Liberty Ventures is currently in the process of spinning off Liberty TripAdvisor Holdings.
- TripAdvisor shares (normal shares and supervoting shares) will go from Ventures to TripAdvisor Holdings.
- Holdings will take out a $400M margin loan.
- Holdings will pay Interactive $350M for BuySeasons. (EDIT: This may be wrong. See the bottom of this post.) It will hang onto $50M.
I don’t think that Interactive, Ventures, or TripAdvisor will be that attractive. TripAdvisor has extremely high growth and seems to be a wonderful business. However, its multiple is very high (a P/E ratio of 66). I think that Malone may sell his personal stake in TripAdvisor for something cheaper.
The underlying businesses
In order of quality…
BuySeasons: This e-Commerce business has terrible economics. It has seen a significant downwards trend in its revenues and profitability. It has changed CEOs 3 times in the past 4 or so years. In YE2012 it violated the covenants on its amended revolving credit and term loan agreement. The S-1 filing states: “The projected use of TripCo’s corporate cash will be to primarily fund any operational cash deficits at BuySeasons.” This suggests that BuySeasons is a money-losing business.
E-commerce: In aggregate, Liberty’s e-commerce businesses have seen their revenues grow while profitability has gone down. It seems that they are in a very tough industry. Because of this, I don’t think that they are great businesses.
QVC and HSN: Their growth is roughly going neck to neck with inflation. In the future, these businesses may see a threat from people watching content through the Internet. Currently, the home shopping networks capture viewers who are channel surfing. These companies intentionally try to get placement on channels that will capture more channel surfers. I don’t know if a Netflix/Youtube future will hurt these businesses.
Expedia: Its earnings have been volatile. I’m not smart enough to figure this one out. One could make the argument that it has grown over the past few years (factoring in amortization of intangible assets) and will grow in the future at a reasonable rate.
TripAdvisor: TRIP has seen its operating income grow from $125M in 2008 to $295M in 2013.
The end game for TripAdvisor Holdings
As mentioned previously, Liberty TripAdvisor Holdings will be a weird pairing of TripAdvisor (a very high quality business) and BuySeasons (one of the worst businesses that Liberty Interactive owns). I’m not sure what the reasoning for that is. Perhaps Malone wants to make the e-commerce segment look better by getting rid of the business that is obscuring the growth and profitability at the e-commerce segment. In any case, BuySeasons likely won’t make a meaningful difference as to how well or how poorly TripAdvisor Holdings fares. It is too small.
I think the idea is for TripAdvisor Holdings to merge with TRIP. Then Malone will leave the board and cease to be an insider. He will then be able to sell his personal stake in the company without insider trading restrictions or other having to sell other Liberty shareholders’ TRIP shares. Malone can then use the proceeds to purchase high-growth companies with lower valuations (e.g. LMCA, Liberty Broadband, etc.). Or he can simply do other things with his wealth.
Tracking stock considerations
When Holdings is spun out, there will be significantly fewer assets at Ventures. Suppose that Holdings will have a market cap of $3.4B (*don’t take this number too seriously). Ventures has a market cap of $5.3B. Spinning off around two thirds of Ventures’ value will leave less assets at Ventures to collateralize the ~1.9B debt at Ventures. This is harmful to Interactive shareholders since Interactive is liable for the debt attributed to Ventures. I believe that Holdings overpaid for BuySeasons to compensate Interactive shareholders for taking on increased credit risk.
Is the deal fair to Ventures shareholders?
I don’t know.
Malone owns a slightly greater percentage of Interactive than Ventures.
Liberty Interactive’s Strategy
Interactive’s presentation to shareholders (PDF) struck me as unusually promotional for Maffei and Malone. Obviously Malone is focused on discounted cash flow, free cash flow, etc. The presentation talks about revenue growth, valuing the stock based on price-to-sales, and other metrics that Malone probably does not use. The presentation also has unusually good graphic design compared to Liberty Media’s presentations and Interactive’s past presentations.
I think Malone wants to raise the share price so that Interactive can make accretive acquisitions of other, better companies. He wants to trade up.
Later on, it is expected that Interactive will split itself up into a pure play home shopping company and a pure play e-commerce company. This may raise the share price and/or make tracking stock shares more attractive as an acquisition currency.
Ventures is basically a highly levered investment vehicle. Interestingly enough, Malone hasn’t made any major investments with Ventures other than buying supervoting TripAdvisor shares. He seems to have exercised a lot of discipline given that he did not identify attractive opportunities for Ventures (with Charter going to Liberty Media). In the meantime, Ventures has been deleveraging.
Ventures has made some green energy investments for tax purposes. The word “green” and the phrase “tax equity” do not appear at all in Interactive’s 10-K. The 10-K does state the amount of “Alternative energy tax credits”.
Overall, I’m not that excited about Ventures given that Malone does not seem to have identified any brilliant investments.
The bottom line
Currently, I am more interested in other parts of Malone’s empire. My guess is that the companies with the best future growth prospects are:
- Discovery (DISCA/B/K)
- Liberty Global (LBTYA/B/K)
- Charter, which will be under Liberty Broadband (LBRDA/B/K)
- Sirius XM, under Liberty Media (LMCA/B/K)
*Disclosure: The only part of Malone’s empire that I own is LMCA. I haven’t done my research on Discovery.
EDIT (8/18/2014): I may have screwed this one up. There was a 8-K filed today that states:
On August 15, 2014, Liberty Interactive Corporation (the “Issuer”) effected a change in attribution of (a) its subsidiary, BuySeasons, Inc., from the Liberty Interactive tracking stock group to the Liberty Ventures tracking stock group and (b) $25,000,000 in cash from the Liberty Ventures tracking stock group to the Liberty Interactive tracking stock group. This change in attribution was effected in preparation for the Issuer’s previously announced spin-off of all of the capital stock of Liberty TripAdvisor Holdings, Inc., which is anticipated to occur on August 27, 2014, subject to the satisfaction or waiver of all conditions.