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More than two decades ago, during the depths of the bear market that followed the bursting of the dot-com bubble, U2 was touring the Pacific Northwest to promote its album All That You Can’t Leave Behind. After paying a huge premium, I was able to score a ticket for the show in Portland, Oregon and it was absolutely amazing watching the band perform.
When I heard about U2 performing at the Sphere in Las Vegas, I brought back memories of that Portland concert in 2001. I watched most of that concert about six feet from the stage but I can’t begin to imagine the experience at the Sphere with the largest LED screen on earth and 167,000 speaker drivers. When I noticed that Sphere’s CFO had resigned recently, I figured it was time for us to dig into this new spin-off to understand if the opportunity for investors is as good as the experience for concert goers.
Sphere Entertainment Co. (SPHR): $34.44
Market Cap: $1.20B
Enterprise Value: $2.10B
Key Insights
Company
Sphere Entertainment Co. is a premier live entertainment and media company comprised of two segments, Sphere and MSG Networks.
Sphere: The inaugural 580,000-square-foot Sphere debuted in Las Vegas in September 2023, boasting a capacity for 20,000 guests and a year-round schedule of diverse events. The Sphere was designed by Populous, a global design firm specializing in stadiums and large-scale event venues.
Picture this: The Sphere, is not just the world’s largest spherical structure standing tall at 366 feet and stretching wide at 516 feet but also a visual wonderland with a massive 16K LED screen, spanning 160,000 square feet. The audio experience is just as thrilling with advanced tech for a 3D sound experience that’ll leave you in awe. But it doesn’t stop there; the Sphere adds an extra layer with 4D effects like haptic feedback, scents, and more, ensuring an unforgettable sensory journey. And let’s not forget the exterior—580,000 square feet of programmable LED displays that transform the Sphere into a mesmerizing spectacle.
Billionaire heir to a cable TV fortune and owner of the Knicks, the Rangers, Madison Square Garden, Radio City Music Hall, and other venues, James Dolan invested more than $2 billion in building the Sphere, surpassing its original budget by over $1 billion.
These include The Sphere ExperienceTM, featuring original immersive productions, concerts, artist residencies, and high-profile sporting and corporate gatherings. Sphere Studios in Burbank, with a 68,000-square-foot development facility and the 28,000-square-foot Big Dome, supports these endeavors as a specialized screening and production hub.
The Sphere Experience: Postcard from Earth
The company incurred $2.1 million in expenses associated with advertising their in-house production, “Postcard from Earth.”
Tickets and Advertising
The Sphere’s vast 1.2 million LED light screen offers advertising for $450,000 per day or $650,000 per week, according to reports. They ran ads for CBS Sports, DreamWorks, Formula 1, Warner Bros., and YouTube.
Due to high demand, an additional 11 U2 shows have been scheduled for January and February 2024. On Ticketmaster U2 ticket prices start at $140 and go all the way up to $2,500.
Mr. Dolan is reportedly in discussions to secure a licensing deal for The Sphere. The Post reported that James Dolan is presenting investment opportunities in Abu Dhabi for the construction of a second Sphere arena all while grappling with a $225 million budget dispute with construction companies for his Las Vegas venue.
MSG Networks: This segment comprises of MSG Network, MSG Sportsnet, and MSG+, including the direct-to-consumer streaming products.
MSG Networks covers the New York designated market area and adjacent regions, offering a diverse range of sports content. Exclusive live local games and programming feature teams like the Knicks (NBA), Rangers, Islanders, Devils, and Sabres (NHL), along with extensive coverage of the Giants and Bills (NFL).
Spinoff
Sphere Entertainment Co., previously known as Madison Square Garden Entertainment Corp., was established on November 21, 2019, as a direct, fully-owned subsidiary of Madison Square Garden Sports Corp. (MSG Sports). On April 17, 2020, MSG Sports distributed all outstanding common stock of Madison Square Garden Entertainment to MSG Sports’ stockholders, a transaction referred to as the “2020 Entertainment Distribution.”
On April 20, 2023, Sphere Entertainment distributed its live entertainment division called MSG Entertainment (MSGE) common stock to its stockholders while retaining approximately 33% of MSGE.
