Description

NOTE:  The number of shares outstanding (and, consequently, the market capitalization) shown in the summary box include (1) the shares issued in the rights offering completed on June 16, 2016 and (2) the shares imputed to Liberty Media Group’s retained interest in the Liberty Braves Group (20% interest pre-rights offering; 15.5% interest post-rights offering).  See the share math later in the write up.

Mr. Market is valuing the Atlanta Braves at $832 million, notwithstanding the prospect of significant revenue uplift from a new stadium opening for the 2017 season and additional upside from a 1.5 million square feet real estate development adjacent to the stadium.  For reference, the Seattle Mariners are in the process of being sold (sale announced in April and closing in August) for $1.4 billion, with $1.2 billion attributed to the baseball club.

Liberty Braves Group common stock is a tracking stock issued by Liberty Media Corporation, intended to track the financial performance of the Atlanta Braves major league baseball club and the Atlanta Braves' stadium and mixed use real estate development scheduled to open in 2017.  Liberty Braves Group has three classes of common stock:  Series A (BATRA), with one vote per share; Series B super-voting shares, with ten votes per share; and Series C (BATRK), with no votes per share.  All series of common stock participate on an equal basis with respect to dividends and distributions.  BATRA and BATRK both trade freely, but BATRK generally trades at a slight discount and is more liquid.  Liberty Media’s chairman, John Malone, owns approximately 96% of the Series B shares and thereby controls approximately 48% of the voting power.

BACKGROUND.

Most VIC members are, I expect, familiar with Liberty Media, as various parts of the Liberty complex have been written up many times on VIC.  A brief background:

Liberty Media is controlled by John Malone, who has been making money for shareholders for decades.  Liberty’s chief executive, Greg Maffei, joined the company in 2005 and has overseen a multitude of generally value-enhancing transactions, most notably Liberty’s rescue financing for Sirius XM in the depths of the financial crisis and Liberty’s investment in Charter Communications.

Liberty Media acquired the Atlanta Braves from Time Warner in 2007 in an asset-for-shares swap.  Specifically, in exchange for approximately 68.5 million Time Warner shares, Liberty received the Atlanta Braves, another small company, and $984 million in cash in a tax-free exchange.  The value attributed to the Braves in that transaction was approximately $460 million.

Fast forward to April 2016 – Liberty Media issued Liberty Braves Group tracking stock to track the financial performance of the Atlanta Braves and related assets.  The creation of the Liberty Braves tracking stock was part of a comprehensive reclassification of Liberty’s common stock into three tracking stock groups, one designated as the Liberty Sirius Group, one designated as the Liberty Media Group, and one designated as the Liberty Braves Group.

Liberty attributed to the Liberty Sirius Group its interest in Sirius XM Holdings, and attributed to the Liberty Media Group all businesses, assets, and liabilities not attributed to the Liberty Sirius Group or the Liberty Braves Group (including Liberty's interests in Live Nation Entertainment, minority equity investments in Time Warner and Viacom, and the proceeds from recently settled litigation with Vivendi).  In addition, the Liberty Media Group retained an attributed interest in the Liberty Braves Group.  The interest was originally 20%, but was reduced to approximately 15.5% in connection with the Liberty Braves Group rights offering (see below).

Shortly following the tracking stock recapitalization, the Liberty Braves Group completed a rights offering, by which it raised $200 million and issued approximately 16 million Series C Liberty Braves Group shares.

The assets attributed to the Liberty Braves Group can be placed in two buckets:  (1) the Atlanta Braves Major League baseball club and related assets, together with the Braves’ interest in SunTrust Park, a new ballpark located in Cobb County, Georgia in which the Braves will begin play in 2017; and (2) a 1.5 million square feet mixed use real estate development (The Battery Atlanta) located adjacent to SunTrust Park.  All of these assets are owned, directly or indirectly, by Liberty Media Corporation’s wholly owned subsidiary, Braves Holdings, LLC.

