Big investors cheer MSG decision to explore spinoff

MSG considers spin-off
MSG considers spin-off

Madison Square Garden's stock price surged Tuesday, and big investors cheered the Knicks owner's decision to explore a possible spinoff that would separate its entertainment businesses from its media and sports businesses.

The board of directors unanimously approved the exploration plan on Monday.

Shares of MSG were up more than 9 percent in early trading Tuesday. (For the latest stock price, click here.)

"We're delighted that they're doing this and giving clarity to what I want to own as a legacy holding," said Mario Gabelli, chairman and CEO of Gamco Investors, which owns more than 4.5 million shares of MSG. "Owning the Knicks and (New York) Rangers is very attractive."

In an interview on CNBC's "Squawk Box," Gabelli said that if the spinoff goes through, he would hold shares in both companies, calling MSG Network and the teams the company's crown jewels. He also noted the value of Madison Square Garden—as well as the air rights above the property—and other live performance venues in its portfolio.

Earlier, Ariel Investments CEO John Rogers Jr. told "Squawk Box" the split is the right thing for shareholders, noting that developments in the Knicks organization put the team in a position to reach the championships. Ariel owns nearly 2 million shares.

Rogers said the recent $2 billion purchase of the Los Angeles Clippers by former Microsoft CEO Steve Ballmer illustrates that people see the value in sports teams more than ever. He expects valuations of sports teams to keep pace in the future.

Gabelli on possible MSG split
Gabelli on possible MSG split

"I think it continues to grow because live television is just so important these days," Rogers said. "People are willing to pay so much for these properties because of the cash flow that comes from television."

Rogers said he would also remain an investor in both companies should the split happen, calling the Madison Square Garden business irreplaceable. "There really is no duplication for the Garden," he said.

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The board said a spinoff would create two distinct publicly traded companies, a move that will provide better clarity on its businesses and prospects. Shareholders would be able to own shares in both new companies.

"Investors favor companies with greater strategic focus on their core businesses," MSG President and CEO Tad Smith said in a statement. "We are exploring the opportunity to improve upon the excellent shareholder return created since MSG's spin-off over four years ago by separating our business into two companies, each with its own distinct value proposition for investors."

He said the live entertainment company "would capitalize on significant opportunities to grow rapidly within the changing entertainment landscape. The [sports and media company] would enjoy steady growth and high cash flow that we expect will result in capital returns to shareholders."

Buyback and appointments

Separately, the board also announced the repurchase of up to $500 million of the company's Class A common stock, its first ever share buyback.

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Two new independent directors—Nelson Peltz and Scott Sperling—will join the board. Peltz is currently chief executive officer and a founding partner of Trian Fund Management, a multibillion dollar alternative investment management firm. Sperling is co-president of Thomas H. Lee Partners, a private equity firm.

Gabelli said the addition of Peltz and Sperling, as well as the buyback, are signs that MSG is becoming more sensitive to the stock price relative to the underlying value of the company.