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Welcome to Episode 61 of Special Situation Investing where today we will cover Liberty Media’s spin-out of Braves Inc. To begin, let’s cover some history surrounding Liberty Media and its founder, and current Chairmen of the Board, John Malone.
John Malone has a storied history in the business world and elevated himself to self-made billionaire status largely through cable and media deals made over many decades. For those interested in his career, I highly recommend the book Cable Cowboy. The book gives some fascinating insights into Malone’s unique approach to value creation and justified the entire book even though it only covers his early life and business deals through 2005.
From 2006 on, Malone’s Liberty Media has handily outperformed the S&P 500 with a combined annual growth rate of 18%. The combined performance of Liberty Media’s spin-offs and separations over the last decade have returned an additional 16% above the S&P 500 for the 12 months following the spin-off date.
We believe that two factors drive the excess returns of Liberty Media. First, John Malone is an owner operator with a proven track record and has skin-in-the-game. At the time of this writing, Malone owns 48.4% of Liberty Media and is active in the companies operations through his role as Chairmen of the Board.
Second, the owner mentality drives the company to incubate value in a way that most professionally managed companies can not. Rather than see themselves as in the xyz business, Liberty’s leadership see themselves as capital allocators and this leads them to follow value wherever they find it.
For those of you looking for even more examples of John Malone’s business prowess, you can revisit Joel Greenblatt’s 1999 investing classic, You Can Be a Stock Market Genius. Greenblatt’s Liberty Media case study begins with the question “How do you make a half billion dollars in less than two years?,” answer, “Start with $50 million and ask John Malone. He did it.”
With that very broad background out of the way, lets delve into the current structure of Liberty Media. Broadly speaking, Liberty is divided into three sections which are Sirius XM, Formula 1, and the Atlanta Braves. Each of the three sections is represented in the market by a myriad of ticker symbols that include LSXMA, LSXMB, LSXMK, BATRA, BATRK, FWONA, and FWONK. To further confound the situation, the ticker symbols are tracker stocks and not your typical publicly traded stock. The difference between a standard stock and a tracker is that the tracker means to represent the performance of the underlying asset but doesn’t come with the same ownership claim that a typical stock would represent for the investor. John Malone is probably as well know for business complexity as he is for outstanding performance so I must admit that I wasn’t surprised to find needless complexity from the outset of my research.
So what is Liberty Media planning to do through the recently announced spin-out? In short, they plan to fully separate the Atlanta Braves and its associated real estate development into its own stock that will be called Atlanta Braves Holdings. The remaining assets of the company will themselves be streamlined into three distinct and newly issued tracking stocks. These tracking stocks along with the Braves spin-out will replace the existing business structure. The Atlanta Braves spin-out is what initially attracted us to the stock but seeing what was included in the three remaining trackers has us equally excited about the entire transaction.
To keep things clear, however, let’s first focus on the Braves spin-out. The spin-out will include 100% ownership of the Atlanta Braves along with The Battery Atlanta, which is a 1.5 mm square foot collection of leasable space surrounding the Braves new stadium. The real estate properties include office, hotel, dinning, and entertainment space that enhance the area with concerts, conferences, UFC fights and other events.
The current market cap for the Braves and Battery Park sits at about 1.8 billion with 1$.6 billion in assets, $142 million in cash and $700 million in debt. Last year the Braves generated $496 million in revenue and the Battery generated $39 million in revenue. Several qualitative factors influence the valuation of Braves Holdings including the longstanding success of the team, the breadth of the fan base and the high level of sellout games that the team generates. On the Battery side of the spin-out you have a property that garners over 10mm visitors per year placing it just below Disney's Epcot center in terms of annual visitors as well as the fact that Atlanta is now the 6th largest urban market in the US.
So how does this part of the transaction make money for holders of the spin-out? We think there are two catalysts with one being a much bigger driver than the other. The biggest value driver is the team itself. Owning a team is a bit of a trophy for the world’s billionaires and the teams themselves sell for higher and higher prices with each passing year. Here are a few recent comps to give you an idea of the valuations we’re seeing, the Minnesota Timberwolves sold to Alex Rodriguez for $1.5 billion, The Utah Jazz sold for $1.6 billion and the Denver Broncos sold to a member of the Walton family for $4.65 billion. With those prices in mind you can see the potential buyout value of the oldest team in baseball that is also a recent winner of the World Series.