Post-distribution, Sphere Entertainment kept the Sphere and MSG Networks businesses, while MSG Entertainment now owns the traditional live entertainment business. Stockholders of Sphere Entertainment received one share each of MSG Entertainment’s Class A and Class B common stock for every corresponding share held in the company as of April 14, 2023.
Tao Group Hospitality Disposition
In April, Madison Square Garden Entertainment Corp (MSGE) finalized the sale of 66.9% of its stake in Tao Group Hospitality to the real estate-focused investment firm Mohari Hospitality. The deal, valuing the high-end restaurant business at $550 million, resulted in MSG Entertainment receiving approximately $300 million in net cash proceeds.
The transaction was completed in May. In 2017, MSG Entertainment had acquired a majority stake in Tao Group, known for its nightclubs and fine dining establishments across more than 20 markets. The business generated approximately $485 million in revenue in fiscal year 2022.
Management Change
On October 30, 2023, Sphere Entertainment announced the resignation of Gautam Ranji, who held the positions of Executive Vice President, Chief Financial Officer, and Treasurer. His departure was effective November 3, 2023, just days before the scheduled earnings release on November 8th. The unexpected nature of the Chief Financial Officer’s departure raised eyebrows, especially given the proximity to the crucial earnings release.
James Dolan later disclosed during the earnings call that it was a mutual decision.
Gautam Ranji had a brief stint with the company, lasting less than a year. The absence of prior CFO experience is atypical for an individual holding the CFO position in a sizable company with a prominent profile. Mr. Ranji’s annual base salary was $625,000 annually.
On December 8, 2023, Sphere Entertainment Co. appointed David F. Byrnes as Executive Vice President, and Chief Financial Officer effective the same day.
Mr. Byrnes comes from Madison Square Garden Entertainment Corp. (MSGE), where he held the same role since February 2023. Previously, he served as the Executive Vice President of Corporate Finance at ViacomCBS Inc., a position he took on in December 2019 after the merger of CBS and Viacom Inc
The Byrnes Employment Agreement provides for an annual base salary of $1 million and an annual target bonus of 100% of annual base salary. Starting July 1, 2023, 50% of Mr. Byrnes’ annual bonus will reflect the performance of his prior employer and 50% of his annual bonus will reflect the performance of the company, he will receive a mid-year long-term incentive grant of $100,000 and annual long-term awards with an aggregate target value of not less than $1,800,000.
Valuation
The company has a market cap of $1.14 billion, an enterprise value of $2.04 billion, and $832 million in net debt. The forward P/E at 16.30 is very reasonable. Short interest at 14.36% is high and a red flag.
Debt Funding Plan
In a recent SEC filing, Sphere Entertainment unveiled its strategy to raise $225 million through the sale of convertible senior notes maturing in 2028, with an option for purchasers to acquire an additional $33.75 million in notes. The company aims to utilize part of the proceeds to fund capped call transactions, minimizing potential dilution of common stock resulting from debt-to-equity conversion. The remaining funds will be allocated for general corporate purposes, including capital for Sphere-related growth initiatives.
As of September 30, the company started the quarter with $433.5 million in cash, including $123 million from advance ticket sales. Sphere Entertainment’s total debt was approximately $1.2 billion at the quarter’s beginning.
Earnings Call Highlights
Analyst Estimates for Sphere
Morgan Stanley increased its price target from $26 to $30 on their December 18th research note. “We have an $60 bull case, a $10 bear case, and our increased Sphere segment adjusted EBITDA forecast lifts our PT to $30.”
JP Morgan increased its price target from $28 to $33.
Kevin Mack: “I’ve updated my valuation for the company to be $70 per share. This is based on a FY2025 Sphere AOI of ~$175M and a multiple of 15x. This takes into account the potential negative value of MSGN at -$400M, but ignores the future growth prospects of licensing Sphere (or cost-rationalization of the Las Vegas Sphere SG&A base.)”
Guggenheim Securities upgraded Sphere’s shares to buy and raised the price target on the stock to $40 from $38.
CNBC’s Jim Cramer said the Sphere is interesting, but he is not recommending it for investors’ portfolio. “The company’s long-term growth strategy hinges on building new Sphere venues in all sorts of cities around the world, and at present, it’s not clear where they’re headed next,” Mr. Cramer said.
