LIBERTY TRIPADVISOR HOLDINGS LTRPA
May 15, 2018 - 5:13pm EST by
mement_mori
2018 2019
Price: 12.35 EPS 0 0
Shares Out. (in M): 75 P/E 0 0
Market Cap (in $M): 927 P/FCF 0 0
Net Debt (in $M): 456 EBIT 0 0
TEV ($): 1 TEV/EBIT 0 0

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  • Arbitrage
  • Holding Company
 

Description

 

Recommendation

 

Long 1 LTRPA/B and short 0.4125 TRIP (hedged at full control ratio) to capture ~12% gross spread to LTRPA/B’s simple NAV with optionality on a sale of LTRPA/B to TRIP or a third party such as GOOG/FB/BABA/BKNG over the next 12-24 months (LTRPA/B’s “not-so-hidden” asset is its ~57% voting control of separately traded TRIP) accreting an incremental ~13-26% to the spread or more in the event of multiple competing bidders for a ~25-38+% “all in” return with minimal risk of realized capital loss.  Looking through recent idiosyncratic dynamics that have driven the spread to its historical wides (last year the complex traded at a premium to simple NAV), we believe the spread should normalize towards parity in the immediate to intermediate term and begin to trade back at a premium in 2019 as the market appreciates the potential for a change in control of LTRP pursuant to underappreciated insider incentives / contract cadence.

 

 

Investment Thesis

 

Liberty TripAdvisor Holdings (“LTRP”) was spun off from Liberty Interactive Corporation (“Liberty”) in August 2014 in a tax-free, asset-backed distribution to shareholders of the tracking stock Liberty Ventures (“LVNT”) as Liberty sought to simplify LVNT’s complex holding company structure. LTRP is an orphaned spin with no natural owner whose primary asset is voting control of separately traded TripAdvisor (“TRIP”). LTRP has a ~22% economic and ~57% voting interest in TRIP through the ownership of ~31 million TRIP shares comprising ~18 million TRIP common shares, which are entitled to one vote per share, and ~13 million super-voting TRIP Class B shares, which are entitled to ten votes per share (there are ~140m TRIP shares outstanding).  Calling LTRP’s stake a “hidden asset” seems somewhat silly since it effectively accounts for LTRP’s Net Asset Value (“NAV”); perhaps the stake is best described as a “not-so-hidden” asset whose value remains deeply underappreciated due to a constellation of idiosyncratic factors that have recently arisen (more on this below). Inclusive of the after-tax cash proceeds from the sale of LTRP’s small operating business (BuySeasons) last year, LTRP had $21 million in cash and $477 million in debt per its balance sheet for the period ended March 31, 2018.  There are ~75m LTRP shares outstanding consisting of ~72m LTRP Class A shares (“LTRPA”), which are entitled to one vote per share (LTRPA controls ~71% of the LTRP vote), and ~3m super-voting LTRP Class B shares (“LTRPB”), which are entitled to ten votes per share (LTRPB controls ~29% of the LTRP vote). The liquid LTRPA ($12.35) and illiquid super-voting LTRPB ($12.40) trade near parity (LTRPB currently trades at a puny 0.4% premium to LTRPA), presenting a compelling share class trade in its own right were it not for LTRPB’s aforementioned illiquidity.  Big picture, we recommend setting up the LTRP spread by going long 1 LTRPA/B and going short 0.4125 TRIP at the full control ratio (~31m underlying TRIP shares / ~75m LTRPA/B shares) in order to capture a ~12% gross spread to simple NAV plus optionality on an acquisition of LTRPA/B over the next 12-24 months accreting an incremental +13-26% to the spread or more for a ~25-38% “all in” return with little risk of realized capital loss.

