Cablevision’s Spinoff Success Stories

Holders Who Kept Their Stakes Have Doubled Value Since 2010
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The Madison Square Garden Co. is moving to unlock value from its New York-based professional sports teams. But stockholders in Cablevision Systems — MSG’s former parent — have already benefitted from a series of financially astute deals that have effectively doubled the value of their holdings.

MSG, which includes iconic New York liveentertainment venues Madison Square Garden and Radio City Music Hall, as well as the New York Knicks and New York Rangers professional sports teams — said its board of directors approved a plan to explore a possible spinoff of the assets into two separate, publicly traded companies. According to MSG, one entity would hold the live-entertainment properties, while the other would house its sports and media properties, including the teams and regional sports networks MSG and MSG Plus.

The spin, if it takes place, will be the third in the past four years for longtime holders of Cablevision stock. In 2010, Cablevision spun off its MSG unit and, a year later, completed the separation of its Rainbow Media programming unit — AMC, IFC, WE tv and SundanceTV — to create AMC Networks.

Both transactions were done as tax-free distributions to shareholders, which received one share of each company for every four Cablevision shares they held. If it goes through with the transaction, MSG said, it will be a taxfree spinoff to shareholders.

REAPING GAINS

The latest potential transaction highlights what have been a lucrative four years for Cablevision stockholders, who have doubled the value of their holdings associated with the company through spinoffs alone.

A person who held 1,000 shares of Cablevision stock on Jan. 1, 2010 (worth about $26,000) would as of last Tuesday (Oct. 28) hold 1,000 shares of Cablevision (worth $18,810); 250 shares of AMC (worth $14,992); and 250 shares of MSG (worth $18,247), for a total investment value of about $52,000. That is a 100% return and doesn’t include cash dividends, which Cablevision began distributing in 2008.

Most of that value has been generated by the spun-off companies. MSG stock has grown in value from $18.22 at its Feb. 10, 2010, debut to $72.99 on Oct. 28, a gain of 300%. AMC has risen from $39.75 on July 1, 2011, to $59.97 on Oct. 28, a 51% increase.

In the same four-year span, Cablevision’s unadjusted stock price has declined by about 28%.

Gamco Investors portfolio manager Chris Marangi, whose firm owns Cablevision, MSG and AMC stock and who has been both a critic and a booster of the company, said the returns are just as good going back further to 2007, when Cablevision’s controlling shareholders, the Dolan family, failed in three attempts to take the company private.

Critics of the going-private transactions rejected those moves mainly because they believed they’d be left out of a sale of the cable company. As it turned out, holding on to the stock proved more lucrative.

Marangi, whose firm was against Cablevision going private in 2007, said that even at the last price the Dolan family offered — $36.26 per share, in cash — investors who had the foresight to hold onto their stock fared well.

At the time of the last Dolan family offer, Cablevision was trading at $31.86 per share. As of Oct. 24, the combination of Cablevision, AMC and MSG shares are worth a collective $55.04 — a 45% return, according to Marangi.

By comparison, the S&P 500 Index during the same timeframe showed a 30% return on investment, he noted.

“One of the hidden gems within Cablevision at that time that were not recognized were the sports and entertainment assets that became MSG,” Marangi said. “Management has done a good job of growing the value.”

That value could increase again if MSG is split.

According to some analysts, a catalyst for the spinoff is the increasing value of sports teams, particularly National Basketball Association teams such as the Knicks. That was highlighted in May’s sale of the Los Angeles Clippers to former Microsoft CEO Steve Ballmer for $2 billion. That price was almost four times the previous record, the $550 million sale of the Milwaukee Bucks earlier in the year.

After the Clippers deal, Forbes estimated that the Knicks could sell for as much as $2.5 billion and would have an enterprise value of about $4.8 billion.

MSG’s current market capitalization is $5.5 billion.

MSG stock has taken off since the company said it would consider spinning off the assets. It reached a new 52-week high of $75.02 on Oct. 29 and is up about 14% since it made the announcement after the close on Oct. 27.

GARDEN PARTY

Even at that lofty price, Marangi believes MSG is undervalued. He estimated that the company as it is currently structured is worth about $100 per share.

There are still some questions around a deal — mainly whether the Madison Square Garden arena will be housed in the live entertainment or sports segment. Some believe that without the actual Garden, the live entertainment segment’s value would be severely diminished.

The sports segment would be most highly valued with the Knicks, the National Hockey League’s Rangers (valued at about $850 million), the WNBA’s New York Liberty ($10 million), as well as the NBA DLeague’s Westchester Knicks and the minor-league hockey Hartford Wolf Pack.

The regional sports networks could be worth as much as $4 billion, according to some estimates.

Sterne Agee media analyst Vasily Karasyov said he believes separating the assets will go a long way in alleviating investor concerns that MSG would take money from the more profitable networks and put it into lower growth portions of the business.

“Separating ‘bad’ MSG from ‘good’ MSG will give investors more comfort with capital allocation,” Karasyov said in a note to clients.

Garden of Dreams

Madison Square Garden Co. is exploring separating into two separate entities. Here’s what the companies may look like.

Entertainment Assets:

Madison Square Garden arena*

Radio City Music Hall

The Beacon Theater

The Chicago Theater

The Los Angeles Forum

The Wang Theater (Boston)

Media Assets:

New York Knicks (NBA)

New York Rangers (NHL)

New York Liberty (WNBA)

Westchester Knicks (NBA Development League)

Hartford Wolf Pack (AHL)

MSG Network

MSG Plus

15% interest in Sí TV Media

* There is some speculation that the arena may be included with the media assets.

Source: Madison Square Garden Co.

The Madison Square Garden Co. is moving to unlock value from its New York-based professional sports teams. But stockholders in Cablevision Systems — MSG’s former parent — have already benefitted from a series of financially astute deals that have effectively doubled the value of their holdings.

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