Almost six years after splitting the company to unlock value, Madison Square Garden Entertainment said it has agreed to combine with MSG Networks in a tax-free exchange of shares.

The recombination is expected to bolster MSG Entertainment, which includes Madison Square Garden arena, Radio City Music Hall and other venues that have been hit hard as the pandemic has shut down the concert business. The entertainment unit is building a state-of-the-art facility in Las Vegas -- MSG Sphere at the Venetian -- which is scheduled to open in 2023. The company also has said it plans to build a second MSG Sphere in London, pending necessary approvals.

The company said the combination of the entities’ media, digital and venue assets should help MSG Entertainment capture a greater share of the burgeoning sports gaming business. Some analysts have estimated sports gaming could become a $12 billion business by 2025.   MSG Networks controls two regional sports networks -- MSG Network and MSG Plus.

“MSG Entertainment is actively executing a plan designed to grow the Company beyond its established collection of assets into one that is pioneering the next generation of entertainment,” MSG Entertainment CEO Andrew Lustgarten said in a press release. “We have always believed in the value of live sports and look forward to welcoming MSG Networks back into the fold as part of a transaction that we are confident would enhance our financial flexibility and set the stage for continued growth and value creation.”

The deal is expected to close in the third quarter. Moelis & Company LLC and The Raine Group are serving as independent financial advisors and Wachtell, Lipton, Rosen & Katz is serving as independent legal counsel to the Special Committee of the Board of Directors of MSG Entertainment. LionTree Advisors LLC and Morgan Stanley & Co. LLC are serving as independent financial advisors and Davis Polk & Wardwell LLP is serving as independent legal counsel to the Special Committee of the Board of Directors of MSG Networks. Debevoise & Plimpton LLP is serving as legal counsel to the Dolan family.

The two companies were originally part of Cablevision Systems Corp. which spun off MSG -- including its professional sports teams and regional sports networks unit -- in 2010. In 2015, the assets were split into The Madison Square Garden Co., which included the teams and concert venues, and MSG Networks, housing the RSNs. In 2020 The Madison Square Garden Co. split again into MSG Entertainment, housing its concert venues, and MSG Sports, which included its professional sports teams. Cablevision was sold in 2016. MSG Sports continues to be a separate entity.

According to the deal, MSG Networks shareholders will receive 0.172 shares of MSG Entertainment Class A or Class B stock for each share of MSG Networks they own. 

With all three of its units contributing, the Madison Square Garden Co. scored an 18% rise in adjusted operating cash flow during its second fiscal quarter.

MSG Co., comprising MSG Entertainment, MSG Sports and MSG Media, generated $149.8 million in adjusted operating cash flow for the period ended Dec. 31, 2014, compared with AOCF of $126.6 million in the year-earlier period. Management said there was no material AOCF impact on MSG Media or the company overall in the quarter, after last year's sale of Fuse to SiTV for $226 million.

Total revenue for the company rose 7% to $542.5 million from $509.4 million. Operating income surged 43% to $149.8 million from $126.6 million. MSG’s bottom line edged up 1% to $61.2 million in the recently completed quarter.

"Our company delivered double-digit AOCF growth in the second quarter as we benefited from the full availability of the Forum and The Garden, as well as broad-based organic growth,” said president and CEO Tad Smith. “Additionally, we are continuing to explore the possible separation of our businesses and believe that the creation of two distinct publicly traded companies would provide both new entities with greater flexibility to pursue their own business plans, while enabling investors to evaluate more clearly each company's unique assets and potential."

MSG’s board of directors, in October, unanimously approved a plan to explore a spin-off that would separate the live entertainment venues like the Madison Square Garden Arena, The Beacon Theater and The Forum in Los Angeles, from its professional sports teams, inlcuding the New York Knicks and New York Rangers, and media properties under MSG Networks.

A breakdown shows that MSG Media saw revenues decline 8% to $166.2, as affiliate fee revenue fell $10.3 million, largely due to the absence of affiliate fees from Fuse, partially offset by higher affiliate fees for MSG Networks. Advertising revenue was off $5.4 million, mostly minus Fuse contributions, which overcame an increase at MSGN.  

Second-quarter AOCF of $89.1 million increased 4% due to a decrease in selling, general and administrative and direct operating expenses, mostly offset by the decrease in revenues. The decline in selling, general and administrative expenses was due to the absence of costs for Fuse, while the decrease in direct operating expenses was due to the absence of expenses for Fuse, partially offset by an increase in expenses at MSG Networks.

Operating income rose 35% to $108.9 million largely on the $23.8 million increase in the gain on sale of Fuse realized in the quarter. During the quarter, MSG said satisfied certain performance goals necessary to recognize the value of the 15% equity interest in SiTV Media, LLC it received as consideration in the transaction.

MSG Entertainment revenues climbed 19% to $194.1 million behind more event-funds from the Forum, the Madison Square Garden Arena and The Chicago Theatre; an uptick in revenues for the Radio City Christmas Spectacular franchise (primarily due to the production at Radio City Music Hall); plus higher venue-related sponsorship and signage and suite rental fee revenues. This was partially offset by lower event-related revenues at Radio City Music Hall -- excluding the annual holiday show.

Second-quarter AOCF reached $56.1 million, 33% higher than in the corresponding year-ago period, while operating jincome jumped 37% to $52.3 million, both due to higher revenues, partially offset by an increase in direct operating expenses, emanating from the added number of events at the various venues.

At MSG Sports, second-quarter revenues advanced 10% to $202.5 million, reflecting the favorable impact of The Garden being fully open during the quarter. On an overall basis, the increase in revenues was primarily due to higher professional sports team pre/regular season ticket-related revenue; suite rental fee revenue; inter-segment broadcast rights fees; professional sports team pre/regular season food, beverage and merchandise sales; and professional sports team sponsorship and signage revenues. 

Second-quarter AOCF advanced $13.8 million to $14.9 million, as operating income totaled $11.4 million, reversing a $2.9 million loss the prior year. The results stemmed primarily from the increase in revenues, partially offset by higher selling, general and administrative expenses and, to a lesser extent, more direct operating expenses. The higher SGA costs came from more team-related marketing costs, allocated corporate general and administrative expenses and employee compensation and related benefits, partially offset by the absence of marketing costs recorded in the prior year quarter associated with the debut of the fully transformed Madison Square Garden Arena.