 

 

Using TRIP’s current market value across the ~31m shares collectively owned by LTRP, LTRPA/B currently trades at a ~12% gross spread to its simple NAV of ~$13.88 per share.  For purposes of simplicity, we use LTRPA’s current share price ($12.35) as a proxy for the share price across the complex (LTRPB trades $12.40). This simple NAV understates the value opportunity because LTRP’s underlying TRIP shares deserve a control premium.  In December 2012 Liberty paid Barry Diller a $116 million premium above the market value of his TRIP shares for control of TRIP. It makes economic sense that LTRP’s board and management team would at least want to recoup that past premium paid. If we capitalize this $116 million and add it to LTRP’s simple NAV to impute an adjusted NAV, we get another ~$1.55 per share in which case the gross spread rises to ~25%.  TRIP is a strategic asset that might be palatable to multiple bidders. There is an argument that the value of control of TRIP has increased since Liberty acquired it from Diller in 2012. If a formal auction process were launched for TRIP, there is a possibility that numerous deep-pocketed strategics such as Google, Facebook, Booking Holdings, and Alibaba could bid multiples of the ~$1.55 per share. The spread currently does not appropriately discount this optionality.

 

 

A sale of LTRP is not a remote, theoretical scenario.  Liberty readily admits in its financial filings that the catalyst to collapse the LTRPA/B structure would be an acquisition of LTRP by a third party.  Specifically, Liberty focuses on an acquisition of LTRP by TRIP. Liberty bluntly lays out the logic for such a transaction in LTRP’s S-1 filing: “Liberty believes that separating our company from Liberty's other businesses will help facilitate a potential combination of our company with TripAdvisor by eliminating any negotiations regarding the valuation of Liberty's other businesses, thereby making it more likely that a potential agreement could be reached. Liberty believes that a combination of our company with TripAdvisor could be beneficial for our stockholders, on the one hand, and TripAdvisor, on the other hand, by eliminating the control of a large stockholder and the overhang associated with the current dual-public company structure.”  Of course, Liberty adds the legal caveat: “No assurance can be given that any investment, acquisition or other strategic opportunities will become available following the Spin-Off on terms that TripCo finds favorable or at all, nor can any assurance be given that a combination of TripCo and TripAdvisor will ever occur.”  Notably, Liberty’s Gregory Maffei (well respected in the industry as John Malone’s right-hand man), serves as both Chairman/President/CEO of LTRP and Chairman of TRIP.  Maffei owns ~95% of outstanding LTRPB shares, no LTRPA shares, and barely any TRIP shares (only 20,018 in total as of April 2018 per TRIP’s most recent proxy statement).  He is economically incentivized to exit his LTRPB stake for maximum value. He obtained his LTRPB stake in December 2014 when he signed a five-year compensation agreement with Liberty beginning January 1, 2015 and ending December 31, 2019 as well as a separate letter agreement with Malone.  In our view, it is logical that the probability of a LTRP sale increases as we approach December 31, 2019.

 

 

LTRP NAV Build

Value

Per Sh

% NAV

Control Ratio

 

Shares

Per Sh

Market Value of TRIP Stake

1,498

19.95

144%

0.4125

 

31

48.37

Cash

21

0.28

2%

       

Debt

(477)

(6.36)

(46%)

       

LTRP Simple NAV

1,042

13.88

100%

 

     

Current LTRP Equity Value

927

12.35

 

 

     

$ Gross Discount (Premium)

115

1.53

 

 

     

% Gross Discount (Premium)

12%

12%

 

 

     

Fully Diluted LTRP Shares

 

75

         
               

Capitalized Control Premium (Paid to Diller)

116

1.55

 

 

     

LTRP Adjusted NAV

1,158

15.42

 

 

     

Current LTRP Equity Value

927

12.35

 

 

     

$ Gross Discount (Premium)

231

3.07

 

 

     

% Gross Discount (Premium)

25%

25%

 

 

     
               

LTRP Cash Build (Mar '18 Q)

             

LTRPA Cash

656

           

LTRPA Short-Term Marketable Securities

15

           

LTRPA Other Current Assets

68

           

TRIP Cash

(635)

           

TRIP Short-term Marketable Securities

(15)

           

TRIP Other Current Assets

(68)

           

Cash Attributable to LTRPA

21

           
               

LTRP Debt Build (Mar '18 Q)

             

LTRPA Long-Term Debt

477

           

LTRPA Current Portion of Debt

7

           

LTRPA Other Current Liabilities

6

           

TRIP Long-Term Debt

0

           

