MSG Entertainment to explore spin-offs of its live entertainment and MSG Network businesses

Summary of the agreement

On August 18, 2022, Madison Square Garden

MSG
Entertainment Corp (NYSE: MSGE , $60.61, Market Cap: $2.1 billion) announced that its Board of Directors has authorized the Company’s management to explore a potential spin-off of its live entertainment businesses and MSG Network into a separately traded public company. The proposed spin-off will be structured as a tax-free transaction for all MSG shareholders. Upon completion of the contemplated distribution, holders of record of MSGE Class A and Class B common stock would receive a pro rata distribution expected to be equivalent, in the aggregate, to approximately a two-thirds economic interest in the entertainment company and live media. The remainder of the common stock, expected to be equivalent to a one-third economic interest in the live media and entertainment company, would be held by MSG Entertainment (RemainCo). The shares held will then be available 1) for use in a tax-free exchange offer for MSG Entertainment common stock, 2) to raise capital for general corporate purposes, and/or 3) for use in a pro-rata spin-off for MSGE shareholders. The company has not set a timeline for the completion of this spin-off transaction. Completion of the transaction will be subject to various conditions, including certain league approvals, a private ruling from the IRS, receipt of a tax opinion from counsel and final approval of the MSG Board.

Following the anticipated spin-off, MSGE Entertainment (RemainCo) will include MSG Sphere and a majority stake in Tao Group Hospitality. The first MSG arena is currently under construction in Las Vegas and is expected to open in the second half of calendar 2023. It will also include approximately one-third of the economic interest in the live entertainment and media company and most of the Company’s cash. The live entertainment and media company (Spin-Off) will include a diverse collection of venues: Madison Square Garden, Hulu Theater at Madison Square Garden, Radio City Music Hall, Beacon Theater and The Chicago Theatre, along with signature entertainment and sports booking license agreements and long-term arena deals with the New York Knicks and New York Rangers. It will also include the Radio City Rockettes, the Christmas Spectacular production, and MSG Networks, which owns two regional sports and entertainment networks, MSG Network and MSG+, and a companion streaming app, MSG GO.

Reasoning of the agreement

MSG Entertainment is a global leader in live entertainment and the Company owns a collection of unique world-class entertainment assets that are currently undervalued by investors. Therefore, the proposed spin-off aims to overcome this valuation mismatch and create shareholder value for MSGE shareholders over the long term. The market welcomed this announcement, with shares advancing by around 3.5% the day after the announcement (8/19). It is worth noting that MSG Entertainment was spun off on a tax-free basis from Madison Square Garden Company on April 17, 2020.

The proposed split into two companies would allow shareholders to assess each company’s assets and future potential. Similarly, both companies, on an independent basis, will be able to pursue their own separate business strategy and capital allocation policy. MSG Entertainment has a growing portfolio of assets, including state-of-the-art music and entertainment venues – MSG Sphere and Tao Hospitality Group, two businesses with global brands and significant long-term growth opportunities. The first MSG Sphere is currently under construction in Las Vegas and is expected to open in the second half of calendar 2023. Additionally, MSG Entertainment will hold a one-third economic interest in the live entertainment and media company, which would provide an opportunity to raise capital in the future.

The live entertainment and media company, with its valuable portfolio of assets such as Madison Square Garden, the production of the Christmas Spectacular and MSG Networks, is expected to generate significant free cash flow and benefit from the attractive growth profile of its entertainment business. directly.

Review of 4Q22 and FY22 results

For 4Q22, MSGE reported revenue of $453.5 million, up 74% year-over-year, compared to $260.6 million in 4Q21, due to increased revenue from the Tao Entertainment and Hospitality segment, partially offset by lower revenues in the MSG Network segment. The company reported adjusted operating income of $0.7 million in 4Q22, compared to adjusted operating income of $2.5 million in the year-ago quarter. For FY22, MSGE reported revenue of $1.7 billion, up 112% year over year, compared to revenue of $814.2 million in FY21 due to revived consumer demand for the Company’s product portfolio. The company reported an adjusted operating income of $133.6 million in FY22, compared to an adjusted operating income of $40.2 million in FY21. As of June 30, 2022, MSGE had approximately $829 million in cash, while the total debt balance was approximately $1.76 billion.

Company description

Madison Square Garden Entertainment Corp (parent)

Madison Square Garden Entertainment Corp. (MSGE) is a live entertainment provider consisting of venues, bed entertainment brands, regional sports and entertainment networks, dining and nightlife offerings and music festivals. The company was spun off from The Madison Square Garden Company on April 17, 2020. The company’s segments include Entertainment, MSG Networks and Tao Group Hospitality. The entertainment segment includes its portfolio of venues, such as Madison Square Garden, Hulu Theater at Madison Square Garden, Radio City Music Hall, Beacon Theater and Chicago Theatre. The MSG Networks segment includes the Company’s regional sports and entertainment networks, MSG Network and MSG+, a companion streaming application, MSG GO, and other digital properties. The Tao Group Hospitality segment features its controlling interest in Tao Group Hospitality, a hospitality group with entertainment, dining and nightlife brands including Tao, Marquee, Lavo, Beauty & Essex, Cathedrale, Hakkasan and Omnia. It operates about 70 dining establishments. The company reported revenue of $1.7 billion in the year ended June 30, 2022.

Following the anticipated spin-off, MSGE Entertainment (RemainCo) will include MSG Sphere and a majority stake in Tao Group Hospitality. It will also have approximately one-third of the economic interest in the live entertainment and media company (Spin-Off) and most of the company’s cash on hand.

Live Entertainment and Media Company (Spin-Off)

The live entertainment and media company (Spin-Off) will include a diverse collection of venues: Madison Square Garden, Hulu Theater at Madison Square Garden, Radio City Music Hall, Beacon Theater and The Chicago Theatre, along with signature entertainment and sports booking license agreements and long-term arena deals with the New York Knicks and New York Rangers. It will also include the Radio City Rockettes, the Christmas Spectacular production, and MSG Networks, which owns two regional sports and entertainment networks, MSG Network and MSG+, and a companion streaming app, MSG GO.