LIBERTY VENTURES LVNTA
August 23, 2012 - 1:59pm EST by
mjw248
2012 2013
Price: 44.85 EPS $0.00 $0.00
Shares Out. (in M): 37 P/E 0.0x 0.0x
Market Cap (in $M): 1,666 P/FCF 0.0x 0.0x
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 0 TEV/EBIT 0.0x 0.0x

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  • Tracking Stock
  • Malone
  • Travel

Description

I recommend a long position in Series A Liberty Ventures Common Stock (NASDAQ: LVNTA).  The stock is worth at least $60 per share and offers a wide margin of safety at its current price, $44.85.  If Liberty management is able to tax efficiently monetize Venture’s stakes in Expedia and TripAdvisor and effectively reallocate that capital, the upside could be much more significant.

(Note: the liquidation scenario is just for illustrative purposes. There is zero chance Liberty would retire its exchangeables before maturity, take a significant tax hit and forgo substantial future tax benefits)

(Figures in thousands, except per share figures)              
                   
        Liquidation   Low   High  
                   
  Add: Cash     1,325,000 1,325,000 1,325,000  
  Add: Cash from Rights Offering $34.43   312,429 312,429 312,429  
  Add: Expedia Equity Interest 51.72   1,790,024 1,790,024 1,790,024  
  Add / Less: Expedia Forward Sale 34.32   (208,848) (208,848) (208,848)  
  Add: TripAdvisor Equity Interest 33.94   886,170 886,170 886,170  
  Add: IILG Equity Interest 18.83   313,406 313,406 313,406  
  Add: Tree.com Equity Interest 15.38   42,664 42,664 42,664  
  Add: Time Warner Equity Interest 42.19   919,115 919,115 919,115  
  Add: Time Warner Cable Equity Interest 88.96   486,456 486,456 486,456  
  Add: AOL, Inc. Equity Interest 32.38   64,126 64,126 64,126  
  Add: Other Non-Operating Assets     0 0 0  
  Add: Net Tax Benefits of Exchangeables     (978,000) 250,000 250,000  
  Less: Debt     (2,548,000) (2,548,000) (2,548,000)  
  Less: Preferred Stock     0 0 0  
  Less: Non-Operating Liabilities     0 0 0  
  Less: Deferred Tax Gain on Debt Retirements   (313,000) (250,922) (250,922)  
  Less: Deferred Taxes on Equity Interests   (1,065,898) (1,065,898) 0  
  Less: Non-Controlling Interests     0 0 0  
  Equity Value     $1,025,643 $2,315,722 $3,381,620  
                   
  Series A Common Stock 25,777              
  Series B Common Stock 1,448              
  Rights Offering 9,075              
  Options 839              
  Effective Shares Outstanding 37,140              
                   
  Value per Share     $27.60 - $62.40 - $91.00  
  Margin of Safety - Equity $44.85   -62.5% - 28.1% - 50.7%  
                   

 

Liberty Ventures is a tracking stock that was created as a result of Liberty Interactive Corporation’s recent recapitalization transaction.  The goal behind the recapitalization transaction was to unlock the underlying value of Liberty Interactive Corporation by separating the Company’s straightforward operating assets from its more complex bits and pieces, including non-controlling interests in a variety of publicly-traded companies and exchangeable debt securities that have some unique tax attributes.  The new Liberty Interactive tracking stock is the simple one and Liberty Ventures is the complex one.  As an aside, I believe the primary impetus for improving the valuation of Liberty Interactive is to set up a stock-for-stock merger with HSN.