Fiscal 2024 Quarterly Results (Transcript) (Press Release)
Disposition of MSG Entertainment Class A Common Stock in Fiscal 2024 Q1:
During the fiscal 2024 first quarter ending September 30, 2023, the company completed the divestiture of its remaining approximately 10.1 million shares of MSG Entertainment Class A common stock.
Conclusion
The Sphere is a very innovative project and could translate into a high growth company if some of the operational issues around building additional Spheres can be addressed. We really like the fact that the company is considering licensing the technology to others and thereby picking up a more profitable revenue stream.
Achieving Mr. Dolan’s vision of globally expanding Sphere poses challenges, particularly concerning approvals due to the massive structure. A recent setback occurred when the mayor of London rejected the company’s bid for a similar structure, citing aesthetic concerns. In addition to its ventures in entertainment venues, Sphere Entertainment owns regional sports networks. However, the cable business is facing turbulence as a growing number of consumers are moving away from it.
With David F. Byrnes as the new CFO, Sphere Entertainment anticipates better financial leadership. Mr. Byrnes’ background signals a focus on financial strategy and stability. Yet, given the distinct challenges of the entertainment industry, especially with Sphere’s innovative venture, investors may take a cautious “wait and see” approach to evaluate how the new CFO guides the company through its upcoming financial chapters.
The forward P/E is very reasonable but the MSG Networks division is likely to remain a drag on the company.
Sudden Departures
CEO
CFO
Others
Appointments
1. Booking Holdings (BKNG): $3469.21
On December 13, 2023, Booking Holdings Inc. announced that it has appointed Ewout L. Steenbergen as its Executive Vice President and Chief Financial Officer effective March 15, 2024.
| MarketCap: $121.04B | Avg. Daily Volume (30 days): 253,442 | Revenue (TTM): $20.63B |
| Net Income Margin (TTM): 25.70% | ROE (TTM): N/A | Net Debt: $107M |
| P/E: 24.47 | Forward P/E: 20.20 | EV/EBIDTA (TTM): 17.74 |
| P/S (TTM): 6.29 | P/B (TTM): 34.36 | 52 Week Range: $1907.38 – $3529.39 |
2. RB Global (RBA): $64.12
On December 12, 2023, RB Global, Inc. announced the appointment of Eric J. Guerin as the company’s Chief Financial Officer effective January 15, 2024.
| MarketCap: $11.69B | Avg. Daily Volume (30 days): 993,717 | Revenue (TTM): $3.08B |
| Net Income Margin (TTM): 5.43% | ROE (TTM): 5.03% | Net Debt: $4.24B |
| P/E: 66.26 | Forward P/E: 20.96 | EV/EBIDTA (TTM): 19.31 |
| P/S (TTM): 3.12 | P/B (TTM): 2.38 | 52 Week Range: $49.80 – $67.96 |
3. Viatris (VTRS): $10.45
On December 14, 2023, the Company appointed Theodora (Doretta) Mistras to serve as the Chief Financial Officer of the company, effective as of March 1, 2024.
Ms. Mistras will commence employment with the company as of January 1, 2024, and serve as Chief Financial Officer-elect until she assumes the role of Chief Financial Officer.
| MarketCap: $12.54B | Avg. Daily Volume (30 days): 8,838,220 | Revenue (TTM): $15.47B |
| Net Income Margin (TTM): 11.84% | ROE (TTM): 9.15% | Net Debt: $17.23B |
| P/E: 6.90 | Forward P/E: 3.67 | EV/EBIDTA (TTM): 6.04 |
| P/S (TTM): 0.82 | P/B (TTM): 0.60 | 52 Week Range: $8.39 – $11.52 |
4. EOG Resources (EOG): $121.43
On December 13, 2023, the Board appointed Chief Accounting Officer Ann D. Janssen as EOG’s Executive Vice President and Chief Financial Officer and principal financial officer effective January 1, 2024.
| MarketCap: $70.81B | Avg. Daily Volume (30 days): 3,783,151 | Revenue (TTM): $23.73B |
| Net Income Margin (TTM): 33.22% | ROE (TTM): 30.55% | Net Cash: $1.18B |
| P/E: 9.01 | Forward P/E: 8.90 | EV/EBIDTA (TTM): 5.13 |
| P/S (TTM): 3.00 | P/B (TTM): 2.55 | 52 Week Range: $95.38 – $135.06 |
5. Hewlett Packard Enterprise (HPE): $16.74
On December 13, 2023, the Board of Directors of Hewlett Packard Enterprise Company appointed Marie Myers to serve as HPE’s Executive Vice President and Chief Financial Officer, effective as of January 15, 2024.
