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
Related:
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)
You need to account for the tax on the value of the publicly traded stakes. On Ventures’ books, a lot of the publicly owned stocks are carried at a value much much lower than the current market price (because many of them are accounted for on an equity basis).
If you were to hard liquidate Ventures now, you’d get somewhere around $20/share (give or take $10.. I may have calculated things wrong). The premium is because people are applying a discount on the deferred tax liabilities. The present value of them is lower than their book value… but depends entirely on when the tax will be paid. It’s hard to say when Liberty will sell their shares and whether or not they will buy back their debt (both has occurred in the past).
Here is an old writeup: http://glennchan.wordpress.com/2012/07/12/special-situation-opportunity-liberty-ventures/
If you read through Ventures’ filings where insiders have made comments, they thought that Ventures would start trading in the range of a few to several million dollars (though that was before Expedia and Trip shot up in value). The memo to employees had an example share price of $20.
Great writeup Glenn. The valuation is a monster once you start really diving into the debentures, derivatives, and taxes. With a quick and dirty method of taking the DTLs and debentures at face value, it is fairly valued now – but that still does not discount the current holdings for complexity, etc. On the other hand, face value for liabilities they will continue to defer is draconian. I admit that I do not understand all the moving parts, and that holding LVNTA right now is largely a bet on the jockey. We will see!
This structure is very strange. In essence, they created two different share classes with equal voting rights and then issued more shares on top of that through the Ventures rights offering. It’s a creative way of showing the individual performance of their operating units without a spinoff, but no matter which shares you buy you are getting the same thing. Effectively it’s nothing more than a secondary offering presented in a unique way. Maybe it will prove that they were previously undervalued, but regardless I feel like there has to be some sort of arbitrage opportunities between these two listings. Even if they were undervalued before, it shouldn’t matter which stock you purchase at this point. This can get confusing.