Rogers Communications (RCI) announced on Wednesday that it would pay C$4.7 billion ($3.5 billion) for 37.5% of Maple Leaf Sports & Entertainment (MLSE), owner of some of Canada’s most valuable sports properties, including the NBA’s Toronto Raptors and NHL’s Toronto Maple Leafs.
Americans might be unfamiliar with MLSE, but having spent most of my life in Toronto -- I now live in Halifax on Canada’s east coast -- it was a big news story.
If you are a Madison Square Garden Sports (MSGS) shareholder, yesterday’s news should be music to your ears. If you don’t own its stock, the options activity, unusual or otherwise, should begin to perk up in the weeks ahead.
Here’s why.
The MLSE Backstory
MLSE was formed in 1998 when the Maple Leafs merged with the expansion Raptors, and both teams moved into the newly built Air Canada Centre arena.
Now called the Scotiabank Arena, MLSE has gone on to add Toronto FC, an MLS expansion team, build BMO Field for the soccer team, complete Maple Leaf Square, a mixed-use development beside Scotiabank Arena, acquire the Toronto Argonauts of the Canadian Football League, and continue to drive revenue growth in sports-related projects in Southern Ontario.
BCE (BCE) and Rogers jointly acquired 75% of MLSE from the Ontario Teachers’ Pension Plan in 2012, each contributing C$533 million ($393 million) cash into the deal. Twelve years later, BCE is selling for 9x what it originally paid. That doesn’t include any annual profits distributed to MLSE’s owners as dividends.
The sale happened for two reasons.
First, BCE is transforming the company into a more agile, less debt-ridden, profitable business. The after-tax proceeds will pay down some of its debt, nearly C$40 billion ($29.1 billion) as of June 30.
Secondly, Ed Rogers, the founder's son, is Chairman of the company. His family controls 97% of the voting shares -- the Class A shares are worth 50 votes each while the Class B have no voting rights but share equally in the dividends -- so he can do whatever he wants with the company. And he wants a sports empire. Rogers separately owns the Toronto Blue Jays of Major League Baseball and the Rogers Centre, where it plays.
Okay, enough of the history lesson.
What’s in It for MSGS?
Based on the price Rogers Communications paid for BCE’s stake, MLSE is valued at $12.53 billion ($9.24 billion). The sports and entertainment company is private, so neither Rogers nor BCE provide any details of revenues or profits in their financial reports.
One online estimate from Growjo.com suggests it was C$733 million ($540 million) in 2023. I can't say how accurate that is, but let’s run with it.
Walt Disney (DIS), arguably one of the largest and most successful entertainment companies anywhere, has a trailing 12-month EBITDA of $14.8 billion as of June 30. According to Morningstar, Disney's enterprise value is $216.03 billion, 14.6x EBITDA. Its EBITDA margin is 16.4%.
Of course, it doesn’t own sports teams, and we all know that billionaires are prepared to pay nutty multiples to control the world’s most valuable teams.
Based on the Disney comparisons, MLSE’s EBITDA would be $89 million ($540 million times 16.4%), and its enterprise value would be $1.3 billion ($89 million times 14.6x), considerably less than the BCE transaction puts on MLSE.
Now, we move on to MSGS itself.
According to Morningstar, its trailing 12-month enterprise value is $5.98 billion. That’s 43.8x its TTM EBITDA of $136.4 million. Its EBITDA margin is similar to Disney’s, at 13.3%.
Let’s assume that MLSE's $9.24 billion equity valuation is spot on. Let’s also assume that its enterprise value is the same (it wouldn’t be) as its equity valuation. Based on Madison Square Garden Sports’ numbers, MLSE’s TTM EBITDA would be $210 million, 2.4x my estimate earlier, and an EBITDA margin of nearly 39% ($210 million divided by $540 million).
As you can see, the valuations don’t seem to make sense.
MLSE is overvalued, or their revenue and profit numbers are substantially higher than $540 million. I think it’s the latter.
The Bet on MSGS Using Options
Let’s assume that MLSE’s revenues and EBITDA (in U.S. dollars) are similar to Madison Square Garden Sports’s, which I mentioned above. This would suggest that MSGS stock is 55% undervalued relative to MLSE.
There are differences between the two businesses, but if their valuations should be in the same ballpark, it’s a wonder why investors aren’t buying more options.
As I write this in mid-afternoon trading, MSGS has seven puts and one call option with at least one contract traded (28 in total). The Nov. 11 $210 put exhibited unusual options activity with a Vol/OI ratio of 2.50.
So, it’s currently trading in the money, with a bid price of $5.90. If you sell this put and are made to buy the shares in 57 days, the net price would be $204.10, 2.3% below where it’s currently trading.
Based on 24 million shares outstanding and a $208.97 share price, it has a market cap of $5.03 billion. If you boost that by 55%, it should be about $7.77 billion, or $2.74 billion higher, and trading around $324.
In the worst-case scenario, you have a temporary paper loss until investors realize it’s dramatically undervalued. Alternatively, you go a safer route and buy a cheap, long-duration call in the $300s somewhere.
Either way, I’m surprised MSGS hasn’t seen more action from the news.
On the date of publication, Will Ashworth did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
