Business Context and Reporting Period
Company: The Madison Square Garden Company (MSG)
Filing Type: Form 8-K (Current Report)
Date of Report: January 31, 2017
Event: Entry into a Material Definitive Agreement to acquire a controlling interest in the TAO Group.
Key Financial Metrics and Transaction Structure
This filing details a strategic acquisition rather than periodic financial results. Key transaction metrics include:
- Acquisition Interest: MSG acquired a 62.5% common equity interest and an $8.7 million preferred equity interest in Tao Holdings.
- Valuation: The upfront purchase price values the TAO Group at $400 million (inclusive of leverage).
- Cash Consideration: MSG paid approximately $181 million for the common equity interest and $8.7 million for preferred equity.
- Debt Financing: A $110 million five-year term loan and a $12 million revolving credit facility were secured from lenders led by Goldman Sachs Specialty Lending Group, L.P. The debt is non-recourse to MSG.
- Interest Rates: Floating rates based on Base Rate (min 4.00%) + 6.50% to 7.00% margin, or LIBOR (min 1.00%) + 7.50% to 8.00% margin.
- Preferred Return: 9% per annum (compounding quarterly, paid-in-kind).
- Recurring Obligations: Tao Holdings must pay MSG an annual $5 million management fee (increasing 5% annually starting 2018) and purchase at least $1 million of MSG inventory/services annually.
Material Changes and Contingencies
The primary material change is the consolidation of Tao Holdings' results into MSG's financial statements. Significant contingencies and future cash flow obligations include:
- Earn-Out: Sellers may earn up to an additional $25.5 million based on trailing twelve-month adjusted EBITDA targets, payable in up to three tranches of $8.5 million. Unearned portions are forfeited after January 1, 2022.
- Equity Incentives: A bonus pool for TAO Group founders ranging from $4 million in 2017 to $8 million in 2021, plus a potential additional $25 million aggregate incentive over five years.
- Call and Put Rights: MSG has a call right to increase its equity interest after the fifth anniversary. Founders have put rights to sell their equity to MSG or Tao Holdings under specific conditions (e.g., termination of employment, change in control).
Guidance, Outlook, and Risks
Operational Outlook: The TAO Group operates 19 venues across New York City, Las Vegas, and Sydney, with contracts to open five new venues in NYC and eight in new markets (Los Angeles, Chicago, Singapore). Founders retain day-to-day management responsibility under five-year employment agreements.
Risks and Contingencies:
- Forward-Looking Statements: The filing contains forward-looking statements regarding future performance which are not guarantees.
- Debt Service: The transaction relies on significant leverage ($110 million term loan) with floating interest rates, exposing the entity to interest rate risk.
- Performance Targets: Additional consideration and bonuses are contingent on achieving specific EBITDA targets.
- Non-Competition: Founders are subject to worldwide non-competition restrictions.
Investor Verification Checklist
- Verify the exact purchase price adjustments and final closing consideration paid.
- Review the specific EBITDA targets required to trigger the $25.5 million earn-out payments.
- Assess the impact of the $110 million term loan on MSG's consolidated leverage ratios and debt covenants.
- Confirm the timeline and conditions for the $5 million annual management fee and inventory purchase obligations.
- Examine the "fair market value" definitions used for call and put rights in the LLC Agreement.