Liberty held an investor day on April 21, 2016 to promote the Liberty Braves Group tracking stock.  Here is a link to the slide deck, which I encourage readers to review.

http://files.shareholder.com/downloads/ABEA-4CW8ZW/1808896258x0x887114/F4E1E31C-97E1-41BA-8F3E-3083F8E04A05/Liberty_Braves_Investor_Day_2016_Webcast.pdf

ATLANTA BRAVES BASEBALL CLUB AND SUNTRUST PARK.

Atlanta Braves Baseball Club.  Braves Holdings owns and operates the Atlanta Braves Major League Baseball club and five minor league baseball clubs (the Braves are also associated with a sixth minor league team not owned by the Braves).  Braves Holdings’ revenues can be placed in two categories – league generated revenue, which is shared equally among the thirty MLB clubs, and team generated revenue, which (subject to revenue sharing) is generated and retained by the Braves.

League Generated Revenue.  League generated revenues are derived primarily from national television and radio broadcast rights, national sponsorships and licensing deals, and the MLB All Star Game.  Of these, payments received for national broadcast rights are the largest revenue driver.  MLB has negotiated national broadcasting and radio agreements on behalf of the 30 MLB clubs with ESPN, TBS, Fox, and SIRIUS XM.  All four contracts are effective through the 2021 season.

Team Generated Revenue.  Team revenue includes the following:

• Local television and radio broadcast rights
  
• Ticket sales
  
• Advertising and sponsorship
  
• Stadium revenues (naming rights, concessions and merchandise sales, suites and premium seat fees, parking)
  

The Braves have local broadcasting agreements with Sportsouth Network (Fox SportSouth).  The Braves’ local television rights have historically been well below market.  The agreement with Fox SportSouth was renegotiated after the 2012 season; although the renegotiated agreement places the Braves in the upper half of local sports rights deals, the payments are still below what the Braves could obtain on the open market.  The renegotiated agreement runs through 2027.  The Braves also have the largest radio affiliate network in MLB, with 147 local radio station affiliates broadcasting Braves games across the Southeast.

Revenue Sharing.  For purposes of (somewhat) equalizing the competiveness of small market low revenue clubs with big market high revenue clubs, each MLB franchise may be required to share locally derived revenue with the other MLB clubs through MLB's revenue sharing plan.  At its April 21 investor day Liberty management stated that, historically, the Braves have been in the middle of the pack in terms of locally generated revenue (and, therefore, neither a significant payer or recipient of revenue sharing dollars).  However, with the opening of SunTrust Park, Liberty management expects that the Braves will become a revenue sharing payer, mitigated somewhat by the Braves’ below-market local broadcast rights.  In this regard, revenues from Braves Holdings’ adjacent real estate development are not subject to revenue sharing.

MLB Advanced Media (BAM).  The Atlanta Braves, together with each of the other twenty nine MLB clubs, owns an equal interest in MLB Advanced Media, MLB's interactive media and internet company.  BAM operates the official web site for MLB and the thirty club web sites, and also operates MLB.tv, MLB’s live game streaming service.  In addition to the services it provides to MLB, BAM provides back-end infrastructure for numerous third party streaming services, including HBO Now and Watch ESPN.

            BAM currently generates $1 billion in annual revenues.  In 2015, MLB authorized the spin off of BAM Tech, the technology unit that serves third party (non-MLB) streaming video clients.  In connection with the spin off, BAM is soliciting outside investors.  Media reports have placed a value of $3 billion on BAM Tech.

SunTrust Park.  Beginning in the 2017 season, the Braves will play in SunTrust Park, a new ballpark located in Cobb County, Georgia.  SunTrust Park will feature 41,500 seats, including 35 suites and 3,800 additional premium seats, multiple hospitality clubs, and retail merchandise venues.

Operating Agreement.  Braves Holdings entered into a thirty-year stadium operating agreement with Cobb County and the Cobb-Marietta Coliseum and Exhibit Hall Authority.  Highlights of the agreement:

• The term of the agreement is thirty years (through 2046).  Further, the Braves agreed to a non-relocation clause, agreeing to play all their home games at SunTrust Park for the thirty year term.
  
