MSG Gets Unlikely Assists from Combs, Jackson

NEW YORK (The Deal) -- With the New York Knicks suffering through a miserable season, the excitement at Madison Square Garden (MSG) these days comes from the buzz that new CEO Tad Smith may get assists from legendary coach Phil Jackson and rap mogul Sean "P. Diddy" Combs.

Luring Jackson, who played for the Knicks from 1967-78, to the front office would be a clear score for Smith, a Cablevision Systems  (CVC) executive who succeeded Hank Ratner as the company's president and CEO on Feb. 28. Jackson would presumably bring gravitas and playoff success to James Dolan's troubled team.

Meanwhile, Combs' $200 million offer for music network Fuse, as reported by Bloomberg, is more difficult to evaluate. The bid from the rapper's Revolt TV is short of some firms' valuations of Fuse by well more than $100 million, but would contain a silver lining.

"It is positive that someone is interested because that channel has struggled to gain scale," said Sterne Agee analyst Vasily Karasyov.

The reported price would be in line with CBS's (CBS) purchase last year of TV Guide Network and Lions Gate Entertainment's (LGF) purchase and sale of a stake in the target, Karasyov said.

Brett Harriss of Gabelli & Co. projected that the network would fetch $6 for each of its 65 million subscribers, or $380 million.

Combs' bid is "lower than we would have expected," he said, "but when you are dealing with something that is not profitable you're going to have wide variation in valuation."

For a benchmark, Harriss pointed to Al Jazeera Media Network's $500 million payout for Al Gore-backed Current Media LLC, which had fewer subscribers than Fuse. Additionally, Kroenke Sports & Entertainment in February 2013 agreed to pay $265 million for Outdoor Channel Holdings and its 40 million subscribers.

Other analysts also said they expected a bigger payout.

"While below the $300 [million] price tag we had expected, with the channel generating no material Ebitda a sale would be positive," wrote Stifel, Nicolaus & Co. analyst Benjamin Mogil, whose $65 target values Madison Square Garden at 11 times projected 2015 Ebitda

"It is unclear as to how quickly the new CEO, Tad Smith, will move on such a divestiture although having been a Cablevision executive he would have had considerable exposure/familiarity with the channel," Mogil added.

Macquarie Capital's Amy Yong suggested in a report that the bid, which comes to 2 times revenues, is likely an opening offer. Yong said she expects the final price would be closer to $300 million.

Fuse features programming such as "Insane Clown Posse Theater" and "Big Freedia: Queen of Bounce."

Madison Square Garden disclosed last fall that it had retained JPMorgan Chase (JPM) to shop the network. "Fuse's value has not gone unnoticed with various parties expressing strategic interest in the network," then-CEO Hank Ratner said.

During the company's February earnings call, management refused to discuss the sale process.

Fuse subscribers were up in the most recent quarter, largely because it returned to Dish Network (DISH). MSG Networks, meanwhile, and declining subscribers.

Yong suggested that the hiring of Phil Jackson as head of basketball operations for the Knicks, with a 25-40 record, could be a catalyst for Madison Square Garden.

"The team could benefit from his leadership, given Mr. Jackson's impressive track record including 11 NBA championship titles as head coach," Yong wrote. "Importantly, we believe Mr. Jackson could retain key players including Carmelo Anthony, who is a free agent in July."

High-profile signings, and nonsignings, have had demonstrable monetary or strategic value for Madison Square Garden.

When NBA star LeBron James was a free agent in July 2010, Madison Square Garden's Class A and B shares gained $100 million in value, on speculation that he could sign with the Knicks. The shares' value promptly dissipated when James signed with the Miami Heat.

The Knicks' 2012 burst of Linsanity, led by phenom point guard Jeremy Lin, gave Madison Square Garden leverage that helped to end a blackout by Time Warner Cable (TWC).

Granted, it is difficult to know just how much the teams' streak improved the parent company's negotiating position.

Since Madison Square Garden named Smith CEO on Feb. 28, the Knicks have a winning record. The team has won four games in a row against bottom-dwelling teams such as the Minnesota Timberwolves, Utah Jazz, Cleveland Cavaliers and Philadelphia 76ers.

"It might get little investors excited on the margins," Karasyov said, doubting that it would motivate major sponsors. "I don't think the sponsorship is driven by the coach, its driven by the attendance."

Gabelli analyst Harriss noted that if Jackson could replicate his playoff success at Madison Square Garden, the ticket, food and beverage sales would pile up. "Every playoff game at home is worth about a million dollars in profit," he said.

Madison Square Garden has spent over $1 billion to upgrade the arena, and would like to see it full during the post-season.

Despite the performance of Carmelo Anthony, a starter in February's All-Star Game, making the playoffs would be an uphill climb for the Knicks.

Earlier this season, the sports and pop culture website Grantland described the Knicks as "James Dolan's second-most-pathetic blues band," in a nod to the team owners' musical group, JD and the Straight Shot.

As Larry Brown, Stephon Marbury and other high-profile signees have proven, it's no small task to fix the Knicks.

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