The second, and much less important value driver, would be a separate, post spin-out, buyout of the team and The Battery real estate development. The Battery property could fit nicely into Brookfield’s top tier real estate portfolio or some other similar corporation and even if The Battery isn’t bought out in the near term it would offer a profitable stub style remainder following an Atlanta Braves purchase and resultant payout to shareholders.
After covering the spin-out, lets now go through the three remaining tracker stocks one by one. Beginning with Sirius XM (and we admit it’s the piece we know the least about) you have a profitable company that dominates an admittedly niche market. Nested inside Sirius XM is 100% owned Pandora and Stitcher which produced a surprising amount of subscriber and add revenue given what we think their industry market share is.
Next up you have 100% owned Formula 1 which monetizes ticket sales, add revenue, experiences, and media rights surrounding the global race series. Here we believe the valuation thesis is similar to the baseball team as owning a race brand like Formula 1 is more than a business and serves as status symbol.
This was illustrated by recent news of a Saudi Arabian sovereign wealth fund bid for the Formula 1 franchise that offered well over $20 billion for the current $16 billion market cap company. Liberty Media was not interested in selling which likely indicated that they value Formula 1 at some number above what the Saudis offered. As you can see by the offer, however, when a group of people has more money than god they’re looking for both an investment and the status that goes with ownership of an iconic brand.
Finally the third tracking stock will represent Liberty Media’s 31% ownership of Live Nation. Live Nation is a stock that we’ve been looking at separately so discovering that Liberty owned a 31% stake and that the stake in the company was part of the spin-out was an exciting two-for-one discovery.
The investment thesis for Live Nation stems from three things. First, the COVID lock-downs severely damaged Live Nations earnings in 2020 and 2021 as the business model is essentially ticket sales to live events. Next, the record sales business model for entertainers is being disrupted by low cost streaming services. Artist can no longer rely on record sales to make their money and as such are headed back out on the concert circuit to monetize in person events. Third, the Department of Justice began a probe regarding Live Nation anti-trust allegations. Essentially, Live Nations ownership of Ticketmaster raised questions surrounding a possible monopoly on live events.
Now, either the threat of a breakup will pass or Live Nation will be forced to split but either way the DOJ probe has pushed the stock down into the low $70 dollar range off of its recent $120 per share high. In summary, you have two massive, but temporary, blows to Live Nations stock price and earnings against a backdrop of a business that’s actually improving as more artist go on tour.
Okay, a few more hodgepodge items before we wrap up. The first is that Liberty Media has several small stakes in unrelated ventures that could one day create value for shareholders. For a complete list see the company’s recent investor presentation but to just name a few you have a 1% stake in Clear Secure, a 4% stake in INRX, a 7% stake in Denver’s Kroenke Arena, and a 30% stake in Meyer Shank Racing. The company also holds a 33% stake in Associated Partners, a 20% Stake in Liberty Media Acquisition Corp, and an 80% stake in Liberty Technology Venture Fund. The second list is essentially Liberty Media owned corporate structures tasked to identify and incubate future investments.
Insider and institutional ownership of Liberty Media also turned up some interesting things. For starters, and as stated before, John Malone owns 48.4% of the company, Berkshire Hathaway owns 8.4% of the company, and Seth Klarmin’s Baupost Group owns 1.9% of the company. Mario Gabelli’s Gabelli fund also had significant holdings in the Braves and Formula 1 portion of Liberty Media and have recently touted the businesses potential as a buyout target.
Because Liberty Media is currently represented by seven tracker stocks that encompass four major underlying business entities and because those business entities are spread among the existing three major divisions of Sirius XM, Braves, and Formula 1, we believe that investors will have to purchase a representative sample of the three current business segments if they want to receive Braves holdings stock along with the newly created three tracker stocks. I fully expect more details to be announced as the spin-out approaches but we do recommend that investors begin to build up their positions opportunistically as the spin-out details are announced and the transaction date approach.
We like that this spin-out has multiple success vectors including Malone’s track record, the company’s spin-off track record, and the distinct and compelling value propositions encapsulated in the various distinct business lines. The multiple paths to success approach is appealing when compared to spin-offs whose value stems from a single catalyst that if thwarted leaves the investor in the lurch.
With that we wrap up Episode 61 of Special Situation Investing. As always we’ll keep you posted as this and other investment opportunities develop. We thank you for your support and for the boosts you’ve sent our way over Fountain. Our Fountain account was down for several weeks in early January so we may have missed a boost or two during that time, but we’re back up and running now, and again thank you for any boosts you send our way.