Liberty Ventures’s primary assets and liabilities include:

i) $1.325 B in cash

ii) Expedia – 21.8 MM shares of Common Stock and 12.8 MM shares of Class B Common Stock.  Liberty entered into a forward sales contract on 12 million shares of Common Stock in March 2012 at a per share forward price of $34.316.  The forward contract may be settled, in October 2012, in stock or cash, at the election of Liberty.

iii) TripAdvisor – 13.3 MM shares of Common Stock and 12.8 MM shares of Class B Common Stock.

iv) Interval Leisure Group – 16.6 MM shares of Common Stock

v) Tree.com – 2.8 MM shares of Common Stock

vi) $1.138 B principal amount of 3.125% Exchangeable Senior Debentures due 2023 – each $1,000 face value debenture is exchangeable into 19.136 shares of Time Warner (NYSE: TWX), 4.8033 shares of Time Warner Cable (NYSE: TWC), and 1.7396 shares of AOL (NYSE: AOL).  The exchangeable value of each of these debentures is currently about $1,291.  Liberty still owns the reference shares related to this liability, so it is effectively hedged.  These debentures have a put / call feature in 2013, so it is possible that Liberty retires them in the near-term.

vii) $469 MM principal amount of 4.000% Exchangeable Senior Debentures due 2029 – each $1,000 face value debenture is exchangeable into 11.4743 shares of Sprint (NYSE: S) and 0.786 shares of Century Link (NYSE: CTL).  These exchangeables are way out of the money and Liberty no longer owns the reference shares. 

viii) $460 MM principal amount of 3.750% Exchangeable Senior Debentures due 2030 – each $1,000 face value debenture is exchangeable into 8.3882 shares of Sprint (NYSE: S) and 0.5746 shares of Century Link (NYSE: CTL).  These exchangeables are way out of the money and Liberty no longer owns the reference shares.

ix) $373 MM principal amount of 3.500% Exchangeable Senior Debentures due 2031 – each $1,000 face value debenture is exchangeable into 5.2598 shares of Motorola Solutions (NYSE: MSI).  These exchangeables are way out of the money and Liberty no longer owns the reference shares.

x) $414 MM principal amount of 3.250% Exchangeable Senior Debentures due 2031 – each $1,000 face value debenture is exchangeable into 9.2833 shares of Viacom (NASDAQ: VIAB) and 9.2833 shares of CBS (NYSE: CBS).  These exchangeables are moderately out of the money and Liberty no longer owns the reference shares.

xi) $830 MM of net taxable income to be recognized ratably in tax years 2014 through 2018 related to the cancellation in April 2009 of $400 million in principal amount of 2029 Exchangeables and $350 million in principal amount of 2030 Exchangeables

The exchangeable debentures have a material tax benefit associated with them.  Liberty is able to deduct an implied interest rate of 9.0% - 10.0% per annum on the face value of these debentures for tax purposes while only paying a low single digit cash interest rate.  The excess of the deduction over the cash payment builds a tax liability that will reverse when these exchangeables mature or are retired otherwise. 

Liberty had to value three of these exchangeable debentures when it reattributed them between tracking stock groups in February 2010.  The valuation included the value of the net tax benefits and was disclosed in the 10K for fiscal 2010.  That valuation implied a value for the net tax benefits for those three series of exchangeable debentures of $250 MM - $300 MM.

(As of March 31, 2010)        
           
      Fair Value    
           
  4.000% Exchangeable Senior Debentures due 2029   $248,000    
  3.750% Exchangeable Senior Debentures due 2030   230,000    
  3.500% Exchangeable Senior Debentures due 2031   295,000    
  Total Fair Value   $773,000    
           
           
  Valuation Used for Reattribution $482,000 - $526,000  
           
  Implied Value of Net Tax Benefits $291,000 - $247,000  
           

I also did a DCF valuation of the net tax benefits of the exchangeables, excluding the 3.125% exchangeables that may be called next year, and came to a valuation of around $250 MM using a 6.0% discount rate. 

Liberty's reported deferred tax liability related to its investments is based on the carrying value of its investments. Most of its investments - and most notably Expedia and TripAdvisor, its largest investments - are equity method investments, and the carrying values are well below cost. Here is how I estimated the deferred tax liability related to Liberty's investments based on their current market value:

 

(As of December 31, 2011)      
         
         
  Carrying Value of Investments:      
  Time Warner   $787,000  
  Time Warner Cable   348,000  
  AOL   30,000  
  Expedia   621,000  
  TripAdvisor   184,000  
  Other   100,000  
  Total Carrying Value of Investments   $2,070,000  
         
