|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|
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)|
|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: 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|
|Series A Common Stock||25,777|
|Series B Common Stock||1,448|
|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)|
|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 Cable||348,000|
|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|