Sell Madison Square Garden If the Rangers Lose?

Tickers in this article: MSG

NEW YORK (TheStreet) -- Another Game Seven goes off Thursday night in the National Hockey League playoffs. The New York Rangers host the Ottawa Senators at Madison Square Garden.

I am working feverishly to ensure that I am firmly planted on the couch by 4:30 p.m. PT with Molson Canadian in hand. There might not be a better time of the year than the NHL's second season.

I happen to be a Toronto Maple Leafs fan. This, however, does not mean that I dislike all other Canadian franchises. In fact, when the Leafs are out of the race (every year), I root for Canadian teams. I was born in Western New York, but have always identified in many ways with Canadian culture.

Right now, the Sens are the last Canadian team standing. Up until yesterday, I was preparing to root for them to win this evening. Then, I read an article by Mike Ozanian in Forbes, titled: Senators Set to Extract $300 Million from Madison Square Garden Shareholders.

Mike wrote a nice article, but he did leave several things out. He estimates that every time the Rangers host a playoff game, Madison Square Garden , the company, nets $1 million income. He extrapolates this out using the following math: If the Rangers go to the Cup they'll play at least 10 more games. MSG trades for 33 times earnings, so that would shave about $330 million worth of value from the company's market cap.

That's not an exact science because Ozanian fails to factor in cost savings related to less hockey and the fact that the MSG-owned New York Knicks have already clinched a playoff spot. Postseason revenue from basketball should help offset any hockey-related losses.

It's not just that MSG owns the Rangers and the Knicks and the arena the teams play in. The company also owns the stable of Madison Square Garden television networks that air the games. So, we're talking about some serious synergy between revenue streams.

Ozanian points out that losing Rangers revenue because of a first round exit could hit MSG hard, particularly because the company saw net income decline by $5 million between the first six months of fiscal year 2011 and the first six months of fiscal year 2012. What Ozanian does not explain is that you can attribute this loss primarily to the labor dispute that cut the NBA season short.

If you scroll through MSG's most recent annual report, you'll see that the NBA lockout was responsible for the 14% year-over-year decrease in revenue for the three months ending December 31:
The Company's, MSG Media segment's and MSG Sports segment's results of operations for the three and six months ended December 31, 2011 were impacted by the NBA work stoppage. The delay in reaching an agreement . . . delayed the start of the 2011-12 NBA regular season by approximately two months until December 25, 2011. In addition to the delayed start, the resolution of the NBA work stoppage resulted in the 2011-12 regular season being shortened by 16 games, or approximately 19.5%, to a 66-game season. A higher percentage of games will be played in the second half of our 2012 fiscal year as compared to the comparable period of the prior year. In the second quarter of our 2012 fiscal year, the Knicks played a combined 6 preseason and regular season games, of which 2 were home games and 4 were away games, as compared to a combined 40 preseason and regular season games in the comparable period of the prior year, of which 18 were home games and 22 were away games.

If the Rangers lose tonight, they could actually miss out on up 21 games over three potential playoff rounds (Eastern Conference, Semifinals, Eastern Conference Final and the Stanley Cup Final). If each series went seven games, I am pretty sure MSG would miss out on 11 or 12 Rangers home games. The home games represent the bigger hit, but Ozanian also left out the fact that MSG would lose advertising and other dollars on the missed away games. But, is this a reason to sell or not buy the stock?

Stock Performance

MSG has been on a roll lately. It closed at a 52-week high of $35.43 on Wednesday, trading as high as $35.55 intraday. I am not certain we can attribute the stock's run since late last year to the Rangers' games, though they didn't hurt. Neither did Jeremy Lin-Sanity or the Knicks' forthcoming playoff appearance.

In the short-term, the bear case is that the Rangers lose tonight and the Knicks get swept in the first round. The bull case would have both teams going to their respective league finals, creating a potential scheduling nightmare at MSG. But, that's all short-term stuff that might impact a day or swing trade, but likely as little to do with the long-term narrative here.

As a long-term investor, I will continue to buy MSG no matter which near-term scenario plays out. I do not own the stock on the basis of a sports team's fluctuation between winner and loser. I own MSG because of the massive cross-platform opportunities it can leverage as sports team owner, venue owner, content owner and regional advertising juggernaut.

As I noted in an article on TheStreet earlier this month, MSG's unique situation also makes it a prime buyout candidate for a larger player in media and/or telecom.

Tickers in this article: MSG