(Malone) Tracking stocks versus spinoffs

Advantages of spinoffs

Spinoffs can hurt bondholders if the debt covenants are weak and allow the company to spin off significant assets backing the debt.  This benefits the equity as the spin-off that is unencumbered with debt can issue debt at lower rates.

Spinoffs make a company easier to understand and allow more institutional investors to own the stock (e.g. sector/industry-specific funds).  This may increase the share price.  This can generate value if the stock is used as acquisition currency in rolling up poorly-managed companies (e.g. LBYTA).

Advantages of tracking stocks

In a tracking stock structure, losses at one tracker can offset profits at another tracker.  Spinoffs have minor tax inefficiencies because they cannot do this.

Tracking stocks have complicated financials, conflicts of interest between trackers (sometimes leading to lawsuits), and are slightly more difficult to analyze than standalone companies because trackers are liable for other trackers’ liabilities.  The complexity may cause tracking stocks to sell at lower prices than they otherwise would.

Personally, I’m not sure if tracking stocks generate value for investors in aggregate.  Tracking stocks create more opportunities for Malone to trade against his shareholders or to use overpriced stock as acquisition currency (trading against non-Liberty shareholders).

Spinoffs of stock (DTV)

This form of spinoff reduces Malone’s voting control over a company.  This is unusual because Malone is obsessed with control.  I suspect that Malone does this if he intends on ultimately selling his position in a company.  Part of this is because major insiders are vulnerable to lawyer-parasites if they sell shares and the share price happens to fall significantly on news.  If they cease to be insiders, they can sell shares without worrying about lawsuits.

Spinning off stock also reduces the market impact of Malone selling his stake in a company.

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