TRIP Current Portion of Debt

(7)

           

TRIP Other Current Liabilities

(6)

           

Debt Attributable to LTRPA

477

           
               

LTRPA/B Shares Outstanding

             

LTRPA

72

           

LTRPB

3

           

LTRPA/B

75

           

 

 

 

 

 

LTRPA/B Shares, Votes, & Ownership

 

 

 

 

 

           

LTRPA/B Shares & Votes

LTRPA/B Shares

% LTRPA/B Shares

Votes / Share

LTRPA/B Votes

% Votes

LTRP Class A Shares ("LTRPA")

72,127,124

96%

1

72,127,124

71%

LTRP Class B Shares ("LTRPB")

2,929,777

4%

10

29,297,770

29%

Total LTRPA/B Shares

75,056,901

100%

 

101,424,894

100%

           

Greg Maffei Ownership of LTRPA/B

LTRPA/B Shares

% Shares

Votes / Share

LTRPA/B Votes

% Votes

LTRPA Shares Owned

0

0%

1

0

0%

LTRPB Shares Owned

2,770,173

95%

10

27,701,730

95%

Total LTRPA/B Shares Owned

2,770,173

4%

 

27,701,730

27%

 

 

 

 

 

TRIP Shares, Votes, & Ownership

 

 

 

 

 

           

TRIP Shares & Votes

TRIP Shares

% Shares

Votes / Share

TRIP Votes

% Votes

TRIP Common + Options/RSUs/MSUs

127,522,001

91%

1

127,522,001

50%

TRIP Class B

12,799,999

9%

10

127,999,990

50%

Total TRIP Shares

140,322,000

100%

 

255,521,991

100%

           

TRIP Shares & Votes Owned by LTRPA/B

TRIP Shares

% Shares

Votes / Share

TRIP Votes

% Votes

TRIP Common Owned by LTRPA/B

18,159,752

14%

1

18,159,752

14%

TRIP Class B Owned by LTRPA/B

12,799,999

100%

10

127,999,990

100%

Total TRIP Shares Owned by LTRPA/B

30,959,751

22%

 

146,159,742

57%

 

 

 

 

 

How would a control premium on LTRP’s underlying TRIP shares be distributed among LTRPA (which controls ~71% of the LTRP vote) and LTRPB (which controls ~29% of the LTRP vote)?  At public conferences Liberty has suggested that a theoretical sale of LTRP would be an arms-length process subject to a shareholder vote. There is an argument that Maffei may want to structure a transaction to keep a higher proportionate share of the control premium for himself – that is, arguing that LTRPB shares should get ~29% of the premium (based on LTRPB’s voting rights) rather than ~4% (LTRPB as a percentage of total LTRPA/B shares outstanding).  From a pure corporate governance perspective though, LTRPA holders will ultimately have the final say (Maffei has a blocking stake but not enough to unilaterally dictate terms). Liberty has historically been shareholder friendly, and the LTRP spread does not currently discount a reasonable probability of a control premium accruing to LTRP’s underlying TRIP shares (we are not at the point of debating what proportionate split of such a premium the spread may be discounting).  As a final mitigant, since Maffei owns more than 15% of LTRP he is defined as an “interested stockholder” under Section 203 of the Delaware General Corporate Law. This would effectively prohibit a business combination involving Maffei and a third party for a period of three years unless the deal were approved by holders of 66⅔% LTRPA/B shares not owned by Maffei.

 

 

It is important to note that there is no tax treatment uncertainty with regard to LTRP’s TRIP stake since the LTRP spin has been grandfathered by the IRS.  LTRP reported in conjunction with the spin that it received a formal Private Letter Ruling (“PLR”) from the IRS blessing the tax integrity of the structure.  LTRP began trading a year before Yahoo’s aborted spin of Yahoo Small Business catalyzed the IRS to more closely scrutinize the distribution of large, separately traded equity stakes alongside small, almost token operating businesses.

