Business Context and Reporting Period
Company: The Madison Square Garden Company (renaming to Madison Square Garden Sports Corp.)
Filing Type: Form 8-K (Current Report)
Date: March 31, 2020
The filing announces the Board's approval of a spin-off distribution of MSG Entertainment Spinco, Inc. (renaming to Madison Square Garden Entertainment Corp.). The distribution is scheduled for April 17, 2020, subject to regulatory approvals (NBA, NHL, SEC) and a tax opinion. Concurrently, the Registrant will change its name to Madison Square Garden Sports Corp. (Ticker: MSGS), while the spin-off will trade as Madison Square Garden Entertainment Corp. (Ticker: MSGE).
Key Financial Metrics and Liquidity
Liquidity and Debt:
- Revolving Credit Facilities: During March 2020, the New York Knicks borrowed the full $200 million available under its facility, and the New York Rangers borrowed the full $150 million available under its facility.
- Cash Contribution: Approximately $300 million of the borrowed funds will be contributed to MSG Entertainment Spinco as part of a total cash contribution of approximately $1.2 billion.
- Post-Distribution Cash: The Registrant expects a cash balance of approximately $100 million following the distribution, including $50 million remaining from the drawn facilities.
- Remaining Capacity: The Registrant will retain $15 million of borrowing capacity under the Knicks Unsecured Credit Facility.
- Delayed Draw Term Loans: To address COVID-19 liquidity impacts, the Registrant expects to enter into two delayed draw term loan facilities (up to $110 million for Knicks and $90 million for Rangers) with MSG Entertainment Spinco. Draws are conditional on the Registrant having less than $50 million in liquidity.
Revenue and Profit: The filing text does not provide specific revenue, profit, or margin figures for the reporting period. It notes that virtually all operations are shut down due to the pandemic.
Material Changes and Agreements
Corporate Structure: The company is splitting into two independent public entities. The Registrant will retain the sports teams (Knicks, Rangers), while MSG Entertainment Spinco will retain the venues (The Garden, etc.) and the sports bookings business.
Arena License Agreements: New 35-year agreements require the Knicks and Rangers to play at The Garden.
- License Fees: Approximately $22.5 million annually for the Knicks and $16.7 million for the Rangers for the first full contract year (ending June 30, 2021), increasing 3% annually thereafter.
- Force Majeure: If capacity is limited to 1,000 or fewer attendees due to force majeure, fees may be reduced by up to 80%. If the arena is unavailable, no fees are due, but future payments remain due even if seasons do not resume.
Executive Compensation: New employment agreements were executed for James L. Dolan (Executive Chairman) and Andrew Lustgarten (President and CEO).
- James L. Dolan: Base salary not less than $400,000; target bonus 200% of base; long-term awards with target value not less than $3.6 million.
- Andrew Lustgarten: Base salary not less than $900,000; target bonus 200% of base; long-term awards with target value not less than $3.3 million.
Outlook, Risks, and Unusual Items
COVID-19 Impact:
- Operations: Virtually all business operations are shut down. Events at The Garden, Hulu Theater, Radio City Music Hall, and other venues are postponed or cancelled through April and into May.
- Season Suspensions: The NBA and NHL have suspended their seasons; resumption is uncertain.
- MSG Sphere: Construction of the Las Vegas venue is temporarily suspended due to supply chain disruptions. The company no longer expects to open the venue in calendar year 2021.
- Tao Group: Hospitality venues are closed, materially impacting the business.
Tax Implications: The distribution is intended to be tax-free under Section 355 of the Internal Revenue Code. Deferred revenue from ticket sales and sponsorships will be accelerated to the distribution date, though the Registrant expects this to be offset by net operating losses.
Conflicts of Interest: Significant overlap in directors and officers between the Registrant, MSG Entertainment Spinco, MSG Networks, and AMC Networks. An "Overlap Policy" has been adopted to manage corporate opportunities and fiduciary duties.
Investor Verification Checklist
- Verify the effectiveness of the Form 10 registration statement for MSG Entertainment Spinco.
- Confirm receipt of final approvals from the NBA and NHL regarding the distribution and arena license agreements.
- Monitor the status of the $200 million delayed draw term loan facilities and the Registrant's liquidity position relative to the $50 million draw threshold.
- Assess the timeline for the resumption of NBA/NHL seasons and the impact on Arena License Agreement revenue recognition.
- Review the updated construction timeline and cost estimates for the MSG Sphere project in Las Vegas.