Liberty TripAdvisor Holdings (LTRPA) – Capital Structure Arbitrage – 50% Upside

Current Price: $5.06

Target Price: $7.71

Upside: 50%

Expiration date: TBD

This idea was shared by Vladimir.

 

The idea is a capital structure arbitrage, when the same assets are trading at a different price – and in this particular case it is Liberty TripAdvisor (LTRPA). The play here is to go long LTRPA (a vehicle that owns TRIP shares) and to short TripAdvisor (TRIP) for nearly 50% profit or more. Recent recapitalization transaction partially eliminated the reasons why the spread appeared in the first place and cleared the path towards return to historical trading levels where for most of the time the market priced LTRPA above its NAV due to trip control premium.

Great write-up on TRIP/LTRPA has been published on Sumzero (this idea is under the paywall), but with a slightly different twist – the idea was to buy LTRPA as a cheaper alternative for TRIP as a re-opening trade. But since TRIP has rebounded above its pre-covid levels, and the discount between LTRPA/TRIP widened significantly it is much less risky now to place a fully hedged trade and play for discount elimination.

 

Some background

I would rather not go into details on John Malone and his stellar track record and jump straight into one of his companies in the Liberty empire.

In December 2012, Liberty Interactive acquired voting control in TripAdvisor. As a result of the transaction, Liberty Interactive held 31m TRIP shares representing 22% economic and 57% voting interest. Before the transaction, Liberty Interactive was the largest shareholder but did not control the company.

In August 2014, Liberty Interactive announced a spin-off of its TRIP ownership into a publically listed tracking stock with a ticker LTRPA (Liberty TripAdvisor). LTRPA is basically a tracking stock to TRIP and currently owns c.29m share worth c.$1.5bn.

TRIP background is not needed here as in my proposed trade you don’t have to believe in its prospects. It is just worth mentioning that the COVID recovery thesis in TRIP has already played out and the company trades at a level higher than pre-pandemic (see graph below). Therefore, I would suggest a fully hedged trade.

Historical TRIP share price:

 

Covid crisis and Certares

At the peak of the Covid crisis on March 16, 2020, LTRPA announced an agreement with Certares that it will purchase preferred redeemable shares in the amount of $325m with an 8% coupon paid either by cash or by TRIP shares. LTRPA required that money to pay down the margin loan it had against TRIP shares.

The catch with the redeemable shares was that their value was adjusted by the accretion factor linked to the growth of TRIP shares. The ratio calculated as 80% of the growth of TRIP shares above $17.08. Thanks to the swift recovery, accretion factor grew from 1.0 to 2.66 (at the current spot price) and caused the value of these prefereds to grow from the nominal $325m to almost $1bn. Moreover, Certares had a right to put its preferred shares to LTRPA in one year after the transaction closed.

LTRPA started trading at a massive discount to NAV only once the Covid crisis hit and the company had to add this expensive leverage to its balance sheet. Some discount to NAV might be warranted due to this incremental leverage on the balance sheet of LTRPA, but not to the extent seen since the beginning of 2020. Keep in mind that the discount in the chart below is based on LTRPA (and not LTRPB) price and already accounts for the accretion factor – i.e. NAV is calculated by deducting the full market value of the preferred shares on particular dates.

 

Recent recapitalization

On the 22nd of March, LTRPA in its press release stated that it will repurchase up to $300m worth of preferred shares issued to Certares. The valuation of the Certares shares will be determined based on the $1000 nominal amount per share multiplied by an accretion factor. At the date of the transaction the accretion factor resulted in 2.7x – definitely a home run for Certares. The sources of repurchase – senior debentures at 0.5% 2051 exchangeable for TRIP shares at a premium for c. $280m and TRIP shares for the amount of $90m.

In the Repurchase Agreement, Certares has (1) agreed to permanently waive the right to redeem Preferred Shares prior to the mandatory redemption date, (2) granted Liberty TripAdvisor the option to repurchase all or a portion of the remaining Preferred Shares on or after March 27, 2024, and (3) agreed to hold the Tripadvisor shares for a period of at least six months. Additionally, Certares withdrew its director from BoD. The remaining preferred shares owned by Certares will continue to be adjusted on the accretion factor, which works in both ways, i.e. if TRIP shares decline the outstanding value of preferred shares will decline as well.