 

 

Why does this opportunity exist?  LTRPA/B actually traded at double-digit percentage premium to its simple NAV on a gross spread basis last year.  The spread widened materially as TRIP stock rose ~26% from ~$39 to ~$49 following 1Q18 earnings on May 8 and LTRPA/B did not fully co-participate in large part due to a lack of natural buyers of LTRP.  This dynamic has been exacerbated by event-driven de-risking due to volatility in large, concentrated, consensus arbitrage positions such as NXP Semiconductors (“NXPI”) over the past month as well as ahead of the upcoming court decision in AT&T / Time Warner (“TWX”) on June 12 (a victory for TWX is seen as thematically spread-tightening and vice versa).

 

Looking through these idiosyncratic dynamics, we believe the LTRP spread should normalize towards parity by year end and begin to trade at a premium in 2019 as the market appreciates the potential for a change in control of LTRP.  On a near-term mark, the risk would be event-driven volatility following a TWX loss catalyzing a mass widening of spreads, where we could see the current ~12% gross widen towards ~15-20%. In addition, LTRP trends to lag TRIP directionally in the nearer term, so when TRIP moves sharply up (down) the LTRP spread tends to widen (narrow).  Such events present opportunities to add to a LTRP spread that is already at a historically wide level with little conceivable probability of realized capital loss given the math of the simple NAV in context of the incentives in play. The more realistic risk is LTRP trading like a range-bound “dead money” spread for longer than 12-24 months if Maffei renews his contract beyond year-end 2019 and sees little rush in collapsing LTRP into TRIP to simplify the structure.

 

 

Reference Links

 

LTRP S-1 Filing: https://www.sec.gov/Archives/edgar/data/1606745/000104746914006875/a2221042zs-1a.htm

 

Filing Confirming Receipt of PLR (“private letter ruling issued to Liberty by the IRS”): https://www.sec.gov/Archives/edgar/data/1606745/000110465914063370/a14-11716_8ex8d1.htm

 

 

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

* Acquisition of LTRPA/B by TRIP or a third party (GOOG/FB/BABA/BKNG).

* Normalization of the spread towards parity from current ~12% as idiosyncratic backdrop falls away.

    sort by    

    Description

     

    Recommendation

     

    Long 1 LTRPA/B and short 0.4125 TRIP (hedged at full control ratio) to capture ~12% gross spread to LTRPA/B’s simple NAV with optionality on a sale of LTRPA/B to TRIP or a third party such as GOOG/FB/BABA/BKNG over the next 12-24 months (LTRPA/B’s “not-so-hidden” asset is its ~57% voting control of separately traded TRIP) accreting an incremental ~13-26% to the spread or more in the event of multiple competing bidders for a ~25-38+% “all in” return with minimal risk of realized capital loss.  Looking through recent idiosyncratic dynamics that have driven the spread to its historical wides (last year the complex traded at a premium to simple NAV), we believe the spread should normalize towards parity in the immediate to intermediate term and begin to trade back at a premium in 2019 as the market appreciates the potential for a change in control of LTRP pursuant to underappreciated insider incentives / contract cadence.

     

     

    Investment Thesis

     

    Liberty TripAdvisor Holdings (“LTRP”) was spun off from Liberty Interactive Corporation (“Liberty”) in August 2014 in a tax-free, asset-backed distribution to shareholders of the tracking stock Liberty Ventures (“LVNT”) as Liberty sought to simplify LVNT’s complex holding company structure. LTRP is an orphaned spin with no natural owner whose primary asset is voting control of separately traded TripAdvisor (“TRIP”). LTRP has a ~22% economic and ~57% voting interest in TRIP through the ownership of ~31 million TRIP shares comprising ~18 million TRIP common shares, which are entitled to one vote per share, and ~13 million super-voting TRIP Class B shares, which are entitled to ten votes per share (there are ~140m TRIP shares outstanding).  Calling LTRP’s stake a “hidden asset” seems somewhat silly since it effectively accounts for LTRP’s Net Asset Value (“NAV”); perhaps the stake is best described as a “not-so-hidden” asset whose value remains deeply underappreciated due to a constellation of idiosyncratic factors that have recently arisen (more on this below). Inclusive of the after-tax cash proceeds from the sale of LTRP’s small operating business (BuySeasons) last year, LTRP had $21 million in cash and $477 million in debt per its balance sheet for the period ended March 31, 2018.  There are ~75m LTRP shares outstanding consisting of ~72m LTRP Class A shares (“LTRPA”), which are entitled to one vote per share (LTRPA controls ~71% of the LTRP vote), and ~3m super-voting LTRP Class B shares (“LTRPB”), which are entitled to ten votes per share (LTRPB controls ~29% of the LTRP vote). The liquid LTRPA ($12.35) and illiquid super-voting LTRPB ($12.40) trade near parity (LTRPB currently trades at a puny 0.4% premium to LTRPA), presenting a compelling share class trade in its own right were it not for LTRPB’s aforementioned illiquidity.  Big picture, we recommend setting up the LTRP spread by going long 1 LTRPA/B and going short 0.4125 TRIP at the full control ratio (~31m underlying TRIP shares / ~75m LTRPA/B shares) in order to capture a ~12% gross spread to simple NAV plus optionality on an acquisition of LTRPA/B over the next 12-24 months accreting an incremental +13-26% to the spread or more for a ~25-38% “all in” return with little risk of realized capital loss.