         
  Deferred Tax Liability Related to Investments $210,000  
  Assumed Effective Tax Rate   38.5%  
  Implied Excess of Carrying Value over Tax Basis $545,455  
         
         
  Estimated Tax Basis of Investments   $1,524,545  
         
         
  Current Market Value of Investments   $4,293,113  
  Less: Estimated Tax Basis of Investments   (1,524,545)  
  Potential Taxable Gain   2,768,567  
         
  Assumed Effective Tax Rate   38.5%  
  Potential Deferred Tax Liability   $1,065,898  
       
 
 
 
There is a rights offering related to the recent recapitalization transaction.  For every three shares of LVNTA received in the recapitalization, a stockholder also received a right to buy an additional share of LVNTA at a 20% discount to the 20 trading day VWAP of LVNTA immediately following the recapitalization. The rights will start trading once the subscription price is established and will expire 20 days after that.
 
This opportunity exists for a few reasons.  First, Ventures is clearly the red-headed step child of the recent recapitalization transaction, so there is certainly some indiscriminate selling occuring by newly minted LVNTA holders who don't want to or can't own it. Second, the rights offering is probably also putting some technical pressure on the stock through tail-swallowing.  Finally, tracking stocks have historically traded at varying discounts to intrinsic value.
 
While I think TRIP and EXPE are within a range of fair value, you could hedge out your exposure to them. Just keep in mind the forward sale and the rights offering when calculating the hedge ratio.
 
I'll add one more point - and this is speculation on my part - but the structure of this transaction is very similar to the one used to originally create Liberty.  At the time, John Malone was the CEO of TCI, but he was primarily a manager. He owned something like 1% of the company. The spin-off and associated rights offering are how he gained his large stake in Liberty. Its possible that this is the opportunity for Greg Maffei to do the same thing. Will be interesting to watch.

Catalyst

- End of rights offering should eliminate associated technical pressure
- Diminishing technical pressure from "spin-off" dynamics over time
- Liberty will likely highlight the underlying value in presentations
- Tax efficient monetization of Expedia and TripAdvisor stakes
- Reallocation of capital (e.g. acquisitions, investments, etc.)
- Sell-side coverage - Lazard recently initiated with a Buy
    sort by    

    Description

    I recommend a long position in Series A Liberty Ventures Common Stock (NASDAQ: LVNTA).  The stock is worth at least $60 per share and offers a wide margin of safety at its current price, $44.85.  If Liberty management is able to tax efficiently monetize Venture’s stakes in Expedia and TripAdvisor and effectively reallocate that capital, the upside could be much more significant.

    (Note: the liquidation scenario is just for illustrative purposes. There is zero chance Liberty would retire its exchangeables before maturity, take a significant tax hit and forgo substantial future tax benefits)

    (Figures in thousands, except per share figures)              
                       
            Liquidation   Low   High  
                       
      Add: Cash     1,325,000 1,325,000 1,325,000  
      Add: Cash from Rights Offering $34.43   312,429 312,429 312,429  
      Add: Expedia Equity Interest 51.72   1,790,024 1,790,024 1,790,024  
      Add / Less: Expedia Forward Sale 34.32   (208,848) (208,848) (208,848)  
      Add: TripAdvisor Equity Interest 33.94   886,170 886,170 886,170  
      Add: IILG Equity Interest 18.83   313,406 313,406 313,406  
      Add: Tree.com Equity Interest 15.38   42,664 42,664 42,664  
      Add: Time Warner Equity Interest 42.19   919,115 919,115 919,115  
      Add: Time Warner Cable Equity Interest 88.96   486,456 486,456 486,456  
      Add: AOL, Inc. Equity Interest 32.38   64,126 64,126 64,126  
      Add: Other Non-Operating Assets     0 0 0  
      Add: Net Tax Benefits of Exchangeables     (978,000) 250,000 250,000  
      Less: Debt     (2,548,000) (2,548,000) (2,548,000)  
      Less: Preferred Stock     0 0 0  
      Less: Non-Operating Liabilities     0 0 0  
      Less: Deferred Tax Gain on Debt Retirements   (313,000) (250,922) (250,922)  
      Less: Deferred Taxes on Equity Interests   (1,065,898) (1,065,898) 0  
      Less: Non-Controlling Interests     0 0 0  
      Equity Value     $1,025,643 $2,315,722 $3,381,620  
                       
