For followers of John Malone and his family of companies, frequent restructurings are nothing new. And he continues to provide special situation investors plenty to do. On the heels of the announced Starz spin, Liberty Interactive executed a previously announced splitoff of the company into new tracking stocks Liberty Interactive (LINTA) and Liberty Ventures (LVNTA). Since the company is remaining one legal entity, the transaction is not a spinoff or separation per se. Rather, the new tracking stocks are intended to “reflect the separate economic performance of the businesses and assets to be attributed” to two separate divisions of Liberty Interactive.
The new Liberty Interactive tracking stock will reflect the operations of the television and internet retailer QVC, Liberty’s 34% stake in Home Shopping Network, and a handful of wholly-owned e-commerce companies (Backcountry.com, Bodybuilding.com, Provide Commerce, inc. and others). Liberty Ventures will reflect Liberty’s ownership in its minority stakes of public companies: AOL, Expedia, Interval Leisure Group, Lending Tree, TripAdvisor, Time Warner Cable, and Time Warner Inc. (Note the presence of previous spinoff pair Expedia and TripAdvisor, themselves spun from IAC Interactive.) Some of Liberty Interactive’s cash and debt has been attributed to both groups.
It is important to note that, following the Transaction, holders of Liberty Interactive common stock will have no direct investment in the businesses or assets attributed to the Interactive Group, and holders of Liberty Ventures common stock will have no direct investment in the businesses or assets attributed to the Ventures Group. Rather, an investment in either tracking stock will represent an ownership interest in ourcompany as a whole.
So there you have it – not a spinoff. But some of the same dynamics are in play. There is a large “parent” and a diminutive “child” – LINTA’s new market cap is $9.65bn versus LVNTA’s $1.2bn. Liberty Interactive is a mix of operating companies and minority stakes which produce no cash. The new tracking stock structure mostly separates the operating companies and asset plays. This may help highlight the true financial performance of the operating companies (LINTA), which will start to report results free from the pile of non-consolidated assets. Simultaneously, it will become much easier to value the Ventures Group as a quasi-standalone unit.
Speaking of Liberty Ventures, here is my back-of the-envelope net asset value (NAV) estimate, based on share prices at an arbitrary time on Friday:
- 2% of AOL63m
- 26% of Expedia 1.8bn
- 30% of Interval Leisure Group 327m
- 25% of Tree.com 39m
- 26% of TripAdvisor 1.2bn
- 2% of Time Warner Cable 555m
- 2% of Time Warner, Inc. 821m
- Cash 1.3bn
- Debt 3bn
That is roughly 3.2bn of value net of debt, split by 27.55m shares outstanding, or $116.50 NAV per share. This ignores deferred tax liabilities of over $2bn – because John Malone has a history of tax-efficient transactions, and nobody expects Ventures to be broken up and sold.
The splitoff transaction had one further wrinkle. Owners of Liberty Interactive received rights to buy more shares of Liberty Ventures at a 20% discount to the volume-weighted average price during Liberty Ventures’ first 20 trading days (one right for every three Venturs shares). This means that once the rights are exercised, there will be a big dose of dilution, especially if Ventures continues to trade far below its NAV. Let’s say that Ventures trades at 45 until the rights are priced, in which case they will have a $36 exercise. Liberty will receive $330m in proceeds from the rights for a Ventures NAV of 3.54bn – now split among 36.7m shares, for a new per share NAV of $96.50. This is one of those interesting moments where the investor cannot ignore Mr. Market – the value of his investment is determined, at least in part, by how it trades for the next 20 days!
Disclosure: The author is long LINTA and LVNTA
S-4 Registration Statement (Liberty Interactive IR)
Expedia/Tripadvisor Articles (StockSpinoffs)
Liberty Interactive Corp.: A Top Retailer In The U.S. For Under 6x Earnings (Thomas Lott on SeekingAlpha.com)