysts believe the spin would simplify Cablevision’s structure, help the arena fund much-needed renovations and make future sales or acquisitions less complicated.

Madison Square GardenLast week, Cablevision said MSG had successfully obtained commitments from a group of banks for a new $375 million five-year revolving credit facility, which will be used for working capital, ongoing capital expenditures and other general corporate purposes.

The company added that it expects to complete the MSG spin during the first quarter of 2010, but offered no further details.

Cablevision could also be setting the stage for bigger rate increases for the MSG networks, according to Pali Research media analyst Richard Greenfield. According to its 10-Q quarterly report filed in November, Cablevision said it will pay an additional $30 million to MSG in 2010 as a result of its renewal of carriage agreements. Greenfield, who has a “buy” rating on Cablevision, asserted that translates into an 82-cent per-subscriber, per-month rate increase for the MSG networks, which he called “substantial.”

According to SNL Kagan, MSG is currently getting, on average, about $1.84 per month per subscriber from multichannel video providers for the network and about $1.44 for sister channel MSG Plus. An 82 cents-per-subscriber increase would push a combined MSG and MSG Plus into the $4.10 range, a heady neighborhood given that MSG does not have a full-year slate of professional sports. Since it lost the rights to New York Yankees Major League Baseball games in 2002 and New York Mets games in 2005 (both franchises launched their own cable networks), MSG has focused on National Basketball Association contests from the MSG-owned New York Knicks and National Hockey League games from the New York Rangers (owned by MSG), the New York Islanders, New Jersey Devils and the Buffalo Sabres. The networks also air select Madison Square Garden concerts and soccer matches from the UEFA Champions League.

In his research note Greenfield wrote that Cablevision could be setting the bar for increases for other operators. “We believe the rationale for setting a high MSG sub fee rate is to put MSG in the best possible position to negotiate with third party distributors (such as Time Warner Cable, Comcast, DirecTV, Dish Network and Verizon) as those affiliation deals expire over the next several years (timing unknown),” Greenfield wrote.

It’s unclear where the 82-cent difference went. MSG also includes music network Fuse and MSG Plus, but it is likely that the bulk of the increase went to MSG, which is the higher-rated network. Also, Greenfield said that he does not know Cablevision’s base cost for MSG — the SNL Kagan data is an average.

And while a combined $4.10 appears to be high, the cost covers two separate networks. Of the other New York-area regional sports networks, the Yankees Entertainment & Sports Network charges distributors $2.46 per subscriber, while the Mets co-owned SportsNet New York charges $1.95 per customer, according to SNL Kagan.

Greenfield believes that the spun MSG will generate strong cash flow, fueled by the higher carriage fees, increased entertainment revenue and reduced expenses. In his note, Greenfield estimated that MSG would generate about $107 million in cash flow in 2009, rising to $169 million in 2010, a 58% increase. Based on that cash flow estimate, Greenfield wrote that MSG should be valued at about $1 billion ($3.36 per Cablevision share) and could easily be worth $5 per share as investors learn more about the company. Cablevision stock closed at $25.98 per share on Dec. 16.

Cablevision declined to comment.

MSG BY THE NUMBERS
Pali Research media analyst Rich Greenfield’s estimates for MSG (in millions):

  2009E 2010E
SOURCE: Pali Research estimates
Revenue $1,067 $1,134
EBITDA $107 $169
Cap ex $55 $250

 

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