Andrew Bary
Sphere Entertainment, led by CEO James Dolan, is playing hardball with creditors of the company's highly leveraged Madison Square Garden Networks unit. Investors appear to like that strategy.
In a filing late Friday with the Securities and Exchange Commission, Sphere said that MSGN's lenders had agreed to a month-long forbearance on an $829 million loan that had been due that day. Sphere shares were up 2.4% to $45.55 late on Monday and are 34% higher so far this year.
Investors are betting that Sphere can reach a restructuring deal and reduce MSGN's debt at a modest cost to the company. The forbearance agreement, which ends Nov. 8, is an indication that there has been progress in the talks with lenders.
A deal to cut debt would remove what has been an overhang for Sphere and improve its balance sheet. The MSGN debt accounts for most of Sphere's total borrowings of $1.4 billion.
Sphere has leverage with lenders because the MSGN debt is guaranteed only by its MSGN unit, the regional sports broadcaster that carries New York Knicks and New York Rangers games. Most analysts think that the MSGN business is worth less than the debt it carries -- perhaps around $500 million -- and that it is a smart move for Dolan and Sphere to take a tough line with the banks.
Wolfe Research analyst Peter Supino recently wrote that he thinks the MSGN debt will be reduced to $400 million. Even a default, he wrote, could prove positive. He raised his rating on the stock to Outperform from Peer Perform with a target of $60 for the price.
Sphere could potentially walk away from MSGN, default on the loan, and essentially give the business to the bank group. A more likely scenario is that the banks agree to take a hit of potentially a few hundred million dollars and that Sphere kicks in cash to reduce MSGN's indebtedness. That could leave the new debt on MSGN in the $400 million range cited by Supino.
The company said on its August earnings conference call that it had decided to pursue a "refinancing through a workout with its existing lenders" and had hired advisors to assist it. A workout generally refers to a debt restructuring that may involve loan forgiveness.
Sphere is a combination of two businesses. The main one is the Las Vegas Sphere, a lucrative concert and entertainment arena opened a year ago with a distinctive light-covered "skin" that has become a popular venue for advertisers. And then there is MSGN, which has been shuffled around the sports and entertainment empire controlled by the Dolan family.
The Dolan empire, meanwhile, is composed of three separate family-controlled companies. The Knicks and Rangers teams are owned by Madison Square Garden Sports (ticker MSGS), and play in the Madison Square Garden arena in Manhattan owned by Madison Square Garden Entertainment (MSGE). Knicks and Rangers games, as noted above, are broadcast on MSGN.
The regional sports-programming business has been under pressure in recent years as cord-cutters have turned away from cable TV. MSGN has been adversely affected: Its adjusted operating earnings fell 16% to $142 million in Sphere's latest fiscal year, which ended in June. Total subscribers fell by 13%.
Some analysts fear that MSGN is a melting iceberg whose business may be further adversely affected by the new national NBA contract. Some value it in a range of 2-4 times adjusted annual operating income. Supino is at the higher end of that range, at four times, for a value of more than $500 million.
Sphere sounded optimistic about reaching a deal on its August call. "We had strong support from a number of our larger relationship banks to participate in the refinancing, however, we were just unable to get sufficient overall support from the full lender group to complete the full syndication," Chief Financial Officer David Byrnes said at the time. "And that's what led us to where we are here right now on the workout."
The company said last week that Byrnes is leaving the company.
There is no bank agreement yet, but Wall Street is optimistic that a deal can be reached that will be favorable to Sphere.
Write to Andrew Bary at andrew.bary@barrons.com
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(END) Dow Jones Newswires
October 14, 2024 15:35 ET (19:35 GMT)
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