• The Braves are paying the Authority an annual license fee of $3 million.
  
• The Braves are paying an additional $3.1 million per year to the Authority, which may be used by the Authority solely to fund debt service on the bonds issued to finance SunTrust Park.  This payment obligation is extinguished when the bond debt is retired.
  
• Subject to Cobb County’s rights to conduct up to three special events per year, the Braves have the exclusive right to operate SunTrust Park and retain all revenues in connection therewith (including tickets, merchandise, suites, concessions, sponsorships, advertising, naming rights and all other revenue streams).
  
• The Authority may not sell SunTrust Park without the Braves’ consent.
  
• During the thirty year term, the Braves have the right to purchase SunTrust Park (subject to repayment of outstanding bonds) at a negotiated price.
  
• At the end of the term, the Braves have an option to purchase SunTrust Park for 50% of the then current fair market value.
  

Stadium Financing.  The development of SunTrust Park is expected to cost approximately $672 million, financed as follows:

• $392 million in funding from Cobb County and various other local entities (including $368 million through municipal bonds issued by the Authority).
  
• $280 million contributed by Braves Holdings.
  

In September 2015, Braves Holdings obtained a $345 million five year bank term loan to fund its $280 million financing commitment, plus $50 million of ballpark related equipment, plus cost over-runs.

REAL ESTATE DEVELOPMENT (THE BATTERY ATLANTA).

In 2014, Braves Holdings acquired 82 acres of land for the purpose of developing SunTrust Park and an adjacent mixed-use complex.  Except for a portion of the land underlying SunTrust Park, Braves Holdings retained fee title to the land and, together with third party development partners, is developing a 1.5 million square feet mixed used project.  Project stabilization is projected by the end of 2017.

The expected cost of the project is approximately $558 million, financed as follows:

Braves Holdings debt    $290 million

Braves Holdings equity $200 million

Third party funding        $68 million

Highlights of the project include:

• A 250,000 square feet office tower leased to Comcast for fifteen years.  The building will serve as a regional headquarters and primary technology hub for Comcast.  The agreement with Comcast will provide multi-terabit network capabilities to SunTrust Park and the surrounding community.
  
• A 53,000 square feet Roxy Theatre to be operated by Live Nation pursuant to a fifteen year net lease.
  
• A sixteen floor, 265 room luxury hotel to be operated by Omni Hotels & Resorts.
  

The following table gives a summary of the project, with Braves Holdings’ ownership interest in the various components of the project:

VALUATION.

Liberty Braves Net Asset Value (US$ millions, except per-share data)

Share Math:

Valuation of Team and Stadium – Revenue Multiple.  Baseball teams, and sports franchises in general, are typically valued at 4x to 5x revenues.  From 2013 to 2015, the Braves generated average revenues of approximately $250 million per year, yielding a current valuation of $1 billion.

According to figures presented at Liberty Braves’ investor day, new ballparks typically see significant increases in revenue.  From 2006 to 2012, six new (or substantially renovated) parks opened, with increases in revenue ranging from 3% (Mets) to 32% (Marlins), with an average revenue increase of 19%.

Sales of Other Franchises.  Since the beginning of 2012, three major league franchises have sold, the Los Angeles Dodgers in 2012, the San Diego Padres in 2012, and the Seattle Mariners in 2016:

Forbes Valuation.  For what it’s worth, Forbes values the Braves at $1.175 billion.

No Separate Value for BAM.  The Atlanta Braves, like all clubs, indirectly owns a 1/30 interest in BAM.  A value for BAM Tech alone of $3 billion would put Braves Holdings’ share at $100 million.  In this regard, it is reasonable to assume that the pending Mariner’s sale took BAM’s value into account.

Real Estate Development.  My NAV calculation includes no separate value for The Battery Atlanta real estate development.  However, I value the rights offering cash at full value.  Because all of these funds are earmarked for Brave Holdings’ equity contribution to the development, this implies that, at stabilization, Brave Holdings’ equity in the project will at least be equal to cost.