     

     

    Using TRIP’s current market value across the ~31m shares collectively owned by LTRP, LTRPA/B currently trades at a ~12% gross spread to its simple NAV of ~$13.88 per share.  For purposes of simplicity, we use LTRPA’s current share price ($12.35) as a proxy for the share price across the complex (LTRPB trades $12.40). This simple NAV understates the value opportunity because LTRP’s underlying TRIP shares deserve a control premium.  In December 2012 Liberty paid Barry Diller a $116 million premium above the market value of his TRIP shares for control of TRIP. It makes economic sense that LTRP’s board and management team would at least want to recoup that past premium paid. If we capitalize this $116 million and add it to LTRP’s simple NAV to impute an adjusted NAV, we get another ~$1.55 per share in which case the gross spread rises to ~25%.  TRIP is a strategic asset that might be palatable to multiple bidders. There is an argument that the value of control of TRIP has increased since Liberty acquired it from Diller in 2012. If a formal auction process were launched for TRIP, there is a possibility that numerous deep-pocketed strategics such as Google, Facebook, Booking Holdings, and Alibaba could bid multiples of the ~$1.55 per share. The spread currently does not appropriately discount this optionality.

     

     

    A sale of LTRP is not a remote, theoretical scenario.  Liberty readily admits in its financial filings that the catalyst to collapse the LTRPA/B structure would be an acquisition of LTRP by a third party.  Specifically, Liberty focuses on an acquisition of LTRP by TRIP. Liberty bluntly lays out the logic for such a transaction in LTRP’s S-1 filing: “Liberty believes that separating our company from Liberty's other businesses will help facilitate a potential combination of our company with TripAdvisor by eliminating any negotiations regarding the valuation of Liberty's other businesses, thereby making it more likely that a potential agreement could be reached. Liberty believes that a combination of our company with TripAdvisor could be beneficial for our stockholders, on the one hand, and TripAdvisor, on the other hand, by eliminating the control of a large stockholder and the overhang associated with the current dual-public company structure.”  Of course, Liberty adds the legal caveat: “No assurance can be given that any investment, acquisition or other strategic opportunities will become available following the Spin-Off on terms that TripCo finds favorable or at all, nor can any assurance be given that a combination of TripCo and TripAdvisor will ever occur.”  Notably, Liberty’s Gregory Maffei (well respected in the industry as John Malone’s right-hand man), serves as both Chairman/President/CEO of LTRP and Chairman of TRIP.  Maffei owns ~95% of outstanding LTRPB shares, no LTRPA shares, and barely any TRIP shares (only 20,018 in total as of April 2018 per TRIP’s most recent proxy statement).  He is economically incentivized to exit his LTRPB stake for maximum value. He obtained his LTRPB stake in December 2014 when he signed a five-year compensation agreement with Liberty beginning January 1, 2015 and ending December 31, 2019 as well as a separate letter agreement with Malone.  In our view, it is logical that the probability of a LTRP sale increases as we approach December 31, 2019.

