To my surprise, Curtis R. Jensen, Chief Investment Officer of the Third Avenue Small-Cap Value Fund, revealed in his letter to shareholders from April 30th. 2011, that the fund had added Madison Square Garden common shares to its portfolio. Third Avenue operates value oriented mutual funds, based on the principles of Ben Graham. Its founder, Martin Whitman, applies an adapted version of Graham’s net-net approach, meaning that they invest in companies with market values below what they perceive as “readily ascertainable net asset values”. The difference from the original approach is that they try to determine objectively the true value of the assets, as opposed to taking the balance sheet for granted. In that sense, they are much more active that Graham. In the letter they elaborate on the investment thesis:
“The other notable, albeit smaller, addition to the Small- Cap Value portfolio is MSG Common. MSG Common was spun out of Cablevision (NYSE : CVC) a little more than a year ago as an integrated media, entertainment and sports business. The vast majority of the company’s value lies in its ownership of MSG Networks, a business which includes programming related to seven professional sports teams, as well as original programming, and which boasts approximately eight million subscribers. The Entertainment group creates and produces a variety of live entertainment, such as the Radio City Christmas Spectacular, and produces concerts and special events at other owned and leased venues. The Sports business owns and operates the New York Knicks and Rangers, as well as the New York Liberty of the WNBA. Growth in the business and its cash flows may flow from a number of sources, including i) cable network rate increases, as current agreements allow for 5% to 7% rate escalations; ii) enhanced revenues related to higher ticket prices, concessions and sponsorships at Madison Square Garden (“The Garden”) following that venue’s renovation; iii) reversals of current losses at the Entertainment segment.
Our investment comes with a number of current and prospective business risks beyond those stemming from competition, including, for example:
- Dolan/Governance Risk: the risk that the controlling shareholders, the Dolan family, try to take advantage of the minority shareholders like the Fund (e.g., by buying or selling a corporate asset on terms favorable to themselves or overcompensating themselves);
- Execution Risk: management fails to execute in its large renovation of The Garden, where it is planning to spend several hundred million dollars over the next few years;
- Acquisition Risk: management dissipates a currently strong financial position by making bad acquisitions (e.g., MSG currently has an option to purchase the L.A. Forum);
- Labor Risk: both the NBA and NHL are covered by collective bargaining agreements and the NBA’s agreement expires in August;
- Concentration Risk: MSG’s assets are concentrated in New York City, a city vulnerable to terrorist attacks, for example.
Mitigating the business and investment risks are a number of key factors. We believe the Fund’s cost (approximating current levels) represents a wide discount to our estimate of the intrinsic value of the assets, assets which are hard to replicate, if not unique in their own right (Madison Square Garden, for example, is reportedly the highest grossing entertainment venue in North America and the second highest in the world). MSG starts life with a cash rich, debt free balance sheet, supporting management’s transformational efforts at The Garden. Cash flow is expected to continue to grow since sports, as media content, seem more “DVR-proof” than other forms of content and the company’s media cash flows are underpinned by multi-year contracts with its distribution partners.”
Read the complete letter (link)
Ravi Nagarajan on Marty Whitman (link)
Martin Whitman on Net-nets: