Description

Important Disclosures: Certain funds and accounts managed by us and our affiliates are currently long LVNTA.  We may buy and/or sell shares of LVNTA in the future for the funds and accounts managed by us without notice, and we are under no obligation or agreement to take, or not take, any action or restrict our actions in any manner.  This is not a recommendation to buy or sell shares.  Our views are subject to change without notice and we may trade in any manner, whether consistent or inconsistent with this investment thesis.  The information below is from public sources.  We have not independently verified this information and we make no representations as to the accuracy or correctness of any such information.  We undertake no obligation to update any information below.

Liberty Ventures was written up by clark0225 in July 2015. We refer you to this previous post for a description of LVNTA’s assets as well as for background on LVNTA’s proposed role in financing CHTR’s takeover of TWC.

We are refreshing the LVNTA thesis today to highlight a) the proposed corporate restructuring that was announced in November and b) LVNTA’s current substantial trading discount to NAV. In short, we believe recent market volatility has unduly punished “complex” securities which has created an unusually attractive risk/reward opportunity at LVNTA. At current market prices (as of 3/30/2016) we believe LVNTA is worth $49 or 27% above where it is currently trading. Further, by hedging out some or all of LVNTA’s underlying exposure to EXPE and/or CHTR, investors can create an attractive “stub” position that we believe should benefit disproportionately as the NAV discount closes over time.

Corporate restructuring:

At Liberty’s investor day last November, management announced plans to split Liberty Ventures into three publicly-traded businesses — Liberty Expedia Holdings, CommerceHub and “pro forma” Liberty Ventures. Pursuant to the plan, Liberty Expedia Holdings (proposed ticker LEXEA/B) would house LVNTA’s ownership interest in Expedia as well as the bodybuilding.com asset. CommerceHub (proposed ticker CHUBA/B) is to be comprised of the CommerceHub business. The remaining LVNTA “remainco” will reflect the value of the rest of LVNTA’s attributed assets including 1) LVNTA’s forthcoming investment in Liberty Broadband (LBRDK) 2) equity stakes in FTD, IILG & TREE 3) green energy investments 4) debt (with certain favorable tax attributes) and cash.

We believe the combined value of the spun-off properties (LEXEA/B and CHUBA/B) to be approximately $21/share (see NAV detail below) vs. LVNTA’s $39 share price today. Accordingly, we expect a significant amount of value to be crystallized in the spin-off transactions which will serve to highlight the substantial discount to NAV on the remaining portfolio of assets.

On the company’s Q1 earnings call on 2/26, Liberty management targeted a Q2 close for the spin-off transactions. It is also worth mentioning that in LEXEA/B’s recent S-1 filing management disclosed plans to raise $350m of debt at the LEXEA/B entity. Management plans to distribute a $300m dividend to LVNTA and to use all of the proceeds to repurchase shares within 12 months of the distribution. Given LVNTA’s current discount to NAV, we believe this will be a highly accretive use of capital — at current prices we believe this buyback could retire approximately 12% of LVNTA remainco’s market cap.

Discount to NAV (as of 3/30/2016) — LBRDK at market value:

Our valuation of LVNTA’s assets is below. A few notes:

• We are valuing bodybuilding.com at 8x LTM EBITDA and CommerceHub at 15x LTM EBITDA. The properties have grown EBITDA at 18% and 29% CAGRs respectively over the past 4 years, although we suspect bodybuilding.com’s growth is maturing. CommerceHub’s closest public comp, SPS Commerce (SPSC), is trading at 20x forward EBITDA and is projected by sell-side analysts to grow more slowly than CommerceHub has been growing.

• The LBRDK, IILG, FTD & TREE stakes are valued using current market values. LBRDK is currently trading at a 12% discount to its NAV. We project this discount to narrow once the CHTR/TWC acquisition is consummated (see section below).

• We value the PV of tax-advantaged debentures and solar investments using the cash flow schedule the company has provided and a 10% discount rate.

PRO FORMA ESTIMATED VALUATION USING MARKET VALUE AS OF 3/30/2016

Discount to NAV (as of 3/30/2016) — LBRDK at fair value:

As mentioned above, LBRDK is currently trading at $58 which is a 12% discount to its NAV. Once the CHTR/TWC deal is complete, LBRDK’s sole asset will be CHTR stock. We project this discount to narrow in the coming months as the transaction is completed and we eventually expect management to merge LBRDK back into CHTR which would eliminate the discount completely.  

PRO FORMA ESTIMATED VALUATION USING MARKET VALUE AS OF 3/30/2016

Creating a stub to maximize returns:

We think the LVNTA opportunity is compelling “as-is” and further believe that CHTR and EXPE are strong assets that should grow in value over time. However, to take advantage of LVNTA’s large NAV discount, we have chosen to partially hedge out underlying CHTR and EXPE exposures to magnify our potential returns. For example, if an investor were to completely hedge out LVNTA’s EXPE stake (shorting 0.16 shares of EXPE for every share of LVNTA) one could create a stub with almost 50% potential upside:

PRO FORMA ESTIMATED IMPACT OF HEDGE AS OF 3/30/2016

Risks:

The most significant risk is deterioration in the fundamentals of LVNTA’s underlying operating businesses (mainly EXPE and CHTR and to a lesser extent CHUBA/B and bodybuilding.com). This risk can be somewhat mitigated through hedges of the underlying EXPE & CHTR securities, if so desired. There is also the risk of an adverse IRS ruling related to the proposed spin-offs and/or that the spin-offs do not close the current discount to NAV. Finally, there is the risk of value destructive capital allocation and/or corporate governance, although we believe Malone’s long-term track record of value creation is phenomenal.

Catalyst

Announced spin-offs and stock repurchases