On April 6, LTRPA issued another press release stating that it sold an additional $30 million aggregate principal amount of its 0.50% exchangeable senior debentures due 2051.

Overall, Liberty TripAdvisor has repurchased a total of 137,586 Preferred Shares under the Repurchase Agreement in private transactions, representing 42% of the Preferred Shares originally held by Certares, for an aggregate value of approximately $373 million. Payment by Liberty TripAdvisor to Certares in connection with the Certares Transaction consisted of a combination of approximately $281 million in cash from a portion of the net proceeds from the previously announced offering of the Debentures; and approximately $92 million aggregate value of TRIP, consisting of 1,713,859 shares.

Following the completion of the Certares Transaction: Liberty TripAdvisor had outstanding approximately 188,000 Preferred Shares with a redemption value, as of March 22nd, 2021, of approximately $509 million; and Liberty TripAdvisor owns approximately 16.4 million shares of TRIP common stock and approximately 12.8 million shares of TRIP Class B common stock (which are convertible into TRIP common stock on a 1- for- 1 basis), representing an approximate 22% economic interest and 58% voting interest in TRIP.

 

LTRPA balance sheet and NAV calculation

Please note, that ‘Discount to the stake’ on EV basis appears artificially small only because LTRPB shares are currently trading at excessive levels for no particular reason. LTRPA and LTRPB used to trade rather in line with each other before COVID. Were LTRPB shares to revert back to LTRPA levels, current discount to the stake on EV basis would stand at 14%.

 

Catalyst

Certares still owns more than 50% of the initial stake of preferred shares, which it will redeem either at the discretion of LTRPA any time prior to or at March 2024. To pay out Certares in full LTRPA will be required to sell some of its shares in TRIP. While such redemption by itself may not result in the closure of the discount, it should definitely accelerate negotiations between LTRPA and TRIP as TRIP would not like to find itself in a position when LTRPA will be bought out by the third party at a discount to TRIP share price.

After the recent Certares transaction, LTRPA has stabilized its situation by agreeing with Certares to waive its put right. At the same time LTRPA became an interesting target for anyone interested in taking over TRIP control. As LTRPA is no longer under pressure from Certares, it has some leverage in potential negotiations with other interested parties (Booking.com, Trivago, TRIP) and may call Certares shares if the future buyer would like to streamline the capital structure of the company.

 

Why the situation exists

  • LTRPA is a small-cap with only $480m equity value, complicated balance sheet, and shareholder structure;
  • The company recently went through a recapitalization procedure (Certares preferred shares buy-out), that changed the dynamics of NAV compared to TRIP shares and it is not clear if the market has already fully digested this new dynamics.

 

Risks

  • In my NAV calculation, I have assumed the share price of LTRPA equals LTRPB (which has the same economic interest, but 10 times more voting power), while in fact LTRPB currently trades at a significant premium, which is mostly explained by very low ADTV in the stock. At the same time, there is an argument that in the case of the takeover LTRPB may receive a significant premium at the expense of LTRPA holders;
  • Lack of a hard catalyst. Certares agreed to waive its put right, so its redeemable preferred shares may sit on the balance sheet of LTRPA till March 2023. Nonetheless, I believe that the whole situation with Certaries eventually will result in the merger between TRIP and LTRPA.
  • Potential value-destruction for minority shareholders. The whole deal with Certares looks like value destruction with c.$500m wiped out from LTRPA. My push back on this point – at the time of the transaction, obviously, no one thought that stock will make nearly 3.0x since March’20. At the time, the transaction seemed not that bad – no margin call even if TRIP/LTRPA price goes further down.

