Speculation Swirls Around MSG, Jim Dolan's Media Empire
MSG CEO and controlling shareholder James Dolan

Madison Square Garden Co. (MSG) has tipped off a sale process for the New York Liberty, and according to at least one sports banker, the sale of the Women's National Basketball Association franchise is likely due to a reshuffling of its portfolio rather than selling at the top of the market.

MSG, which owns the Liberty, Knicks and Rangers franchises, as well as New York's Madison Square Garden and Radio City Music Hall, announced late on Tuesday, Nov. 14, that the company had put the Liberty up for sale after 21 years of ownership.

The announcement comes a day after chairman James Dolan took over as CEO of MSG after David "Doc" O'Connor suddenly exited the entertainment company. O'Connor, a former Hollywood agent at Creative Artists Agency LLC, was MSG's third CEO in less than eight years.

The real question is what is going on at MSG and why did the company choose now to sell, the source said. The value of the Liberty, the source said, was marginal to the company's bottom line.

According to David Miller of Loop Capital Markets LLC, the Liberty had negative free cash flow of $23 million in 2017 and are on pace to lose about $41 million in 2018. The firm attributed an asset value of negative $414 million to the franchise, or 18 times its cash flow. 

Despite the estimates from the Wall Street firm, a source close to the league said the team is closer to a break-even point in terms of free cash flow. 

Still, the franchise should garner interest.

"Given escalating NBA team values and the excitement around both the G League and NBA 2K [eSports] league, it seems the Liberty, particularly given their New York market, would be an interesting opportunity," said Charles Baker, co-chair of O'Melveny & Myers LLP's sports industry group. 

The 12-team WNBA has seen other sales in recent years.

On Oct. 17, the San Antonio Stars revealed a move to gambling mecca Las Vegas after a purchase by MGM Resorts International. The deal made MGM the second company with casino holdings to own a WNBA team -- Mohegan Sun, itself owned by the Mohegan Tribe of Connecticut, owns the Connecticut Sun franchise.

The Los Angeles Sparks, one of the eight original WNBA teams along with the Stars and the Liberty, changed hands in 2014, with a group led by Mark Walter and NBA legend Earvin "Magic" Johnson acquiring the club. Walter, CEO of Guggenheim Partners LLC and controlling owner of the Los Angeles Dodgers, had partnered with Johnson to purchase the Major League Baseball team out of Chapter 11 in 2012 for $2 billion.

Neither WNBA team disclosed a value for the transactions.

The value of the Liberty remains an unknown as well, though some analysts have recently taken a stab at valuing some of MSG's properties. Loop has valued the Knicks at close to $3 billion and the Rangers at about $1.2 billion.

Dolan through MSG is the last remaining original owner of a WNBA franchise. In Tuesday's statement announcing the potential sale of the team, he thanked Isiah Thomas, the current president of the team and former president and head coach of the Knicks.

"This was a difficult decision for us, which we made after carefully assessing the needs of our business," Dolan said in the statement. "We are confident that new ownership can build on the foundation we established over these last 21 years and steward this incredible franchise into an even more successful future."

The team did not publicly disclose if it had hired an investment bank to help with the process.

MSG split its entertainment and media businesses into separate companies in October 2015. There had been talk in recent months of the Dolan family struggling in attempts to sell off the media component, MSG Networks Inc. (MSGN) , as cord-cutting continues among video consumers and affects the entire media world.

Both MSG and MSG Networks had better-than-expected financial results in their most recent quarters, though it didn't stop some on Wall Street from speculating about the companies' futures and whether the two should re-combine. The Dolans as of Sept. 30 controlled about 71.2% voting power at MSG and 69.6% at MSG Networks, according to Securities and Exchange Commission filings.

"Although since the separation from MSG, MSGN has done quite well (both operationally and financially -- at least in our opinion), the reality is the public market clearly seems to feel little love for the RSN operator," FBN Securities Inc. analyst Robert Routh wrote in a note Nov. 6, just after the two companies reported earnings. "Thus, unless the Dolan family plans to sell MSGN (as many in the mainstream press have reported more than once), we wonder why they wouldn't think about taking advantage of current market conditions and simply recombine MSGN with MSG."

In October, Dolan hired communications firm Teneo Holdings following the announcement that MSG's chief communications officer would be stepping into a new role. Speculation was that the firm was hired to defend against activist investors, though MSG has since denied that.

Still, it should be noted that Mario Gabelli, who owns about 7.4% of MSG and 5.8% of MSG Networks through Gamco Investors Inc. and Gabelli Funds LLC, maligned MSG at the Yahoo Finance Summit, according to reports, touting a breakup of the company.

The Dolan family controls all of MSG's Class B voting shares, which give it sole control over voting for 10 Class B directors. Class A shareholders such as Gabelli can elect five members to the board. Nelson Peltz of Trian Fund Management LP is a Class A director, as is former Los Angeles Clippers and Time Warner Inc. (TWX) CEO Richard D. Parsons; Joseph J. Lhota, chairman of New York's Metropolitan Transportation Authority and a former mayoral candidate and MSG Networks executive vice president, is a nominee.

Gabelli did not immediately return a request for comment. MSG and Teneo declined comment.

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Editors' pick: Originally published Nov. 17 and has been updated with comments about the team's cash flows.

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