Andrew Bary

A long-awaited deal by Sphere Entertainment with lenders to its Madison Square Garden Networks unit looks favorable for the company because it will substantially reduce debt carried by MSG Networks, the cable broadcaster for the New York Knicks and Rangers.

The complex agreement, disclosed in an 8-K report before the market opened on Friday, will effectively cut about $514 million of debt off a loan of around $804 million.

The bank lenders took a loss of more than $500 million on the deal, which has been the subject of negotiations since before the loan matured in October. It wasn't clear who the lenders were; JPMorgan Chase was the administrative agent for the loan.

The agreement appears to be a setback for Madison Square Garden Sports, the owner of the Knicks and Rangers, because it will reduce the annual broadcast fee paid by MSG Networks to MSG Sports by about 25%. That money is a key profit source for MSG Sports; it will get warrants for almost 20% of MSG Networks to offset that.

Sphere and MSG Sports are controlled by the Dolan family. James Dolan is CEO of both companies.

Near midday on Friday, Sphere shares were up 8.4% to $28.69 and MSG Sports stock was off 1% to $189.70. Sphere's market value is about $1 billion, while MSG Sports' is $4.6 billion.

Seaport Research Partners analyst David Joyce called the deal a "better-than-base case result" for Sphere Entertainment. "Investors can now return their focus to the growth opportunities at the Sphere," he wrote in a client note, referring to the company's best asset, the Sphere arena in Las Vegas.

Sphere shares have fallen nearly 30% this year because investors are concerned about the Las Vegas tourism market and the ultimate profitability of the arena.

The deal with MSG Sports came as Sphere has sought to reduce MSG Networks' debt load. Cord-cutting by customers in the New York area has made the cable broadcaster less profitable. MSG Networks' adjusted operating income fell 16% to $142 million in the company's fiscal year ended in June.

Analysts had estimated that MSG was worth $400 million to $500 million, considerably less than its debt of more than $800 million.

Sphere took a tough tack with MSG Networks' lenders as a result, benefiting from the fact that the terms of the cable company's borrowings only allowed them recourse to its assets. They couldn't go after the entire company's holdings, including the valuable Sphere arena.

Under the terms of the deal, the new loan amount at MSG Networks will be $210 million, down from $804 million, but Sphere and its cable broadcasting unit will make an $80 million payment to the banks. Of the total, $15 million will come from Sphere, while MSG Networks is paying the rest. The net amount of debt forgiveness is effectively about $514 million.

MSG Networks will also get financial relief from MSG Sports. The annual fee for broadcast rights that it will pay MSG Sports will drop by about $48 million to $139 million.

The yearly payment for the Knicks will fall 28%, to roughly $104 million, and the Rangers payment will drop 18%, to about $35 million. The reduction, effective at the start of calendar 2025, will affect half of the current MSG Sports fiscal year, which ends this June.

As a concession for making the deal, MSG Sports will get non-transferrable "penny" warrants for 19.9% equity in MSG Networks.

Some investors would have liked to see Sphere Entertainment simply walk away from MSG Networks and hand the business to the banks in order to focus on the Sphere arena. They view MSG Networks as an assets whose value is fading away and a distraction for Sphere management.

But that would have meant the Dolan family would have lost control of MSG Networks, a key piece of the Knicks and Rangers empire. In addition to Sphere and MSG Sports, the family controls MSG Entertainment, owner of the Madison Square Garden arena where the two teams play.

The result allows Sphere to turn its full attention to improving the profitability of the Las Vegas arena, plus working on deals for other Sphere arenas. It has already announced an agreement for one in the United Arab Emirates.

Write to Andrew Bary at andrew.bary@barrons.com

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April 25, 2025 14:08 ET (18:08 GMT)

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