| MarketCap: $21.48B | Avg. Daily Volume (30 days): 14,482,761 | Revenue (TTM): $29.14B |
| Net Income Margin (TTM): 6.95% | ROE (TTM): 9.84% | Net Debt: $8.09B |
| P/E: 10.87 | Forward P/E: | EV/EBIDTA (TTM): 5.81 |
| P/S (TTM): | P/B (TTM): | 52 Week Range: $13.33 – $17.87 |
1. EOG Resources (EOG): $121.43
On December 13, 2023, EOG Chief Financial Officer Timothy K. Driggers resigns effective December 31, 2023.
| MarketCap: $70.81B | Avg. Daily Volume (30 days): 3,783,151 | Revenue (TTM): $23.73B |
| Net Income Margin (TTM): 33.22% | ROE (TTM): 30.55% | Net Cash: $1.18B |
| P/E: 9.01 | Forward P/E: 8.90 | EV/EBIDTA (TTM): 5.13 |
| P/S (TTM): 3.00 | P/B (TTM): 2.55 | 52 Week Range: $95.38 – $135.06 |
2. UGI (UGI): $22.76
On December 12, 2023, UGI Corporation, a Pennsylvania corporation announced that Roger Perreault will cease to serve in his position as President and Chief Executive Officer effective December 12, 2023.
| MarketCap: $4.80B | Avg. Daily Volume (30 days): 1,982,905 | Revenue (TTM): $8.93B |
| Net Income Margin (TTM): -16.82% | ROE (TTM): -28.70% | Net Debt: $7.44B |
| P/E: -3.18 | Forward P/E: 7.85 | EV/EBIDTA (TTM):-124.10 |
| P/S (TTM): 0.53 | P/B (TTM): 1.13 | 52 Week Range: $19.86 – $40.84 |
3. Aramark (ARMK): $27.39
On December 11, 2023, Aramark announced that Thomas Ondrof, Executive Vice President and Chief Financial Officer, will retire on January 12, 2024.
| MarketCap: $7.16B | Avg. Daily Volume (30 days): 4,095,092 | Revenue (TTM): $18.85B |
| Net Income Margin (TTM): 3.58% | ROE (TTM): 19.93% | Net Debt: $6.55B |
| P/E: 10.66 | Forward P/E: 18.45 | EV/EBIDTA (TTM): 8.99 |
| P/S (TTM): 0.38 | P/B (TTM): 1.93 | 52 Week Range: $23.87 – $45.17 |
4. Lucid Group (LCID): $4.26
On December 11, 2023, Lucid Group, Inc. announced that Sherry House, Lucid’s Chief Financial Officer, informed the company that she is resigning from her position, effective immediately, in order to pursue other opportunities.
| MarketCap: $9.75B | Avg. Daily Volume (30 days): 39,558,779 | Revenue (TTM): $695.83M |
| Net Income Margin (TTM): N/A | ROE (TTM): -61.30% | Net Cash: $2.02B |
| P/E: -2.84 | Forward P/E: N/A | EV/EBIDTA (TTM): -2.70 |
| P/S (TTM): 11.86 | P/B (TTM): 1.80 | 52 Week Range: $3.62 – $17.81 |
5. S&P Global (SPGI): $427.83
S&P Global announced that Chief Financial Officer Ewout Steenbergen has decided to leave the company to pursue another professional opportunity and will remain until March 2024 to ensure continuity and a successful transition.
| MarketCap: $135.54B | Avg. Daily Volume (30 days): 1,325,387 | Revenue (TTM): $12.28B |
| Net Income Margin (TTM): 20.19% | ROE (TTM): 6.91% | Net Debt: $10.47B |
| P/E: 55.42 | Forward P/E: 29.76 | EV/EBIDTA (TTM): |
| P/S (TTM): 11.20 | P/B (TTM): 3.83 | 52 Week Range: $318.90 – $441.67 |
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