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MSG’s share price hit amid update on Vegas Sphere project

Live sports and entertainment giant Madison Square Garden Company (MSG) has seen its share price take a substantial hit as it revealed operating losses for the 2019 financial year and disclosed the sizeable cost of its new arena project for Las Vegas.

For the year ending June 30, 2019, MSG generated revenues of approximately $1.6bn (£1.32bn/€1.44bn), which represents an increase of 5% as compared to the prior year, due to growth at both the MSG Entertainment and MSG Sports segments.

However, the company generated an operating loss of $13.9m, as compared to operating income of $23.1m in fiscal 2018, and adjusted operating income of $169.8m, a decrease of $28.2m. It said this was primarily due to increased expenses in corporate and other, which reflect higher professional fees including costs related to the proposed spin-off of the company’s sports business.

The company is currently pressing ahead with new arenas in Las Vegas and London under the MSG Sphere banner, with the former being highlighted for particular attention in its financial report. While claiming it has made significant progress on MSG Sphere at The Venetian, MSG conceded there are a number of challenges connected to the facility currently under construction in Las Vegas.

In a statement the company said: “MSG views both innovative design and cost management as key imperatives to the construction process. While it is always difficult to provide a definitive construction cost estimate for large-scale construction projects, it is particularly challenging for one as unique as MSG Sphere.”

In May, the company’s board of directors approved a preliminary cost estimate of $1.2bn based upon schematic designs for the purposes of developing the company’s budget and financial projections. In June, MSG engaged AECOM as the project’s general contractor. MSG made the strategic decision to enter into a “cost plus” construction contract with AECOM in this belief this would help efforts to maximise the quality of work, while managing the project’s costs.

In order to further drive cost control, under the terms of the construction contract, AECOM will receive lower fees if the “hard” construction costs come in greater than an “incentive benchmark” agreed upon by the company and AECOM.

The process of setting the incentive benchmark began in July when AECOM provided the company with its proposal, representing its estimate of the hard construction costs of the project. AECOM’s initial benchmark proposal, together with the costs of additional core technology and estimated soft costs, results in a project cost estimate that is approximately $1.7bn.

While the final project cost is expected to finish between $1.2bn and $1.7bn, MSG said of the latter figure: “MSG believes this cost estimate is too high and is now in the contractual process of reviewing, testing and challenging the elements of AECOM’s estimates and assumptions.” MSG’s goal is to open MSG Sphere in Las Vegas in 2021.

In a statement, MSG executive chairman and CEO, James Dolan, said: “Looking ahead, we remain confident in the strength of our core businesses and expect fiscal 2020 to be an important year as we work to complete the proposed sports spin-off and begin to usher in the company’s next chapter, with MSG Sphere in Las Vegas starting to take shape.”

However, yesterday’s (Tuesday’s) news hit MSG’s share price on the New York Stock Exchange. The price fell by $26.10 to $267.33 at close of trading, with the 8.89% drop said to be its biggest-ever fall.

In June 2018, MSG revealed plans to spin off its sports assets and create a dedicated arm for its music and entertainment-focused venues. The Bloomberg news agency said MSG yesterday stated that the spinoff process “is taking longer than expected” but it is committed to completing it in the first quarter of 2020.

Image: AECOM