How to buy the Knicks and the Rangers 50% off

Jonathan Boyar, director of Boyar Value Group and advisor to the MAPFRE AM US Forgotten Value Fund

Madison Square Garden Sports Corp. (NYSE: MSGS) owns two of the most iconic franchises in the world of sports: the New York Knicks and the New York Rangers. Over the past 4 years, the value of the Knicks and Rangers as estimated by Forbes have increased by 65% and 61%, respectively, but despite this substantial increase, MSGS’s shares have increased by a meager 26%, compared with 65% for the S&P 500. While certainly not a slam dunk, we believe that this share price underperformance, coupled with the trophy assets it owns and the substantial increase in third-party valuations for professional sports franchises, has given investors a shot to score big gains

A unique position in the Sports Industry

MSGS’s primary assets include the Knicks and Rangers, two franchises with deeply loyal fanbases in one of the world’s largest media markets. In its latest valuations, Forbes put the value of the Knicks at $6.6 billion, which would make them the second-most valuable NBA franchise, and the Rangers at $2.65 billion, making them the second-most valuable team in the NHL. These valuations add up to $9.25 billion—far more than MSGS’s current enterprise value of ~$5 billion. Essentially, at the current share price investors are purchasing the Knicks at a discounted valuation and getting the New York Rangers for free. This unique opportunity is why we have made MSGS a significant position in the Mapfre US Forgotten Value Fund.

The Dolan family controls MSGS with a 21% economic interest and 71% voting power, and I and others have publicly criticized them for not taking the actions needed to close the valuation gap between the private market value of its sports franchises and their public market value. Management has acknowledged the disconnect more than once but despite pledging to help close the valuation gap has paid little more than lip service to frustrated investors’ concerns. Not surprisingly, the market remains skeptical, especially after the company’s modest capital returns in recent years, and has ascribed MSGS the so-called “Dolan discount,” which has historically plagued other businesses the family controls.

Both the Knicks and the Rangers have performed quite well on the court and on the ice recently, making deep playoff runs that have boosted MSGS’s financials and heightened the prestige attached to ownership of these trophy assets.

Scoring big: The rising value of professional sports teams and media rights

The market for professional sports teams has been robust, for example in 2023 the Washington Commanders, an American football team, sold for $6.1 billion representing the highest price ever paid for a professional sports team in North America Meanwhile, Jim Ratcliffe recently acquired a stake in Manchester United in a deal valuing that franchise at ~$6.4 billion. Even during periods of economic stress like that surrounding the COVID-19 pandemic there was a strong appetite for professional sports franchises with the NY Mets professional baseball team having been acquired during the depths of the pandemic for ~$2.4 billion, the highest price paid for an MLB franchise at that time. Major sports franchises (especially in top markets like New York City) are a naturally scarce commodity, and their favorable tax attributes have historically made them attractive investments. Now that recent changes in NBA ownership rules have allowed institutional investors to hold passive stakes, heightened demand for these assets has been evident through the involvement of private equity firms like Arctos Sports Partners and Dyal Capital Partners, who have invested in multiple sports franchises.

What’s more, the market for sports media rights has been booming, with a significant increase in media rights deals for major sports leagues reflecting the growing value of live sports content. This trend is expected to continue, driven by increasing demand for live sports as a key component of content offerings for traditional broadcasters as well as streaming platforms.

Catalysts for unlocking shareholder value

There are several potential catalysts that could help close the valuation gap between MSGS’s stock market price and its intrinsic value. First, the recent NBA media rights deal, which will commence in the 2025/2026 season, will significantly boost revenue for NBA teams. At a reported ~$7-$8 billion annually, it would be a substantial increase from the current figure of ~$2.7 billion per year.

This substantial increase, which would be shared equally by all NBA teams, could lead to higher third-party valuations for NBA franchises, including the Knicks. Another potential catalyst would be the sale of minority stakes in either the Knicks or the Rangers. The Dolan family has not ruled out this possibility, and such a sale could provide a clear valuation benchmark for these assets, attracting significant interest from institutional investors and billionaires eager to own a trophy asset that is rarely available for sale. (The last time the Knicks and the Rangers were sold was in 1994!)

Alternatively, the Dolan family could even sell the Knicks and the Rangers outright. Incredible as such a sale might seem, we note that in 2016 the Dolans sold another family business, Cablevision, because the price was right. In addition, recently Mark Cuban whose identity is very much tied to owning the Dallas Mavericks sold control of his franchise. Another option would be separating the Knicks and Rangers into distinct publicly traded entities potentially unlocking value at both, allowing investors to directly invest in these franchises while paving the way for future tax-efficient sales. The Dolans have a history of spin-offs, and spinning off these teams would help address the clear valuation disconnect they face.

A trophy asset with untapped potential

With its unique assets and significant valuation discount, Madison Square Garden Sports Corp. presents a compelling investment opportunity. Its primary assets, the Knicks and Rangers, are among the most valuable franchises in their respective leagues. What’s more, whether through the new NBA media rights deal, the sale of minority stakes, or the separation of the teams, the Dolans have multiple avenues for unlocking shareholder value.

The market may be skeptical (and rightly so) of the Dolan family’s control in the absence of significant shareholder-friendly actions, but MSGS offers long-term, patient investors the chance to invest in two premier sports franchises at a substantial discount to their intrinsic value. As the market for professional sports franchises heats up, any steps the Dolans take to unlock value could bring a significant rerating of MSGS’s shares. With that in mind, we’re looking for MSGS to deliver a performance worthy of its iconic assets.