Madison Square Garden Entertainment Corp (MSGE) will be splitting in two. The publicly-traded company announced on Jan 13 that it would spin off its “live entertainment business.”
In the gambling space, the point of such spin-offs has typically been to create a new company to handle the more modern components of the business. Golden Nugget and Rush Street are prominent examples of companies that have spun off online casinos and sports betting from their retail business.
However, MSGE is doing things the other way around.
The spin-off will take with it the company’s name and its original core business, the Madison Square Garden Arena in New York. It will also include other similar theatres and concert halls like Radio City Music Hall and the Chicago Theatre.
What’s left with the original company will be the new MSG Sphere project in Las Vegas and Tao Group Hospitality. The latter operates over 70 nightclubs and restaurants worldwide, about a quarter of those in Las Vegas. This portion will change its name to MSG Sphere Corp (MSGC)
In essence, it’s a move to allow interested parties to invest separately in either MSGE’s traditional business or its more modern, Vegas-oriented endeavors. Rumor has it that it may ultimately sell off Tao Group as well.
Shareholders have seemed largely indifferent to the idea, which MSGE initially proposed in Oct 2022. Stock prices for the company did not change much at that time, nor following Friday’s confirmation. We might see more movement immediately after the spin-off is complete, depending on whether investors see more value in one half of the company than the other.
Wait, Which Half is Spinning Off?
The structure of the move is a little confusing. Many reports have presented it as if the MSG Sphere is the portion spinning off. Technically speaking, however, that’s not true, though the end result will make it appear so, as the spin-off will have the old name and the original company will have a new one.
Why does that matter? Primarily for reasons of ownership.
Existing MSGE shareholders will continue to hold the same number of shares of MSGC after the change. They will also get shares in the new company, which we’ll call MSGE2 for simplicity.
However, all those new shares taken together will only make up a 67% stake in MSGE2. The remaining one-third stake will remain with MSGC. Technically, that means it still belongs to shareholders since they will own MSGC and, by extension, everything it owns. However, that portion of MSGE2 can’t be freely traded except by MSGC’s board of directors.
If this were a 100% spin-off, it wouldn’t matter as much which half is considered the “original company.” However, it does make a difference that the MSG Sphere Corp retains one-third of the new MSGE, not the other way around.
Why is MSGE doing things that way? In its own words:
Those retained shares would then be available for use in a tax-free exchange offer for the common stock of MSG Sphere Corp., to raise capital for general corporate purposes, and/or for use in a follow-on pro-rata spin-off to shareholders of MSG Sphere Corp.
In other words, it retains a little bit of flexibility this way. It could eventually spin off the remaining third as well. However, it could also trade those shares to buy back its own stock or sell them to raise capital as needed. The latter could prove important, given how expensive the MSG Sphere project is proving to be.
MSG Sphere to Open in H2 2023
The MSG Sphere is in the final stages of construction outside the Venetian on the Strip. It’s a gigantic, somewhat crazy project of the sort we’ve come to expect from Las Vegas. When complete, it will be a 366-foot sphere with 600,000 square feet of programmable lighting on the exterior and the world’s highest-resolution LED screen inside.
That interior screen will be as large as three football fields and comprise 256.5 million pixels. For audio, there will be 160,000 speakers and a haptic infrasound system for bass that the audience feels rather than hears. U2 is expected to play the first concerts at the new venue when it opens later this year.
As impressive as the Sphere will be, building it hasn’t been easy. MSGE broke ground on the project in Sep 2018. At the time, it estimated a cost of $1.2 billion and an opening date in 2021. The pandemic, inflation and other factors have taken their toll, pushing back the opening date and causing costs to skyrocket. The latest estimates are for the second half of this year and a final price tag of around $2.1 billion.
Will it be worth it? We’ll have to see when it opens. If it proves to be a success, MSGE plans on building more similar spheres around the world, starting with one in London.