Debt.  My NAV calculation deducts debt as of March 31, 2016.  However, upon completion of SunTrust Park and The Battery Atlanta, assuming all construction financing is fully drawn, Brave Holdings will be carrying $620 million in debt, as follows:

Stadium debt (assuming no cost overruns)        $330 million

Real estate development debt                            $290 million

My NAV calculation therefore implies that (1) the incremental value of the stadium development and (2) the value of the debt-financed portion of The Battery Atlanta will each at least be equal to cost.

Enterprise Value.  BATRA is trading at a 17% discount to NAV.  Viewed differently, Liberty Braves Group’s current enterprise value is $832 million, meaning an investor is effectively paying $832 million for the Atlanta Braves (3.3x trailing revenue).  With an expected revenue lift from the 2017 opening of SunTrust Park, and compared to the pending sale of the Seattle Mariners for $1.2 million, $832 million is cheap.

RISKS.

Expiration of Collective Bargaining Agreement.  MLB’s collective bargaining agreement with the players association expires December 1, 2016.  MLB Commissioner Rob Manfred has expressed optimism that a new deal will be finalized by the end of the World Series, i.e., early November (but what would you expect him to say?).  The effects of a brief work stoppage would most likely be ephemeral.  However, a prolonged work stoppage could be quite damaging – it took MLB years to recover from the 1994-1995 players strike (and one could argue that, although baseball is currently thriving financially, in some ways it never fully recovered).

Bursting of the Sports Media Rights Bubble.  As MLB’s national deals are good through the 2021 season and Brave Holdings’ local deal is good through 2027, this does not present an immediate risk.  As has been discussed at length on VIC and elsewhere, the television industry in a transition phase, and it is not clear what the industry will look like five to ten years from now.  However, I believe it is more likely than not that live sports broadcasts will remain a valuable piece of the ecosystem.

Tracking Stock.  Holders of Liberty Braves common stock are common stockholders of Liberty Media Corporation, i.e., the company as a whole.  Holders of Liberty Braves common stock have no legal rights related to the specific assets attributed to the Liberty Braves Group and, in any liquidation, holders of Liberty Braves common stock will be entitled to receive a pro rata share of Liberty Media Corporation’s available net assets together with the holders of Liberty SiriusXM Group Shares and Liberty Media Group shares.  The assets attributed to the Liberty Braves Group are potentially subject to the liabilities attributed to another tracking stock group; i.e., creditors are not precluded by the tracking stock structure from proceeding against any assets they could have proceeded against if Liberty did not have a tracking stock structure.

In addition, Liberty management has the authority to, without shareholder approval, reattribute assets among the trackers, and to collapse the tracker structure in the future.  You buy the Atlanta Braves today; tomorrow you own Live Nation.  There have been occasions in the past where Liberty tracking stock reattributions have caused angst among part of the shareholder base (e.g., the reattribution among LINTA(QVCA) and LVNTA in 2014).  Nonetheless, Liberty has utilized tracking stocks many times over its corporate life, and history shows that shareholders have generally been treated well.

Liberty Media Group Overhang.  The Liberty Media Group (another Liberty Media Corporation tracking stock) has attributed to it an approximately 15.5% interest in the Liberty Braves Group.  Liberty management clearly stated that the purpose of the retained interest is to provide the Liberty Media Group with additional liquidity (firepower) that it can tap into at any time.

MLB Ownership Restriction.  In connection with the recapitalization that resulted in the issuance of Liberty Braves tracking stock, Liberty Media Corporation agreed with MLB to subject the ownership of Liberty Braves tracking stock to certain restrictions, including that no person may own 10% or more of Liberty Braves common stock unless such person is approved by the Commissioner.  Since John Malone’s voting control makes a control bid unlikely in any event, the MLB ownership restriction should have little practical effect.

Real Estate Risk.  An investment in Liberty Braves Group is subject to the risks inherent in any large scale real estate development, namely delay, cost overruns, and ineffective leasing.  There is also the risk that the leasing market (office, retail, and/or multi-family) softens prior to stabilization.

Catalyst

None.