Bloomberg News

Knicks Beat LeBron James’s Heat When Making Money Is Final Score

April 27, 2012

The New York Knicks will beat the Miami Heat in the opening round of the National Basketball Association playoffs if the measure of success is profit instead of points.

The Knicks were one of eight profitable teams during the 2010-11 season, topping money-losers including LeBron James’s Heat and the Dallas Mavericks, who won the championship. NBA teams lost a combined $300 million a year ago, the league said, saying that’s a key reason why a more restrictive collective bargaining agreement was necessary.

While the Knicks and owner Jim Dolan have made headlines for management dysfunction with their sports properties, little can keep the parent company, Madison Square Garden Co. (MSG:US), from profitability, analysts who cover the New York-based company said.

“If you don’t do anything stupid, you’re going to keep making money,” Dan Medina, a research analyst with Needham & Co., which has a “buy” rating on MSG and doesn’t own shares, said in a telephone interview from his office in San Francisco. MSG was spun off from Cablevision Systems Corp.

The sports teams are a high-profile piece of MSG, which has three main components: MSG Sports, which includes the Knicks, hockey’s Rangers and their arena, Madison Square Garden; MSG Media, which includes the MSG Network; and MSG Entertainment, which includes Radio City Music Hall, which hosts such New York icons as the Christmas Spectacular and the Rockettes.

The sports teams have also been sources of embarrassment. In 2007, the Knicks lost an $11.6 million sex harassment lawsuit brought by a female executive. NBA Commissioner David Stern at the time told ESPN that “it demonstrates that they’re not a model of intelligent management.”

Playoffs Begin

The NBA playoffs begin after a regular season that was trimmed to 66 games from the usual 82 because owners shut down the league in a labor fight with the players union. The Knicks open their postseason tomorrow in Miami against the Heat, which reached the championship series last season.

The Rangers, meantime, defeated the Ottawa Senators 2-1 in a deciding seventh game last night to reach the second round of the playoffs for the first time since 2008. It’s the second straight season both the Knicks and Rangers made the postseason. Last year was the first time since 1997.

MSG shares have more than doubled since the company was spun off from Cablevision Systems Corp. on Feb. 10, 2010. Shares closed at $35.83 yesterday, up 1.1 percent, or 40 cents.

Sports Revenue

Much of MSG’s financial (MSG:US) success comes from controlling the revenue streams associated with the sports teams, Medina said.

MSG had $373 million in revenue in the quarter ended Dec. 31. Of that, $151 million came from the entertainment division, $142 million from media and $89 million from sports, which was hurt as the Knicks played fewer games because of the lockout, Hank Ratner, MSG’s chief executive officer, said in a Feb. 8 conference call to discuss earnings.

“This integrated approach, along with our deep relationships in the sports, media and entertainment industries, and strong connection with our diverse and passionate audiences, is what drives our growth and sets us apart in the industry,” Ratner said in an e-mailed statement.

In the quarter that ended March 31, 2011, during the NBA season, the sports division had revenue of about $158 million, most among the three parts of the company.

Dodgers Sale

The possibility of owning a team, arena and network is one reason why a group led by basketball hall-of-famer Magic Johnson paid a record $2.15 billion for baseball’s Los Angeles Dodgers. The purchase was just as much about media and real estate as it was baseball, sports bankers such as Rob Tilliss, founder of Inner Circle Sports, have said.

“Controlling it all, they will in most cases find a way to make money,” Medina said of MSG, which, he added, benefits from having a fervent fan base in the nation’s No. 1 media market.

Just how much money the sports and media divisions make depends on team performance. More wins usually mean more fans, more concession revenue and more people watching on TV.

“Right now the teams are performing well,” Bob Gutkowski, president of MSG from 1991-94, said in a telephone interview from his office in New York. “The network is performing well. There’s nothing they can do at this particular point not to make money.”

Jeremy Lin Effect

The sports and entertainment divisions got a boost this season from the emergence of Harvard University graduate Jeremy Lin, an undrafted player of Taiwanese descent who drove interest in the team after taking over as the starting point guard on Feb. 6 and sparking a six-game winning streak.

Lin, 23, not only led to the addition of Asia-based sponsors, his popularity helped forge an agreement between MSG and Time Warner Cable Inc., which wasn’t carrying MSG because of a pricing dispute.

About the only thing that could crimp profit, Gutkowski said, would be a prolonged slump from the Knicks and Rangers. That would affect everything from sponsorship and attendance to how much MSG can charge cable operators for its networks.

Heat spokesman Tim Donovan declined to comment on team finances.

Susquehanna Financial Group analyst Vasily Karasyov, who this month downgraded MSG to negative from neutral because “fundamentals don’t support the current share price,” in a telephone interview said even underperforming teams wouldn’t keep MSG from making money. Winning teams, he said, allow for larger price increases and advertising rates.

The Knicks this season raised season tickets by an average 49 percent amid what the company calls an almost $1 billion transformation of the arena. Susquehanna is a market maker in the securities of MSG.

“The changes of winning teams are small, positive and incremental, but not life changing,” Karasyov said. “You can’t ruin MSG.”

To contact the reporter on this story: Scott Soshnick in New York at ssoshnick@bloomberg.net

To contact the editor responsible for this story: Michael Sillup at msillup@bloomberg.net


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Companies Mentioned

  • MSG
    (Madison Square Garden Co/The)
    • $66.86 USD
    • 0.64
    • 0.96%
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