     

     

    LTRP NAV Build

    Value

    Per Sh

    % NAV

    Control Ratio

     

    Shares

    Per Sh

    Market Value of TRIP Stake

    1,498

    19.95

    144%

    0.4125

     

    31

    48.37

    Cash

    21

    0.28

    2%

           

    Debt

    (477)

    (6.36)

    (46%)

           

    LTRP Simple NAV

    1,042

    13.88

    100%

     

         

    Current LTRP Equity Value

    927

    12.35

     

     

         

    $ Gross Discount (Premium)

    115

    1.53

     

     

         

    % Gross Discount (Premium)

    12%

    12%

     

     

         

    Fully Diluted LTRP Shares

     

    75

             
                   

    Capitalized Control Premium (Paid to Diller)

    116

    1.55

     

     

         

    LTRP Adjusted NAV

    1,158

    15.42

     

     

         

    Current LTRP Equity Value

    927

    12.35

     

     

         

    $ Gross Discount (Premium)

    231

    3.07

     

     

         

    % Gross Discount (Premium)

    25%

    25%

     

     

         
                   

    LTRP Cash Build (Mar '18 Q)

                 

    LTRPA Cash

    656

               

    LTRPA Short-Term Marketable Securities

    15

               

    LTRPA Other Current Assets

    68

               

    TRIP Cash

    (635)

               

    TRIP Short-term Marketable Securities

    (15)

               

    TRIP Other Current Assets

    (68)

               

    Cash Attributable to LTRPA

    21

               
                   

    LTRP Debt Build (Mar '18 Q)

                 

    LTRPA Long-Term Debt

    477

               

    LTRPA Current Portion of Debt

    7

               

    LTRPA Other Current Liabilities

    6

               

    TRIP Long-Term Debt

    0

               

    TRIP Current Portion of Debt

    (7)

               

    TRIP Other Current Liabilities

    (6)

               

    Debt Attributable to LTRPA

    477

               
                   

    LTRPA/B Shares Outstanding

                 

    LTRPA

    72

               

    LTRPB

    3

               

    LTRPA/B

    75

               

     

     

     

     

     

    LTRPA/B Shares, Votes, & Ownership

     

     

     

     

     

               

    LTRPA/B Shares & Votes

    LTRPA/B Shares

    % LTRPA/B Shares

    Votes / Share

    LTRPA/B Votes

    % Votes

    LTRP Class A Shares ("LTRPA")

    72,127,124

    96%

    1

    72,127,124

    71%

    LTRP Class B Shares ("LTRPB")

    2,929,777

    4%

    10

    29,297,770

    29%

    Total LTRPA/B Shares

    75,056,901

    100%

     

    101,424,894

    100%

               

    Greg Maffei Ownership of LTRPA/B

    LTRPA/B Shares

    % Shares

    Votes / Share

    LTRPA/B Votes

    % Votes

    LTRPA Shares Owned

    0

    0%

    1

    0

    0%

    LTRPB Shares Owned

    2,770,173

    95%

    10

    27,701,730

    95%

    Total LTRPA/B Shares Owned

    2,770,173

    4%

     

    27,701,730

    27%

     

     

     

     

     

    TRIP Shares, Votes, & Ownership

     

     

     

     

     

               

    TRIP Shares & Votes

    TRIP Shares

    % Shares

    Votes / Share

    TRIP Votes

    % Votes

    TRIP Common + Options/RSUs/MSUs

    127,522,001

    91%

    1

    127,522,001

    50%

    TRIP Class B

    12,799,999

    9%

    10

    127,999,990

    50%

    Total TRIP Shares

    140,322,000

    100%

     

    255,521,991

    100%

               

    TRIP Shares & Votes Owned by LTRPA/B

    TRIP Shares

    % Shares

    Votes / Share

    TRIP Votes

    % Votes

    TRIP Common Owned by LTRPA/B

    18,159,752

    14%

    1

    18,159,752

    14%

    TRIP Class B Owned by LTRPA/B

    12,799,999

    100%

    10

    127,999,990

    100%

    Total TRIP Shares Owned by LTRPA/B

    30,959,751

    22%

     

    146,159,742

    57%

     

     

     

     

     

