If MSG Entertainment (New York Stock Exchange: MSGE) has sold its Tao nightclub and restaurant business, which could indicate that the company’s Sphere project in Las Vegas may need more funding to complete. Investment firm Macquarie said on Friday that costs were tight.
Paul Golding, a highly rated analyst at MSG Entertainment (MSGE), said the proceeds from the sale of the Tao business could be used for the remainder of the Sphere project.
Late Thursday, the New York Post reported that MSG Entertainment (MSGE) is in talks to sell its Tao business. It added that the first round of bids had been submitted.
“I tend to agree with The Post that if Tao is put up for sale, this could be motivated by the need for funding to complete Sphere. It was also pointed out when it was recently revised to include: Originally spun with legacy entertainment businesses and venues – the network generated +$186 million [fiscal year 2022 adjusted operating income] For Tao’s +$67 million and Entertainment’s ($118 million) loss,” Golding wrote in a note to clients.
In December, it was reported that the original plans for the spinoff, first proposed in August, had been changed. The revised plan will separate traditional live entertainment (series of performance venues, entertainment, sports bookings and Christmas Spectacular productions) from MSG Sphere, MSG Networks and Tao Group Hospitality.
Golding added that a possible spin-off by MSG Entertainment (MSGE) could be disruptive if Tao were to be sold, as it would result in additional transactions that would affect revenue and taxes.
“Used in previous spins, the proposed tax-exempt spin-off/RemainCo. structure includes a plan for MSGE cash to remain with RemainCo. and a plan to prorate two-thirds of SpinCo’s economic profits. Remain Co. owns the remaining third,” Golding added.
Golding continued, “The impact of income and tax treatment on business disposals can complicate this structure and lead to a simple valuation of the post-spin equity value.”
Golding said MSG Entertainment (MSGE) is seen as “undervalued” but has a complex next few quarters as it properly builds its capital structure amidst all the liquidity. I added that it is possible.
In November, Jefferies downgraded the stock of Madison Square Garden Entertainment (MSGE), citing “obfuscated” real estate values.