msg-entertainment-surges-on-relief-over-cost-of-las-vegas-concert-venue

MSG Entertainment Surges on Relief Over Cost of Las Vegas Concert Venue

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Madison Square Garden in Manhattan.


Dreamstime


Madison Square Garden Entertainment

shares jumped on Monday as investors expressed apparent relief that the projected cost of building the company’s state-of-the-art concert venue in Las Vegas, the Sphere, is tracking close to expectations.

 Shares of MSGE (ticker MSGE) closed up 16.2%, or $10.12, to $72.55, after being hammered recently. The stock traded above $90 in early June and hit a new 52-week low of $60.26 on Thursday.

 The company, which owns the Madison Square Garden arena in Manhattan and other assets, completed a merger in July with Madison Square Garden Networks, which owns the cable network that broadcasts New York Knicks and Rangers games.

The deal was orchestrated by the Dolan family, which controls both companies as well as

Madison Square Garden Sports

(MSGS), owner of the Knicks and Rangers.

  One reason for the merger, which has been poorly received by investors, was that cash flow from the cable systems could help finance the Sphere, which is due to open in 2023.

 On MSGE’s conference call Monday after the company reported results for the June quarter, the company’s chief financial officer, Mark FitzPatrick, said the updated cost estimate for the Sphere was $1.865 billion.

When it released results for the March quarter, the company said the Sphere cost estimate likely would be about 10% higher than the prior estimate of $1.66 billion. The new estimate is 12% higher than that $1.66 billion.

There had been some concern, given rising construction costs, that the new estimate would top $2 billion, one investor tells Barron’s.

The Sphere has been controversial because of its high cost and uncertain demand. The 17,500-seat concert venue will have a state-of-the-art sound system and an eye-catching exterior. It fills a potential entertainment void in Las Vegas, but MSGE hasn’t provided projected returns on the project.

 MSGE reported revenue of $100 million and an adjusted operating loss of $70 million for the June quarter, the final fiscal quarter of its year. MSG Networks had $166.1 million of revenues in the June quarter and $63.8 million of operating income.

 The company said that on a combined basis, it had $1.7 billion of debt as of June 30 and $1.5 billion of cash.

 The MSGE/MSGN deal was received poorly by investors in part because the two companies had different constituencies. MSGE investors liked its story as a reopening play given its ownership of Madison Square Garden and the Sphere, as well as the Radio City Music Hall Rockettes.

MSGN was more of a value play given its ample cash flow and low valuation. But it also carries the risk of cord-cutting given the distribution of its sports networks on cable systems. It reported a 7% decline in subscribers in the latest quarter from a year ago.

Jon Boyar of the Boyar Value Group wrote in March to Jim Dolan, the chairman of MSGE, that its all-stock offer for MSGN “grossly undervalues” the company.

 MSGE shares are down 3% in the past year, badly trailing

Live Nation Entertainment

(LYV), a prime reopening play thanks to its status as a leading concert promoter. Live Nation stock was up $3.11, to $83.31 Monday, and is up 56% in the past year.

Write to Andrew Bary at andrew.bary@barrons.com