Form 8-K Summary
Registrant: Madison Square Garden Entertainment Corp. (now Sphere Entertainment Co.)
Filing date: July 1, 2021
Reporting period: Event report; no historical quarterly financial statements were filed. The filing concerns the proposed merger with MSG Networks and supplemental disclosures to the joint proxy statement/prospectus.
Business Context and Transaction
- MSG Entertainment entered into a merger agreement with MSG Networks on March 25, 2021.
- Each MSG Networks Class A and Class B share would be exchanged for approximately 0.172 shares of the corresponding MSG Entertainment class, subject to rounding and customary exclusions.
- Stockholder meetings for both companies were scheduled for July 8, 2021.
- The filing supplements disclosures regarding merger negotiations, special committees, financial advisor analyses, projected financial information, potential synergies and director compensation.
Financial Metrics and Projections
The filing does not provide current historical revenue, profit, cash flow, debt or liquidity balances for the registrant. It does provide unaudited prospective information used in evaluating the merger.
| MSG Entertainment projections | FY2021 | FY2022 | FY2023 | FY2024 | FY2025 |
|---|---|---|---|---|---|
| Revenue | $132 million | $1,026 million | $1,175 million | $1,729 million | $2,033 million |
| Adjusted operating income (loss) | $(247) million | $62 million | $90 million | $301 million | $378 million |
| Free cash flow | $(271) million | $(631) million | $(358) million | $96 million | $305 million |
| Unlevered free cash flow | $(291) million | $(678) million | $(406) million | $48 million | $210 million |
FY2021 free cash flow and unlevered free cash flow reflect only the second half of the fiscal year. Adjusted operating income includes MSG Sphere pre-opening expenses.
| Adjusted MSG Networks projections | FY2021 | FY2022 | FY2023 | FY2024 | FY2025 |
|---|---|---|---|---|---|
| Revenue | $644 million | $645 million | $645 million | $659 million | $670 million |
| Adjusted operating income | $283 million | $227 million | $216 million | $216 million | $210 million |
| Free cash flow from operations | $167 million | $140 million | $139 million | $152 million | $130 million |
| Unlevered free cash flow | $76 million | $133 million | $134 million | $149 million | $128 million |
MSG Networks FY2025 free cash flow from operations includes costs associated with refinancing its credit facility maturing in October 2024. One advisor calculated FY2025 unlevered free cash flow at $134 million when excluding those refinancing costs.
Material Changes, Outlook and Unusual Items
- Management estimated approximately $200 million of combined net present value from potential merger synergies, net of one-time costs and assuming a 9% discount rate.
- Potential synergies included tax-attribute utilization, approximately $10 million of annual public-company cost savings beginning July 1, 2021, and potential interest expense savings from refinancing opportunities.
- Moelis’ DCF-based analysis estimated MSG Entertainment standalone per-share value of $65.65 to $120.27 and pro forma value of $70.04 to $130.44, representing an indicated increase of 6.7% to 8.5%.
- MSG Networks DCF analyses produced an implied per-share equity value range of $15.63 to $19.31.
- Financial advisor analyses used terminal values based on 7.0x to 8.0x terminal AOI for MSG Networks and 14.0x to 16.0x terminal AOI for MSG Entertainment.
- The filing disclosed additional valuation adjustments, including $143 million of net present value for net operating tax losses, $148 million of other non-core assets at book value, and valuations for minority interests in Tao Group Hospitality and Boston Calling Events.
- Special committees of both companies were described as fully empowered and composed of directors determined to be independent and disinterested under applicable standards.
- Supplemental disclosures were made without admitting that additional disclosure was legally required. The filing states that certain plaintiffs agreed to dismiss actions with prejudice following the supplemental disclosures.
Litigation, Risks and Contingencies
- As of July 1, 2021, eleven merger-related complaints had been filed.
- Six federal actions in New York and two additional federal disclosure actions alleged that merger materials were materially incomplete or misleading. The filing states that these actions and the Laidlaw action were voluntarily dismissed with prejudice after supplemental disclosures.
- The Hollywood Firefighters action in Delaware and the Leisz action in Delaware remained pending. Preliminary-injunction hearings were held July 1, 2021, with decisions expected before the scheduled July 8 stockholder vote.
- The complaints sought, among other remedies, injunctions against the stockholder vote or merger closing, rescission or damages, and reimbursement of attorneys’ and experts’ fees.
- Key transaction risks included failure to obtain stockholder approval, failure to satisfy closing conditions, termination of the merger agreement, litigation, adverse tax treatment, COVID-19 impacts, disruption to operations, unexpected transaction costs, and possible effects on liquidity and financial flexibility.
- Each member of the MSG Entertainment special committee was to receive a $120,000 retainer plus $15,000 per month beginning August 1, 2021 if the committee’s work continued.
Investor Verification Checklist
- Verify whether the merger closed, was amended or terminated and the final exchange ratio and share issuance.
- Review subsequent filings for the status and resolution of the remaining Delaware litigation.
- Compare the prospective revenue, adjusted operating income and cash flow figures with actual results, particularly the significant negative projected cash flow through FY2023.
- Assess whether the estimated $200 million synergy value was achieved and whether one-time implementation costs differed from assumptions.
- Verify MSG Networks’ debt maturity and refinancing requirements, including the credit facility maturing in October 2024.
- Review the definitive proxy statement, Form S-4 and later SEC filings for complete details on valuation methodologies, conflicts, advisor fees and transaction risks.