An Asset Based Valuation of Liberty Ventures ($LVNTA) Shows a 19% Discount to Net Asset Value
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Main Topic: LVNTA's 19% margin of safety discovered by doing an asset based valuation
Some of you may recall the podcast episode I did about John Malone, the master financial engineer (episode 33) and his creation of shareholder value through the Liberty Complex. I laid out for you most of the different entities and what their holdings are.
Liberty Ventures is just one of many entities in what we call the Liberty Complex. Imagine that the Liberty Complex is like a college campus with a bunch of buildings laying around. Each building in the Liberty Complex is an entity that holds interests in other entities.
In this episode, I am going to walk through a valuation Liberty Ventures (LVNTA) and show how this entity is selling at a deep discount to the sum of its parts.
There are really three four main types of approaches to valuation:
In episode 20 I introduced you to a sum-of-the-parts valuation method that I am going to use today on LVNTA. This method is really useful when a business is full of different kinds of assets and operations. LVNTA is a perfect candidate for this approach to valuation.
In an 8-K filing on April 4, 2017, Liberty Interactive Corp and General Communications, Inc. (GCI) entered into an agreement whereby “Liberty Interactive will acquire GCI through a reorganization in which certain Liberty Ventures Group (“Liberty Ventures”) assets and liabilities will be contributed to GCI in exchange for a controlling interest in GCI. Liberty Interactive will then effect a tax-free separation of its controlling interest in the combined company (to be named GCI Liberty, Inc. (“GCI Liberty”)) to the holders of Liberty Ventures common stock in full redemption of all outstanding shares of such stock.”
The effect of this somewhat complex transaction with leave a free-standing Liberty Ventures with an actual operating business (GCI) at its core.
Before the transaction closes, LVNTA is what is called a “tracking stock” with no real operations behind it. Through this transaction, LVNTA will become a regular common stock, a piece of real operating businesses. As I will show, this tracking stock is selling at a large discount to what it will be worth when the transaction closes.
Let’s start with what assets and operations LVNTA has. Here’s a list that you can get from the company’s website:
|GCI Enterprise Value at Deal Value||TBD|
|Shares of Liberty Broadband Corp (LBRDK)||42.7mm|
|Shares of Charter Communications||5.4mm|
|Shares of Lending Tree||2.8mm|
|Share of ILG (ILG) - Lodging||16.6mm|
As you can see, shares in other public companies comprise the majority of the assets at LVNTA. This will make the valuation a bit easier to do, and easy to automate.
What kind of liabilities should we consider in our valuation?
So some long term debt, and some preferred stock, not too onerous. Are there any off-balance sheet liabilities? Nothing apparent from the company’s 10k filing.
To prepare the asset based valuation, we start by calculating the value of each of the individual assets. Let’s start from the top with GCI Enterprise Value at Deal Value. This represents the value of GCI to Liberty shareholders.
In the GCI deal, shareholders of GCI are receiving $32.50 per share for an enterprise value (capitalization) of $2,678mm at the time the deal was announced, including debt. So we will use $2,678mm as our estimate for GCI’s value.
Although the GCI value is a good estimate, the reality is that Malone and company can recognize and capture value that others don’t see. This is most likely true in the case of GCI and that means probable upside from the price they paid. At the deal price, the premium paid was about 50%, but the levered premium was only 20%.
So let’s put the value of GCI of $2.7b at the top of our asset values and move on to the public shareholdings. The values of LBRDK, CHTR,TREE,FTD, and ILG are easy to calculate if you know the number of shares held by LVNTA, and we do:
|Ticker Symbol||Current Price (7/25/17)||Shares Owned (mm)||$ Value (mm)|
So now we know the value of all the pieces and can put them all together in the asset based valuation:
|Net Asset Value|
|GCI EV @ Deal Value||2,678|
|Preferred Stock o/s||172|
|LVNTA S/O (mm)||107|
|NAV per Share||$68|
|Price / NAV||81%|
As you can see from the math above, total Net Asset Value is $7.3B, divided by estimated shares outstanding after the GCI transaction of 107mm. Keep in mind that this is just a moment in time and will fluctuate with stock prices.
Will this transaction close the approximately 19% gap between the tracking stock price and the net asset value after close of the transaction? Here’s a quote from Greg Maffai, Liberty’s CEO and Malone’s main man:
“We are pleased to announce this transaction with GCI,” said Greg Maffei, Liberty Interactive President and CEO. “GCI is the largest communications provider in Alaska, generates solid cash flow with upside potential and is a strong fit with the largest businesses in Liberty Ventures. This transaction will ultimately create a standalone Liberty Ventures, reducing the tracking stock discount and enabling an asset-backed QVC Group.”
The transaction is expected to close in the second half of 2017
Disclosures: Long LVNTA, CHTR
Ask JB: When is it safe to buy commodities producers?
Thanks for all your answers to my various previous questions.
I would like to know how you go about extremely cyclical resource stocks. I notice that they typically have high/negative PE and low PB when the commodity price is low, and low PE and high PB when commodity price is high. The return from bottom to top for those stocks, from what I see, are simply crazy, like 20-100x. But it also seems like they have very real possibility of going bankrupt during the commodity bear market, especially an extended one.
I wonder if you invest in such stocks, and if you do, what do you look for in these companies? Enough cash to burn for extended period of time? Low cost? Management track record?
Thank you so much for you time and effort in making this podcast, I have received a ton of value and I wish you can reach a broad audience quickly.
JB Says: My experience has been to only buy commodities based business when the commodity is priced at below the cost of production, usually in a panic of some kind. The criteria you use to select one to buy would be the ones with the least or even better, no debt. Debt is what drives most companies into bankruptcy.
1. Buy when commodity price is below the cost of production
2. Buy the low cost producer
3. Make sure the low cost producer has low or no debt
4. These companies are not long term holdings
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