MSGE Could Use Tao Sale Cash to Fund Sphere Completion, Says Analyst

Madison Square Garden Entertainment (NYSE: MSGE) is reportedly mulling the sale of Tao Group, proceeds of which could be used to offset ballooning costs tied to the MSG Sphere on the Las Vegas Strip.

Earlier this week, The New York Post reported that MSGE engaged Goldman Sachs to explore a possible sale of Tao to raise cash for the Sphere project. Rumors are circulating that Golden Nugget owner Tilman Fertitta is interested in buying Tao. He and MSGE boss James Dolan are familiar with each other, as Fertitta owns the NBA’s Houston Rockets and Dolan’s Madison Square Garden Sports (NYSE: MSGS) controls the New York Knicks.

In a note to clients on Friday, Macquarie analyst Paul Golding concurs that a Tao sale in the name of raising capital for Sphere completion is possible, noting that Dolan is looking to fetch 12x earnings before interest, taxes, depreciation, and amortization (EBITDA) for the nightclub and restaurant business. That implies Dolan could be looking for around $800 million for Tao.

The business has ~$84m in debt, and MSGE owns 67% of the equity after the Hakkasan deal. This implies ~$480m in potential proceeds to MSGE if Dolan gets his price,” wrote Golding.

Tao Group’s Sin City venues include Asian and Italian restaurants, namesake day clubs, and nightclubs Hakkasan, Marquee Nightclub, OMNIA Nightclub, and the famed Wet Republic Ultra Pool. The bulk of those venues are located in Strip integrated resorts.

MSGE Spin-Off Plans Still in Play

In addition to Tao, MSGE owns Madison Square Garden, Hulu Theater, Radio City Music Hall, the Beacon Theatre in New York City, and The Chicago Theatre. Last year, the company announced it was evaluating a potential spin-off of the Sphere business, including Tao.

Under the terms of the proposed spin-off, current Madison Square Garden Entertainment shareholders would receive a two-thirds economic interest in the entertainment company, which would retain that name. They’d also get a stake of approximately a third of the newly formed MSG Sphere Corp.

Regarding the need for capital for the Sphere, there’s belief on Wall Street that MSG Networks would be included in a spin-off to provide cash flow to MSG Sphere Corp.

“We tend to agree with The Post that if Tao is up for sale, this may be motivated by capital needs to complete the Sphere –something we also noted when the proposed RemainCo. structure was revised most recently to include the Networks business, which was originally being spun with the legacy entertainment businesses and venues — networks generated +$186m in FY22 AOI to Tao’s +$67m and Entertainment’s ($118m) loss,” added Golding.

Tao Sale Could Affect Spin-Off Timing

Not surprisingly, if MSGE proceeds with a sale of Tao, it could impact the timing of the MSG Sphere separation.

“Proceeds implications and tax treatment for a business disposition could add complexity to this structure and for simply gauging what the post-spin shares might be valued at,” noted Golding.

The analyst said MSGE shares are undervalued, but the next couple of quarters could be “complex.” He has a $65 price target on the stock.