18 COMMENTS

  1. Yardir

    Hey,
    thanks for sharing the idea. I got a qq regarding the catalyst. You write “and may call Certares shares if the future buyer would like to streamline the capital structure of the company”. As you also write above, doesn’t the call right of LTRPA only come into effect from March 2024 onwards? I.e., the preferreds can only be redeemed before March 2024, if both parties mutually agree.
    So, if Certaries doesn’t want to, there’s no way for LTRPA to get out of the accretion factor.
    (For those also worrying about the redemption date of the preferreds – it’s March 27 2025 –
    https://www.businesswire.com/news/home/20210322005367/en/Liberty-TripAdvisor-Announces-Agreement-to-Repurchase-Portion-of-Preferred-Shares-From-Certares)

    1. over2u

      Yes, you are right. Call option is effective only from March 2024, not before.
      Also I would like to comment on NAV calculation – currently NAV calculated based on different LTRPA and LTRPB stock prices and LTRPB trades 8x higher than LTRPA. LTRPB gives its owner higher voting shares (10:1) and the same economic share (1:1) compared to LTRPA. The difference in share price between LTRPA and LTRPB in my view explained by limited float of LTRPB, therefore if only LTRPA share price used for EV calculation the upside on EV basis will be higher than in the table.

  2. snowball

    I am thinking what’s optimal hedge ratio, for this paired trade, which involve both NAV discount and embedded leverage.

    Calculation done below is based on: LTRPA price = $5.2; TRIP price = $48.7; and LTRPA+LTRPB shares outstanding of 75.1 million.

    I think there are three different approaches to hedging this trade.
    (and I am leaning toward approach C, because “A” hasn’t taken into account embedded leverage of LTRPA, and “B” assumes elimination of discount).

    A. $1 of TRIP for $1 of LTRPA: 1 LTRPA = 0.107 TRIP

    B. Delta of LTRPA NAV with respect to TRIP: 1 LTRPA =0.273 TRIP

    LTRPA owns 29.29 million shares of TRIP.
    The effect of 188,000 preferred shares is to “reduce” this ownership by 11*80%=8.8 million shares.
    LTRPA’s net ownership of TRIP thus is about 20.49 million shares .
    Dividing by 75.1 million of LTRPA+LTRPB shares outstanding, we get a hedge ratio of 0.273

    C. Embedded leverage: 1 LTRPA = 0.179 TRIP

    LTRPA NAV has an embedded leverage of about 1.67X, i.e. the increase in TRIP price by 1% leads to 1.67% increase in LTRPA NAV.

    We take into account this embedded leverage, and short $1.67 of TRIP for each $1 of LTRPA.

    Any comments on and corrections of my thoughts are very much appreciated.

    1. over2u

      In my view, to calculate the optimal hedge value you also need to take into account accretion factor for pref shares. Based on my calc it should be 1.89x leverage, i.e. 1$ LTRPA = 1.89$ TRIP. At the same time it should be dynamic, i.e. if NAV discount decreases, the leverage factor should decrease as well. So, ideally I would take a bit less than 1.89x to account for NAV discount decrease.

  3. mkellsat

    What about a long LTRPA short LTRPB trade? It looks way out of whack compared to the historical spread.

    1. over2u

      Given extremely low liquidity in LTRPB, the risk of short squezee is too high in my view.

  4. over2u

    From the recent call – no buybacks to eliminate the spread:

    “So on the LTRP discount as you know there is relatively limited volume in LTRP. And it has fluctuated from being a premium at various times to a discount. And it was made more complicated by the structure we have and the uncertainty around Certares.

    And if you go back and remember when Liberty Trip was spun away from Liberty Ventures it actually had that margin loan. We twice restructured it to try and manage our downside once through a variable forward and once through encouraging a large dividend at TRIP both of which reduced our balances yet we still ran into trouble in the bottom of the pandemic.

    So, we are cautious in our capital structure. We’re very excited about what we’ve put in place because we feel it’s relatively bulletproof. And we have increased our upside in the potential at TRIP after the restructuring with Certares. So, after clearing up that capital structure and aligning us with TRIP more appropriately, we will look at alternatives on things we can do about cleaning up the discount.

    But I think a lot of it is going to be educating the market about how that alignment has improved and how we are better positioned going forward with that runway and the uncertainty removed.”

  5. WhtKngt

    If you look at this on total Market Cap of the LTRPA & LTRPB classes then the situation actually trades at a premium to NAV, no? I see NAV as TRIP value of $1,076 (ref $37), less the net debt of about 721m (11mm cash, $360m pfd’s, $330m debentures, $42m variable fwd) to yield about $355m in NAV, sum of the two market capitalizations is $375m. Am I missing something here or do i have it right but the common thought is ignoring the illiquid B’s price?

