Why I Am Long Madison Square Garden

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

NEW YORK ( TheStreet) -- Early last week, I introduced two media stocks I consider sells -- Netflix ( NFLX) and Sirius XM ( SIRI) -- and six I consider buys -- Rogers Communications ( RCI), Bell Canada ( BCE), Time Warner ( TWX), Disney ( DIS), Pandora ( P) and Madison Square Garden ( MSG). Later in the week, I outlined my bull case for both Rogers and Bell. When I go long media stocks, I do so with a time horizon measured in years, not months and week. I also consider five key criteria when making my selections:
  • Massive and/or rapidly growing revenue
  • Multiple, diverse streams of revenue
  • Multi-platform delivery of premium content
  • Direct control over premium content
  • Ubiquity
  • In this article, I make my bull case for MSG, relating it back to each of the five points. When investors discuss the media space in North America, too few bring up the situation in Canada involving Rogers and Bell. My article from last week details how the two firms dominate the telecommunications, media and much of the sports landscapes north of the border. While I am fairly certain nothing even close to that level could happen in the United States, thanks to tighter (and often nonsensical) regulatory controls, I expect some companies to try to push the envelope.

    In 2012, we will see the continuation of something that picked up toward the end of 2011: various types of media partnerships and consolidation. Although we did not witness much meaningful M&A last year, partnerships hit the wires one after the other, ranging from Clear Channel's ( CCMO.PK) iHeart Radio collaborating with competitors such as Cumulus Media ( CMLS) and Disney hooking up on TV Everywhere ventures with the likes of Time Warner Cable ( TWC) and Comcast ( CMCSA).

    As the year unfolds, I expect more partnerships and M&A activity to pick up. Telcos and media companies in the U.S. need to be even more careful than their Canadian counterparts. Just have a look at what happened to AT&T ( T) when it tried to add T-Mobile to its stable. In Canada, Rogers and Bell sometimes need to appease regulators. For example, Bell will have to divest several radio stations once it takes control of Astral Media. But, at day's end, Rogers and Bell run roughshod. In the States, companies will have to dance the dance with a bit more tact if they wish to pull off anything even close to the Rogers-Bell level. I anticipate more than a couple instances of American companies testing the regulatory waters in 2012.

    MSG seems like a pretty darn good target. That said, I am not long MSG simply because I consider them ripe for M&A. On its own, MSG is already a pretty appealing investment. The stock registered a new 52-week high this past Friday. The way MSG describes itself in its most recent quarterly report makes it pretty clear that it hits each of the aforementioned five criteria pretty hard:
    The Company classifies its business interests into three reportable segments: MSG Media, MSG Entertainment, and MSG Sports. MSG Media produces, develops and acquires content for multiple distribution platforms, including content originating from the Company's venues. MSG Media includes our regional sports networks, MSG network, MSG Plus, MSG HD and MSG Plus HD, collectively called the MSG Networks, and the Fuse Networks (Fuse and Fuse HD) ... MSG Entertainment presents or hosts live entertainment events in our diverse collection of venues, including concerts, family shows, performing arts and special events. These venues include The Garden, The Theater at Madison Square Garden, Radio City Music Hall ... MSG Sports owns and operates sports franchises, including the Knicks of the NBA, the Rangers of the NHL, the Liberty of the WNBA and the Connecticut Whale of the AHL ...
    Multiple, diverse and synergistic revenue streams. Massive revenue ($373 million in the final quarter of 2011, which was down considerably year-over-year thanks to the NBA work stoppage). Multiple distribution platforms. Direct control over premium content. And, at least on a regional/local level, ubiquity. It's all there. Again, I am happy being long MSG with it on its current independent course. I have to think, however, that its doorbell is about to ring if it has not already.

    If Comcast, for example, made a successful play for MSG, granted, it would not come close to the scale of Rogers or Bell, but it would form quite a corporation. Consider the scope of Comcast's business, as of its most recent annual report.

    Comcast is a cable and Internet company; it is a media company (51% stake in NBC Universal); it owns several cable networks, regional sports and news networks, local television stations across America; it owns and operates Universal Pictures as well as Universal theme parks in Orlando and Hollywood; it also owns the Philadelphia Flyers NHL franchise, Wells Fargo Center in Philly and a facilities management and concession/food services company. MSG would fit nicely into the fold.

    Of course, there's the issue of one company owning two NHL franchises. I do not think, however, Comcast would have much of a problem giving up majority ownership of the Flyers. In Canada, Bell already has an 18% stake in the Montreal Canadiens, which it should be able to keep despite the 37.5% stake it will have in the Toronto Maple Leafs as a result of its deal to buy Maple Leaf Sports and Entertainment. I could see a combined MSG/Comcast trimming stakes in both the Flyers and Rangers to make regulators and the NHL happy.

    Later in the week, when I discuss why I am long TWX, I will discuss the possibility of Time Warner, Viacom ( VIA) or Verizon ( VZ) making a play for MSG or one another and why it makes sense.

    For the time being, I am long MSG on its own merits. As with Rogers and Bell, I do not think Wall Street realizes the value that lies in the only-recently tapped revenue potential inherent in MSG's multi-platform synergy between sports, entertainment and media properties.

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