      Series A Common Stock 25,777              
      Series B Common Stock 1,448              
      Rights Offering 9,075              
      Options 839              
      Effective Shares Outstanding 37,140              
                       
      Value per Share     $27.60 - $62.40 - $91.00  
      Margin of Safety - Equity $44.85   -62.5% - 28.1% - 50.7%  
                       

     

    Liberty Ventures is a tracking stock that was created as a result of Liberty Interactive Corporation’s recent recapitalization transaction.  The goal behind the recapitalization transaction was to unlock the underlying value of Liberty Interactive Corporation by separating the Company’s straightforward operating assets from its more complex bits and pieces, including non-controlling interests in a variety of publicly-traded companies and exchangeable debt securities that have some unique tax attributes.  The new Liberty Interactive tracking stock is the simple one and Liberty Ventures is the complex one.  As an aside, I believe the primary impetus for improving the valuation of Liberty Interactive is to set up a stock-for-stock merger with HSN.

    Liberty Ventures’s primary assets and liabilities include:

    i) $1.325 B in cash

    ii) Expedia – 21.8 MM shares of Common Stock and 12.8 MM shares of Class B Common Stock.  Liberty entered into a forward sales contract on 12 million shares of Common Stock in March 2012 at a per share forward price of $34.316.  The forward contract may be settled, in October 2012, in stock or cash, at the election of Liberty.

    iii) TripAdvisor – 13.3 MM shares of Common Stock and 12.8 MM shares of Class B Common Stock.

    iv) Interval Leisure Group – 16.6 MM shares of Common Stock

    v) Tree.com – 2.8 MM shares of Common Stock

    vi) $1.138 B principal amount of 3.125% Exchangeable Senior Debentures due 2023 – each $1,000 face value debenture is exchangeable into 19.136 shares of Time Warner (NYSE: TWX), 4.8033 shares of Time Warner Cable (NYSE: TWC), and 1.7396 shares of AOL (NYSE: AOL).  The exchangeable value of each of these debentures is currently about $1,291.  Liberty still owns the reference shares related to this liability, so it is effectively hedged.  These debentures have a put / call feature in 2013, so it is possible that Liberty retires them in the near-term.

    vii) $469 MM principal amount of 4.000% Exchangeable Senior Debentures due 2029 – each $1,000 face value debenture is exchangeable into 11.4743 shares of Sprint (NYSE: S) and 0.786 shares of Century Link (NYSE: CTL).  These exchangeables are way out of the money and Liberty no longer owns the reference shares. 

    viii) $460 MM principal amount of 3.750% Exchangeable Senior Debentures due 2030 – each $1,000 face value debenture is exchangeable into 8.3882 shares of Sprint (NYSE: S) and 0.5746 shares of Century Link (NYSE: CTL).  These exchangeables are way out of the money and Liberty no longer owns the reference shares.

    ix) $373 MM principal amount of 3.500% Exchangeable Senior Debentures due 2031 – each $1,000 face value debenture is exchangeable into 5.2598 shares of Motorola Solutions (NYSE: MSI).  These exchangeables are way out of the money and Liberty no longer owns the reference shares.

    x) $414 MM principal amount of 3.250% Exchangeable Senior Debentures due 2031 – each $1,000 face value debenture is exchangeable into 9.2833 shares of Viacom (NASDAQ: VIAB) and 9.2833 shares of CBS (NYSE: CBS).  These exchangeables are moderately out of the money and Liberty no longer owns the reference shares.

    xi) $830 MM of net taxable income to be recognized ratably in tax years 2014 through 2018 related to the cancellation in April 2009 of $400 million in principal amount of 2029 Exchangeables and $350 million in principal amount of 2030 Exchangeables

    The exchangeable debentures have a material tax benefit associated with them.  Liberty is able to deduct an implied interest rate of 9.0% - 10.0% per annum on the face value of these debentures for tax purposes while only paying a low single digit cash interest rate.  The excess of the deduction over the cash payment builds a tax liability that will reverse when these exchangeables mature or are retired otherwise. 

