Investors Are Starting To See A Strategic Buyer For MSG Networks As Unrealistic

MSG Networks Inc MSGN shares have fallen 19.5 percent in 15 weeks, almost to the level of Loop Capital Market’s $19 price target.

The market’s take on the New York Knicks broadcaster has aligned with that of the research firm’s, prompting an upgrade from Loop, managing director David W. Miller said in a Monday note.

The firm upgraded MSG Networks Inc. from Sell to Hold Monday and maintains its price target.

“We believe the market has finally come around to our view that a sale of this company to a strategic buyer is unrealistic in the current M&A environment,” Miller said.

A financial buyer is also “likely to pass” on MSG Networks, Miller said, due to the company’s low cash flow generation.

MSG Networks is set to report fourth-quarter earnings and 2017 results Aug. 16. Loop Capital projects the company’s revenue at $155.2 million, $78.1 million in adjusted operating income and an EPS of 51 cents, 1 cent less than Street estimates.

The $161.9 million consensus figure for revenue is “too high in our view,” Miller said.

AT&T, Disney And Others Likely To Swipe Left On MSG

After AT&T Inc. T proposed purchase of Time Warner Inc TWX in December, MSG Networks was bid up, Miller said. The trend continued with an April New York Post story that sparked acquisition rumors with suggestions the company was hiring M&A bankers.

Loop believes the story was mistranslated “because it just so happens that a certain MGN board member also runs a vertically-integrated investment bank,” Miller said.

The analyst named potential MSG Network buyers — and why each one is unlikely to make a move:

• Walt Disney Co DIS owns the majority of ESPN, has NBA exposure and “does not particularly like the ratings profile for the NHL.”
• CBS Corporation CBS also does not like the ratings profile for professional hockey, finds the NBA “too expensive” and would prefer to concentrate on SEC football, the NFL, the Masters and the NCAA tournament.
• Viacom, Inc. VIAB “is already dealing with enough drama at the moment” and isn’t in a position to spend $2 billion or more on a regional sports network.
• Discovery Communications Inc. DISCA just announced its $14.6-billion purchase of Scripps Network Interactive, Inc. SNI “and really can’t afford anything else given [the] very low accretion on the SNI deal.”
• Twenty-First Century Fox Inc FOXA owns 22 regional sports networks and has been criticized for it, Miller said. Moreover, the company owns 80 percent of MSG’s competitor YES and is in the process of buying the British broadcaster Sky.

At last check, shares of MSG Networks were up 3.21 percent at $20.90.