Liberty Ventures: not that interesting at $40

Now that Ventures (see old writeup) is trading, it seems that its price is fair and not particularly undervalued.  (I don’t know if I made a mistake as to Venture’s cash balance and how the cash payment on the Motorola debt was handled.  Ventures may have ended up with more cash than I thought it would.)

So last time I checked, Ventures had a liquidation value of around $643M.  There are roughly 28.6M shares out Ventures outstanding (both A and B, pre-rights offering; the number may be a little off due to buybacks).  Ventures at $44.85 gives a market cap of $1.56B.  You can divide by 0.9375 to account for the dilution from the rights offering… this gives an adjusted market cap of $1.664B.

The difference between $1.664B and $0.643B can be thought of as the discount on Ventures’ various deferred tax liabilities.  That’s a $1021M discount on $2,435M of total deferred tax liabilities.  To put it another way, the market is saying that the $2,435M Ventures will have to pay in tax is worth about $1,414M right now.  (Or you can say that it is similar to $1,414M in debt with a 8% interest rate due in 7.06 years.  Or 6% interest rate debt due in 9.3 years.)

At $20-30 I will probably get interested in Ventures.  I guess I am disappointed that it is trading so high.  This memo to Liberty Interactive employees suggested a trading price of $20 for LVNTA shares (“20.0  LVNTA Market Price post-distribution”).  Damn you efficient markets.

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16 thoughts on “Liberty Ventures: not that interesting at $40

  1. Glenn,
    I just stumbled upon this posting and I am thoroughly unimpressed with this very lazy analysis. Your valuation completely ignores the most important and valuable asset of the company — $4.7B or so of payments from Liberty Interactive over the next 18 years. If Malone can make 3% return on that money the stock is worth roughly $65 today. Also you’re liquidation value appears to be off by at least 50% (you are way too low))…I am very glad that people like you misunderstand Ventures, this creates a great opportunity for people that actually roll up their sleeves and do the work.

    • Hi tiger style,

      Thank you for your comments.

      1- In regards to the $4.7B or so of payments from Liberty Interactive, what are you referring to? Are you referring to the tax deductions thrown off by the exchangeable debentures?

      In case you haven’t already, you can refer to the old writeup at https://glennchan.wordpress.com/2012/07/12/special-situation-opportunity-liberty-ventures/
      I did not assign any value at all to the tax deductions thrown off by the debt. I’ll admit that they do have some minor value. However, if you look at the history of Interactive, the “discount on exchangeable debentures” item in the liabilities hasn’t changed too much over the last several years as Interactive has bought back debt every year. It is possible that they will stop doing so in the future… in which case the “funky tax characteristics” of the debt will be worth more. However, they have to outrun the cost of their debt (cash interest + cost of call option – discount for favorable tax characteristics; I estimate somewhere around 7%-9%… maybe lower if you place a higher value on the funky tax characteristics).

      2- Perhaps you could clarify where I am off in terms of liquidation value. Do you have a writeup on this stock?

    • The liquidation value of Glenn is off. This mislead him to pass up a short term trading opportunity, as the stock will likely settle at mid 50s after the rights offer is done. On the other end, tiger style and others are still looking at the exchangeable with 5 yeas old glasses. Statement 155 has changed the way they are treated, no more annual tax advantage nor LINTA payment to LVNTA on the accretion to fair value.

  2. Alpha I don’t know what u mean. There absolutely is and will be a tax shield. LINTA will pay LVNTA roughtly $100M next year for the tax shield and that will grow each year. If you believe that John Malone can get a 3% return on the annual tax shield through 2030 and you discount that back to present value the stock is worth $57 (that’s NET of the deferred tax liabilities). If he earns 8% the stock is worth over $80. I use a 6% discount rate..why? Because the risk to the tax shield payments is simply the credit risk of QVC which is low and you can simply look at hte intrest rate on long term QVC bonds as a proxy for the discount rate.
    So, to me, the fair value of LVNTA is the PV of future tax shield, the assumed return on those payments plus the book value of LVNTA today. The book value today includes $2.0B of cash (inclusive of cash from rights offering and forward sale of Expedia shares) and $3.9B of stock in TWC, TWX, EXPE, TRIP, etc. The liability side is the face value of exchangeable debt and about $900M in taxes due on unrealzied gains on the stocks mentioned above.

