Why this MSG shareholder sees ‘absolutely no strategic rationale’ for merger deal

Jonathan Boyar, Principal of Boyar Asset Management and President of Boyar’s Intrinsic Value Research, discusses what he likes in this current market environment, and the shareholder letter he recently penned to MSG's James Dolan.

Video Transcript

- And let's start broadly with the idea of the value of trade right now and what you've seen from your vantage point over the last few months and how much more durable you think this move into value can be as we head into the rest of this year.

JONATHAN BOYAR: Great. First, thanks for having me. And yes, I think it's definitely durable. I think this rotation has legs after a decade of value traveling by historic margins. I think there's a lot of pent-up energy to bring it back up. However, investors really need to be cautious. And I think as-- what you said earlier, you know, chasing rotation is very dangerous, and it's terribly tax-inefficient. So I think investors really need to proceed with caution, know what they're buying, and buy it at reasonable prices.

- OK, so Jonathan, what does that mean, exactly, then? You know, we've just been talking about how a lot of the places people have been going have been into financials, into energy, into industrials. What criteria, what should people be looking for specifically?

JONATHAN BOYAR: Well, for us, what we do and what we think are reasonable prices is we look at every company as if we're buying the whole business. And if you're able to buy it at a discount to what an acquirer would, then over the long run, you should be able to make a lot of money. And obviously it doesn't always work, but it's a great strategy to have.

So you have to be very careful on valuation. You have to look at what similar businesses have gone for in transaction, as that's the best guide to see what a business is worth. But investors shouldn't just go all in on one rotation. They should kind of inch their way in instead of trying to buy the flavor of the month.

- Jonathan, when's your dinner with James Dolan?

JONATHAN BOYAR: I don't think I'm-- I don't think I'm invited to his house for dinner or the garden, although I won't wear one of those T-shirts that says bad things about the Dolan family at the garden. But yes, James Dolan and the Dolan family have been very good partners to invest alongside of. If you're a Knicks fan or a Rangers fan, you probably aren't too happy with how they've done. But if you've been a shareholder like we have, you've been handsomely rewarded.

- Now, John, you did write a pointed letter to James Dolan after a recent deal that he just made. Is it time that he just waves goodbye to MSG entirely? Does he have to go?

JONATHAN BOYAR: The deal that you're referring to and the letter that we wrote on-- that we released on Monday is the definition of self-dealing. Just a little bit of background-- he controls three entities that are related to Madison Square Garden. And one of them is Madison Square Garden Entertainment, which owns, essentially, the garden and other venues. And he also owns Madison Square Garden Networks, which has the rights to broadcast the Knicks and the Rangers.

That's a cash cow. And he is attempting to buy MSGN at a price that can only be described as a take under. And since he controls both companies with super voting shares, there's-- it just smacks of self-dealing, and this is something that needs to be stopped. And hopefully one of the major shareholders will be able to do that.

But yes, it's extremely unfair to shareholders. And MSGN, which is what they're taking over, has great growth prospects, especially with the potential legalization of sports gambling in New York, which could significantly increase their business over the next couple of years. And MSGN shareholders are not going to be able to participate.

- And, you know, Jonathan, when I think about the MSG kind of complex of businesses here, what I always end up coming back to-- and maybe it's just sort of the, well, that doesn't really matter, but I understand why you would think that part of this is like, I mean, the Knicks stink. I know it's a great brand, but the Knicks are kind of listless.

And I do wonder, when you look at the sports part of the portfolio, which has been spun out, I mean, is there-- like how much does the performance of the actual franchises play into this? And then also, you mentioned the cable networks as a cash cow. You know, live sports is certainly the best part of the cable bundle, but it's still exposed to what we all agree is a declining-- declining industry there.

So as you think about both the product that is on the court or on the ice and how it is distributed, is there a risk there, and maybe that is why, at least from the Dolan perspective, they would say we need to make this one entity so we're not too exposed to some of these secular trends?

JONATHAN BOYAR: Well, there is no strategic rationale for MSGE to be buying MSGN. And to go back to the valuation, the Knicks are the most valuable team in all of the NBA, and they're-- well, this year they're not terrible. I think they're 24 and 24. But they historically have been terrible. Think about how valuable they will be if they actually were good, and two, how valuable it will be one sports gambling is legalized.

And that will really help the networks in a multitude of ways, mainly the fact that you're going to get, even if the Knicks are not good, people watching the games because they're going to be betting on them. And you can turn MSGE-- well, the Madison Square Garden could be a sports book the way it happened in Washington. There's so much optionality.

But to go in and basically steal a company from shareholders to help fund their growth really makes no strategic sense. And what they really should do is look back at what they did in 2007. So in 2007, you know, the Dolans owned Cablevision, which housed all of these entities into one entity. And they wanted to take it private.

And what they said is, we control Cablevision. And it would not be fair or good corporate governance for us to approve the deal because it would be self-dealing. And they opened it up to the minority shareholders to approve it. And the minority shareholders struck it down. And after that, Cablevision went on a streak of being unbelievably shareholder friendly. And we hope that they continue with the same playbook.