    Liberty had to value three of these exchangeable debentures when it reattributed them between tracking stock groups in February 2010.  The valuation included the value of the net tax benefits and was disclosed in the 10K for fiscal 2010.  That valuation implied a value for the net tax benefits for those three series of exchangeable debentures of $250 MM - $300 MM.

    (As of March 31, 2010)        
               
          Fair Value    
               
      4.000% Exchangeable Senior Debentures due 2029   $248,000    
      3.750% Exchangeable Senior Debentures due 2030   230,000    
      3.500% Exchangeable Senior Debentures due 2031   295,000    
      Total Fair Value   $773,000    
               
               
      Valuation Used for Reattribution $482,000 - $526,000  
               
      Implied Value of Net Tax Benefits $291,000 - $247,000  
               

    I also did a DCF valuation of the net tax benefits of the exchangeables, excluding the 3.125% exchangeables that may be called next year, and came to a valuation of around $250 MM using a 6.0% discount rate. 

    Liberty's reported deferred tax liability related to its investments is based on the carrying value of its investments. Most of its investments - and most notably Expedia and TripAdvisor, its largest investments - are equity method investments, and the carrying values are well below cost. Here is how I estimated the deferred tax liability related to Liberty's investments based on their current market value:

     

    (As of December 31, 2011)      
             
             
      Carrying Value of Investments:      
      Time Warner   $787,000  
      Time Warner Cable   348,000  
      AOL   30,000  
      Expedia   621,000  
      TripAdvisor   184,000  
      Other   100,000  
      Total Carrying Value of Investments   $2,070,000  
             
             
      Deferred Tax Liability Related to Investments $210,000  
      Assumed Effective Tax Rate   38.5%  
      Implied Excess of Carrying Value over Tax Basis $545,455  
             
             
      Estimated Tax Basis of Investments   $1,524,545  
             
             
      Current Market Value of Investments   $4,293,113  
      Less: Estimated Tax Basis of Investments   (1,524,545)  
      Potential Taxable Gain   2,768,567  
             
      Assumed Effective Tax Rate   38.5%  
      Potential Deferred Tax Liability   $1,065,898  
           
     
     
     
    There is a rights offering related to the recent recapitalization transaction.  For every three shares of LVNTA received in the recapitalization, a stockholder also received a right to buy an additional share of LVNTA at a 20% discount to the 20 trading day VWAP of LVNTA immediately following the recapitalization. The rights will start trading once the subscription price is established and will expire 20 days after that.
     
    This opportunity exists for a few reasons.  First, Ventures is clearly the red-headed step child of the recent recapitalization transaction, so there is certainly some indiscriminate selling occuring by newly minted LVNTA holders who don't want to or can't own it. Second, the rights offering is probably also putting some technical pressure on the stock through tail-swallowing.  Finally, tracking stocks have historically traded at varying discounts to intrinsic value.
     
    While I think TRIP and EXPE are within a range of fair value, you could hedge out your exposure to them. Just keep in mind the forward sale and the rights offering when calculating the hedge ratio.
     
    I'll add one more point - and this is speculation on my part - but the structure of this transaction is very similar to the one used to originally create Liberty.  At the time, John Malone was the CEO of TCI, but he was primarily a manager. He owned something like 1% of the company. The spin-off and associated rights offering are how he gained his large stake in Liberty. Its possible that this is the opportunity for Greg Maffei to do the same thing. Will be interesting to watch.

    Catalyst

    - End of rights offering should eliminate associated technical pressure
    - Diminishing technical pressure from "spin-off" dynamics over time
    - Liberty will likely highlight the underlying value in presentations
    - Tax efficient monetization of Expedia and TripAdvisor stakes
    - Reallocation of capital (e.g. acquisitions, investments, etc.)
    - Sell-side coverage - Lazard recently initiated with a Buy
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