    1. snowball

      If we own only LTRPA, then LTRPB’s inflated price will not have any impact on the value of our equity claim.

      The NAV discount for LTRPA has narrowed significantly in the past several weeks. It used to be much wider.

      The spread can be very volatile because of the very high leverage embedded.

      I also notice that IB has raised margin requirement on LTRPA. This may potentially create opportunities in the future when volatility catches some weak hands by surprise.

  6. snowball

    The LTPRA discount to its estimated net asset value seemed to have been eliminated in recent days.

    LTRPA and TRIP share prices have fallen by a similar level.

    However, LTRPA’s value was supposed to (but didn’t) behave like a 2.5X leveraged version of TRIP.

  7. dt

    You are correct. TRIP shares have declined due to the general pressure in the travel sector and the resilience in LTRPA share price has almost eliminated the discount. LTRPA now trades at 7% discount to its NAV – this is in line with the historical levels a few years before the pandemic. Further upside from this trade seems to be limited, unless one expects LTRPA to start trading above its NAV due to TRIP control premium.

    We are closing this idea with 32% return in 4 months. The whole upside has been generated by the short leg of the trade using Vladimir’s suggested leverage ratio of 1$ LTRPA = 1.89$ TRIP.

    Vladimir, thank you for sharing.

  8. snowball

    LTRPA is now trading at a significant premium (>20%) to its estimated NAV, as a result of LTRPA falling much less than its predicted NAV (supposed to be 3-4X TRIP’s price movement) in recent days (in particular in today’s sell off).

    Is it a good idea now to short the LTRPA premium. betting that it will revert back to a discount?

    The original write-up mentioned many reasons why LTRPA should not trade at a discount, but are there any good reasons why it should trade at a premium?

    I can think of two:
    (1) LTRPA is valuable to those who would like to take a leverage bet on TRIP but do not want to take on explicit leverage.
    (2) Control premium. The TRIP voting rights become more valuable,, as TRIP becomes more likely an M&A prey.

    There are also counter-arguments why it should not trade at a premium.
    (1) If TRIP falls below $17, LTRPA may run into financial trouble again.
    (2) It was trading at a discount historically when TRIP was at similar depressed price levels (or below).

    1
    1. AMIR

      What’s your calculation for NAV? I got it trading as wide as ~10% premium, I might be missing something…

      While i wish i still had the spread tightening trade on today, I unwound at around a 10% discount, I put on the spread widening trade the last couple days.

      I think it should revert back to a discount, while the control shares are worth something, I think the typical hold co discount and also the risk of TRIP falling below $17 warrant this to trade at a 10-15% discount

      1. snowball

        Based on Friday closing prices (LTRPA $2.27, TRIP $26.75), my estimate of LTRPA NAV is $1.92. In other words, LTRPA is trading at about 18% premium to NAV.

        However, note that LTRPA is currently a 3.2-3.8X leveraged version of TRIP (depending on whether I use LTRPA price or NAV as denominator to calculate the leverage ratio ;see my April 2021 comment above).

        So the estimated spread is very volatile, and the premium was very high in early hours of Friday session. (and since came down a bit). Just to illustrate the effect, if LTRPA price remains unchanged, and TRIP falls by just 3 ppts, then the premium can increase by >10 ppt.

        I have a new concern: the meme crowd. They could arrive, drive up LTRPA prices, and create a short squeeze.

        LTRPA seems to something that can attract them:
        *Buy on the dips of a pandemic-hit sector (think AMC, Hertz, Carnival);
        *Visually “under-valued” vs historical trading ranges;
        *Very low price per share (it’s not unthinkable that it can become <$1 penny stocks next week).

        1
  9. amirattaar

    LTRPA trading at a significant premium again…

    1. snowball

      It’s extremely difficult to hedge this trade at this highly levered level.
      LTRPA currently has a 6X levered exposure to TRIP, based on my calculation.

      2
  10. g4734g

    I trust your numbers, but overvalued at under $2……….another Malone holding QVC getting just crushed as well…..what are you calculating for current NAV on LTRPA? meanwhile LRTPB still 8-10X LTRPA

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