Madison Square Garden Sports (NYSE: MSGS) has filed a Form 10 Registration Statement with the SEC to formally advance a proposed spin-off separating the New York Rangers from the New York Knicks. The MSGS board approved exploring the split in February, sending shares up 16% that day; the stock has since risen 79% over the past year. The tax-free spin-off for shareholders could trigger $55.4 million in new taxes for the Knicks and $19.8 million for the Rangers under expanded federal tax law. The Knicks are valued at $9.85 billion; the Rangers at $3.65 billion.
In-Depth:
Madison Square Garden Sports (NYSE: MSGS) has filed a Form 10 Registration Statement with the SEC for the proposed spin-off of its New York Rangers business from the New York Knicks, which currently both sit under the MSGS banner. In February, the MSGS board approved a plan to explore a split to unlock shareholder value.
The confidential filing does not ensure the split is completed. “Completion of the transaction would be subject to various conditions, including effectiveness of the Form 10 Registration Statement, any required league approval, receipt of a tax opinion from counsel and Company board approval,” MSGS declared in its release.
The spin-off is expected to be structured as tax-free for shareholders, but there are other tax consequences to this deal.
A new federal tax law expands a 2017 tax provision that limited the compensation public companies could deduct for tax purposes. The 2017 provision capped the deduction at $1 million each for the CEO, CFO and the next three highest-paid officers. The new law expands the number of employees to also include the next five highest-compensated ones starting with the 2027 tax year.
An indepfinishently traded Knicks team would pay its top five executives and top five players $195 million—nearly 90% of that is to players—triggering $55.4 million in taxes, per Seaport Analyst Research Partners analyst David Joyce, after excluding the $1 million per employee in maximum compensation. The Rangers would incur a post-spinoff incremental tax of $19.8 million on $76 million in salaries.
“The spin enhances the possibility of raising capital, and [it] creates minority stake sales clearer, as there are two distinct teams’ business models, which creates for a clearer investment vehicle,” he wrote in an April research note.
Sportico recently spoke with multiple investors who consider MSGS owner James Dolan could relocate beyond just an LP stake deal and sell one of the teams outright. Someone familiar with the spinoff details pushed back on the premise of a control sale of either team. Sportico most recently valued the Knicks at $9.85 billion and the Rangers at $3.65 billion.
A spokesperson for MSGS declined to comment on the possibility of a control sale of one of the teams.
MSG Sports’ plan to potentially split the teams sent shares up 16% the day it was announced in February. MSGS shares are up 79% during the past year. The stock still trades at a 29% discount to Sportico’s $13.5 billion combined valuation for the Knicks and Rangers.
On Tuesday, the Knicks kick off their Eastern Conference finals series against the Cleveland Cavaliers. A series win would likely push the Knicks’ playoff revenue to at least $140 million. The Knicks last won the NBA title in 1973, while the Rangers’ last Stanley Cup win was 1994. The Rangers missed the playoffs this season for the second straight year.
