How Will MSG Networks Fare In The New TV Environment?

MSG Networks Inc MSGN, formerly The Madison Square Garden Company, got a Halloween scare from Morgan Stanley with a downgrade from Equal-Weight to Underweight.

MSG Networks has risks not reflected in the consensus as it moves through distribution renewals, analyst Benjamin Swinburne said in a Tuesday note.

As an independent regional sports network, the company “lacks the benefit of negotiating distribution alongside a broader network portfolio,” Swinburne said (see Swinburne's track record here). 

MSG Networks’ distribution revenue is concentrated with two distributors, according to Morgan Stanley: Altice USA Inc ATUS, which accounts for 25 percent of revenue, and Charter Communications, Inc. CHTR, which accounts for 20-25 percent of revenue.

The company has a levered cost structure in the form of contractually obligated rights fees paid to sports teams under long-term agreements, Swinburne said. Such fees make up 80 percent of MSG Network’s operating expenses, the analyst said.

Morgan Stanley has a $20 price target on the shares.

The Impact Of Sports-Free TV

As MSG Networks’ distribution contracts expire, the company is facing a different TV ecosystem where distribution minimums could be reduced, Swinburne said.

The network’s existing agreements have protected revenues from rising adoption of sports-free TV bundles, meaning that the number of paying subscribers likely exceeds the number of viewing subscribers, the analyst said.

“As agreements renew, we see risk that those minimums are reduced — perhaps meaningfully — leading to an acceleration in paying subscriber losses.”

The combination of a loss of paying subscribers; 4 percent yearly growth in rights fees; and limited means to reduce expenses create a scenario of declining EBITDA over time, according to Morgan Stanley.

At publication, shares of MSG Networks were down 9.56 percent at $17.50.

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