    How would a control premium on LTRP’s underlying TRIP shares be distributed among LTRPA (which controls ~71% of the LTRP vote) and LTRPB (which controls ~29% of the LTRP vote)?  At public conferences Liberty has suggested that a theoretical sale of LTRP would be an arms-length process subject to a shareholder vote. There is an argument that Maffei may want to structure a transaction to keep a higher proportionate share of the control premium for himself – that is, arguing that LTRPB shares should get ~29% of the premium (based on LTRPB’s voting rights) rather than ~4% (LTRPB as a percentage of total LTRPA/B shares outstanding).  From a pure corporate governance perspective though, LTRPA holders will ultimately have the final say (Maffei has a blocking stake but not enough to unilaterally dictate terms). Liberty has historically been shareholder friendly, and the LTRP spread does not currently discount a reasonable probability of a control premium accruing to LTRP’s underlying TRIP shares (we are not at the point of debating what proportionate split of such a premium the spread may be discounting).  As a final mitigant, since Maffei owns more than 15% of LTRP he is defined as an “interested stockholder” under Section 203 of the Delaware General Corporate Law. This would effectively prohibit a business combination involving Maffei and a third party for a period of three years unless the deal were approved by holders of 66⅔% LTRPA/B shares not owned by Maffei.

     

     

    It is important to note that there is no tax treatment uncertainty with regard to LTRP’s TRIP stake since the LTRP spin has been grandfathered by the IRS.  LTRP reported in conjunction with the spin that it received a formal Private Letter Ruling (“PLR”) from the IRS blessing the tax integrity of the structure.  LTRP began trading a year before Yahoo’s aborted spin of Yahoo Small Business catalyzed the IRS to more closely scrutinize the distribution of large, separately traded equity stakes alongside small, almost token operating businesses.

     

     

    Why does this opportunity exist?  LTRPA/B actually traded at double-digit percentage premium to its simple NAV on a gross spread basis last year.  The spread widened materially as TRIP stock rose ~26% from ~$39 to ~$49 following 1Q18 earnings on May 8 and LTRPA/B did not fully co-participate in large part due to a lack of natural buyers of LTRP.  This dynamic has been exacerbated by event-driven de-risking due to volatility in large, concentrated, consensus arbitrage positions such as NXP Semiconductors (“NXPI”) over the past month as well as ahead of the upcoming court decision in AT&T / Time Warner (“TWX”) on June 12 (a victory for TWX is seen as thematically spread-tightening and vice versa).

     

    Looking through these idiosyncratic dynamics, we believe the LTRP spread should normalize towards parity by year end and begin to trade at a premium in 2019 as the market appreciates the potential for a change in control of LTRP.  On a near-term mark, the risk would be event-driven volatility following a TWX loss catalyzing a mass widening of spreads, where we could see the current ~12% gross widen towards ~15-20%. In addition, LTRP trends to lag TRIP directionally in the nearer term, so when TRIP moves sharply up (down) the LTRP spread tends to widen (narrow).  Such events present opportunities to add to a LTRP spread that is already at a historically wide level with little conceivable probability of realized capital loss given the math of the simple NAV in context of the incentives in play. The more realistic risk is LTRP trading like a range-bound “dead money” spread for longer than 12-24 months if Maffei renews his contract beyond year-end 2019 and sees little rush in collapsing LTRP into TRIP to simplify the structure.

     

     

    Reference Links

     

    LTRP S-1 Filing: https://www.sec.gov/Archives/edgar/data/1606745/000104746914006875/a2221042zs-1a.htm

     

    Filing Confirming Receipt of PLR (“private letter ruling issued to Liberty by the IRS”): https://www.sec.gov/Archives/edgar/data/1606745/000110465914063370/a14-11716_8ex8d1.htm

     

     

    I do not hold a position with the issuer such as employment, directorship, or consultancy.
    I and/or others I advise hold a material investment in the issuer's securities.

    Catalyst

    * Acquisition of LTRPA/B by TRIP or a third party (GOOG/FB/BABA/BKNG).

    * Normalization of the spread towards parity from current ~12% as idiosyncratic backdrop falls away.

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