    • the assumed return on those payments

      I’m not sure if one should discount future investment income in that manner. If you did, then you might have odd results like paying some ridiculous multiple of book value for Berkshire Hathaway. I think it’s more appropriate to say that $1 in future taxes in worth less than $1 today.

      The liability side is the face value of exchangeable debt and about $900M in taxes due on unrealzied gains on the stocks mentioned above.

      On the liability side you also have deferred taxes from exchangeable debentures repurchased in the past. This relates to an esoteric tax law… when they repurchased the debt, the tax wasn’t due until a few years after the repurchase. I can’t remember which part of the S-4 corresponds to this but I remember a part that corresponds to that.
      Of course somewhere in there are the green investments too.

    • Tiger. I do not see where the tax shield is. The advantage of the “comparable yield” on the excgangeables has been eliminated (since the Feb 2008 settlement with the IRS the NOL carryforwards have been reversed, also no more bifurcation of debt and call option and related accretion of non-cash interest as per new FASB 155). As I understand LVNTA has only been allocated $19m in tax assets as of 12/31/11 with no valuation allowance. Why LINTA would make these $100m payments? Maybe there is something I miss here. Also the deferred tax liability is higher than $900, there is $210+ on investments (much higher now), $321 on retirement of exchangeables as Glenn was mentioning and $69 for other items. We could apply a 30% PV discount to this liability, but besides this I do not see any other major tax asset. Additional comments very welcomed.

      • I don’t think that the tax advantage of the comparable yield has been eliminated??? It seems to me like Liberty has continued to make tax deductions for the comparable yield. I am not 100% sure on this but the information put out by tax lawyers suggest that the comparable yield deduction still exists.

        2- The IRS may have had a problem with the Time Warner debentures since the cash interest portion was so low. These debentures have been amended: the cash interest portion is much higher. (Also, the call and the put options can only be exercised on certain dates.)

        3- LVNTA and LINTA have a tax sharing arrangement. If LVNTA generates tax losses, it can apply these to LINTA’s profits and receive cash in return. This helps LINTA as LVNTA gets a free no-interest loan from the government; a better capitalized LVNTA is good for LINTA.

        Perhaps this is the tax “shield” that tiger style refers to…?

      • Glen,

        from Liberty Media 2008 10K, the same you quoted on the comparable yield issue:

        “Historically, we have not made significant federal income tax payments due to our ability to use prior year net operating (“NOL”) and capital losses carryforwards to offset current year taxable income. However, as a result of our February 2008 settlement with the IRS related to interest deductions on our exchangeable debentures, our NOL carryforwards were eliminated and we had taxable income in 2006 and 2007 on amended tax returns. Consequently, we made federal tax payments of approximately $152 million for the 2007 tax year during the first quarter of 2008. Based on current projections, we expect to remit federal tax payments for the 2008 tax year and beyond”

        Also:

        “… Effective January 1, 2007, Liberty adopted Statement of Financial Accounting Standards No. 155, “Accounting for Certain Hybrid Financial Instruments, an amendment of FASB Statements No. 133 and 140” (“Statement 155″)….

        … Under Statement 133, Liberty reported the fair value of the call option feature of its exchangeable senior debentures separate from the long-term debt. The long-term debt portion was reported as the difference between the face amount of the debenture and the fair value of the call option feature on the date of issuance and was accreted through interest expense to its face amount over the expected term of the debenture….

        … Pursuant to the provisions of Statement 155, Liberty accounts for its exchangeable senior debentures at fair value rather than bifurcating such instruments into a debt instrument and a derivative instrument. Decreases in the fair value of the exchangeable debentures are included in realized and unrealized gains on financial instruments in the accompanying consolidated statements of operations ”

        This language is not supportive of large tax deductions that generate NOL that can shield QVC profits. Again, the tax asset of LVNTA was $19m at beginning of 2012. Also LVNTA interest expense was $110m as of 12/31/11 vs non cash interest of just $5 million. Again I do not see evidence of interest-related tax shields. If there is other tax-shields they have to be of different source. What is the $100m that Tiger is talking about?

      • Hi Alpha Sigma,

        1- The FASB statement only relates to how the exchangeable debentures appear on Liberty’s balance sheets. It has nothing to do with how much tax gets paid to the IRS.

        2- Regarding how much tax is paid to the IRS: I guess I am not entirely sure anymore.

        There is some information here that suggests that Liberty will cash in their shares of Sprint/CL and Motorola and also buy back their debt:
        http://blogs.rockymountainnews.com/material_disclosures/archives/2008/03/libertys_irs_vi.html

        3- I can’t speak for Tiger. Perhaps he can clarify what he meant.

      • Essentially LVNTA gets to deduct a higher interest expense for the exchangeables for tax purposes than the actual cash interest. If you do the math on this you’ll see that it will enable LINTA to defer over $100M per year in taxes. LINTA will pay LVNTA each year for the right to use this tax shield. In 2030 or thereabouts, LVNTA will owe about $5.4B on these deferred tax liabilities. So LVNTA will get paid over $100M per year (this amount actually grows roughly 10% per year because the accrued value by which they calculate interest expense for tax purposes also grows) for 18 years, which is basically an interest free loan from the government. Malone will invest these proceeds in various businesses. Like I said if he generates a 3% compounded return on this cash flow the stock is very undervalued. I liken LVNTA to a venture capital fund that is trading at a discount to fair value with very modest return assumptions and whose portfolio manager is one of the best in the business.

  3. Some further clarity on my previous post…There are $1.3B of exchangeables (4%, 3.75%, 3.5%) that can use an interest rate of 9.33% on a weighted average basis for tax purposes. The accrued value of these bonds were about $3B at the end of 2011. So here’s the math….take $3B times 9.33% interest rate which is $281M. Now take the $1.3B fae value of the bonds times the true cash rate of ~3.75% and that gets you $49M which is the cash interest expense. The difference between $281M and $49M is $232M. Tax effect that at 40% and you get $93M which is the tax shield in 2011. So for 2012, you add the $281M mentioned above to the accrued vale and you get $3.245B. Repeat my math and you’ll see the tax shield for 2012 will be $102M. LINTA will pay that amount to LVNTA…this will continue until exchangeables expire in 2029, 2030 and 2031. Therefore, to simply look at book value of LVNTA without accounting for this tax shield income that LVNTA will generate would equate to substantially undervaluing the company.

    • Tiger,

      What you say is fascinating. But it is not supported by the financial statements. I wish it was. We built a nice position on this and we plan to sell at $55ish (our estimate of 25% discount to NAV). If your data were right we would make a mistake in selling.

      If this was really going on we would see $281m in interest expense in the LVNTA proforma 2011 income statement and $232m of non-cash interest adjustment to net income in the proforma 2011 cash flow statement (281 – 49). Instead we just have interest expense of $110m as of 12/31/11 vs non-cash interest of just $5 million. Therefore the numbers do not support the existence of this tax shield.

      • THe pro forma historial statement do not reflect what wil be true going forward, that is, LINTA will pay LVNTA for tax shield. If you don’t believe me read the bottom pf page B-23 in the S-4 which states: “it is expected that the Ventures Group will receive cash from the Interactive Group for tax attributes associated with the senior exchangeable debentures.” Take it one step further and call Investor Relations and simply ask them if what I am saying is true.

    • tiger style, terrific analysis of the DTL and the quasi-DTA (LINTA payments) which cannot be put on the books under US GAAP. My only question to you is where are you getting the tax basis of $3 billion on those 3 exchangeables? Did you model the IRS bond accretion based on the projected payment schedule in the indentures or did you get the number some other way? or backed out from the present DTL? Do you know how one can estimate the tax basis of the Viacom debentures that weren’t allowed further deductions 2008 onwards? There will be some trapped basis difference there (accretion from issue till 2008) which will cause taxable gain whenever the Viacoms are retired. How are you figuring in the Viacom 3.25s in your analysis? Thanks a lot in advance!

    • In hindsight, both investments turned out terrific in the 1.5 years after the split.

      Malone will repeat it again with the upcoming transactions!

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