Liberty TripAdvisor (LTRPA) – Discount to NAV – 45% Upside

Current Discount: 30%

Target Discount: 0%

Potential Upside: 45%

Expected Timeline: Q2 2023

LTRPA is a tracking stock for Liberty’s 29.2m shares in TripAdvisor, with 21% economic value and 56% voting power in TRIP. Over the past two years, LTRPA has most of the time traded at or above its NAV, but recently TRIP price shot up and left LTRPA trading at a 30% discount to NAV. While tracking stocks often trade at discounts to intrinsic value, in the case of LTRPA such discounts have historically rather quickly reverted to the mean.

In early 2020, when the pandemic hit travel stocks, LTRPA was forced to restructure its balance sheet. As a result of the new debt structure and high leverage at LTRPA hold-co level, the volatility of the tracking stock relative to its NAV has increased. This created multiple arbitrage opportunities. LTRPA has been covered on SSI 3 times already, with all 3 arbs ending up pretty well over short periods. You can check out those write-ups for more background – Aug’21, Mar’22, and Aug’22.

The current setup with a 32% discount to NAV has some additional peculiarities and is more than a simple play on discount mean-reversion. TRIP/LTRPA is reportedly in discussions with potential buyers. In the company sale scenario, the tracking stock structure would collapse and the discount would be eliminated, resulting in almost 50% upside for the hedged trade. If TRIP is acquired at a premium to today’s price, the return would be even higher.

Historical LTRPA NAV and share price volatility are illustrated in the chart below.

ltrpa volatility

* Note: The chart above shows negative NAV for illustrative purposes only. LTRPA equity value is floored at zero.

 

TRIP/LTRPA in sale discussions

On Feb 12, LTRP / Maffei filed 13D/A, noting the ongoing discussions about a potential sale of both LTRP and TRIP. It’s noteworthy how specific and direct was the language used in this disclosure (emphasis is mine):

On February 9, 2024, the Reporting Person’s board of directors authorized the Reporting Person to engage in discussions with respect to a potential transaction (“Potential Transaction”), pursuant to which all of the outstanding stock of the Reporting Person and all of the Issuer’s outstanding Common Stock and Class B Common Stock would be acquired concurrently for cash. In any such Potential Transaction, it is anticipated that (i) all outstanding shares of Common Stock and Class B Common Stock of the Issuer would receive the same per share cash consideration, and (ii) all outstanding shares of common stock of the Reporting Person would receive the same per share cash consideration (with the amount thereof to be determined based on the per share consideration that would be payable for the underlying shares of the Issuer owned by the Reporting Person following satisfaction of outstanding liabilities, including consideration due to holders of the Reporting Person’s preferred stock). The board of directors of the Issuer has formed a special committee comprised of independent and disinterested directors of the board of directors of the Issuer (“Special Committee”). The Special Committee has authorized the Issuer to, among other things, engage in discussions with respect to a Potential Transaction, subject to certain guidelines. If any such Potential Transaction is consummated, each of the Reporting Person and the Issuer would cease to be publicly traded companies.

I have no idea why such specifics had to be included in the 13D filling and if this really carries any meaning or whether I am reading too much into the tea leaves. The concurrent press release by TRIP was more vague only noting the formation of the special committee “to evaluate any proposals that may be brought forward for a potential transaction, and any alternatives thereto” and the hiring of the financial advisor. On the same day, Reuters reported that LTRP “has been approached by at least one bidder for its controlling stake in Tripadvisor”.

The timing for a potential transaction makes sense as most of LTRPA’s massive holdco debt pile ($636m net debt vs $796m in value of TRIP shares) matures in March 2025. The sale of LTRPA (which is a proxy for the controlling stake in TRIP) or potentially the entire TRIP would be the cleanest and most preferable way of dealing with the pending debt maturities. Maffei’s 13D filing emphasized that both voting and non-voting stocks would receive the same consideration in a sale scenario.

The announcement of the sale transaction would likely eliminate/reduce the tracking stock discount, potentially resulting in a 45% upside on a hedged trade. The discussions seem to have just started and the timeline is uncertain, however, given the historical volatility of the LTRPA discount to NAV, there’s a decent chance it could narrow down significantly over the coming weeks even without any further developments with regards to potential sale.

Several major LTRPA shareholders were buying shares right upon or after the announcement of strategic discussions (the indicated ownership % a for the whole LTRP, whereas reg fillings show % of class A shares owned):

  • Small-cap value fund Cove Street doubled its LTRPA stake from 5% to 10.8%.
  • Canadian PE boutique Crimson Asset Management also doubled the ownership from 6.8% to 14.2%.
  • Investment advisory firm Wittenberg Investment Management filed a new 13G with a 5.1% stake.
  • Triad Investment Management filed a new 13D with a 5% stake which was later changed to 13G after strategic discussions were announced.

 

Capital structure of LTRPA

At current prices ($27.2 TRIP and $1.40 LTRPA), NAV of the tracking stock is at $160m or $2.07/share.

The balance sheet of Liberty TripAdvisor:

  • TRIP stake = $796m. LTRP owns 16.4m of TRIP common stock and 12.8m of class B stock, 29.2m in total. This adds up to 21% economic and 56% voting interest in TRIP.
  • Certares preferreds = $276m. LTRPA has 187.4k of pref. shares outstanding that are owned by Certares. Interest is 8% in TRIP shares or cash. The shares are redeemable in March 2025. The redemption price is the higher of $1000 par + unpaid dividends or the $1000 par multiplied by an accretion factor. The accretion factor is calculated as 80% of the change in TRIP share price above $17.08/share. At today’s TRIP prices, the accretion factor is equal to 1.47.
  • Holdco debt = $383m. It includes $330m in exchangeable notes, redeemable at principal amount on March 27, 2025. And also $53m variable prepaid forward, which matures in November of 2025.
  • Holdco cash = $23m.

 

Hedging and potential return scenarios

Aside from the uncertainties of whether buyout discussions will result in any transaction and whether the LTRPA discount will narrow, there are additional complexities with this arbitrage. While TRIP borrow is cheap and plentiful, hedging would require maintaining a large short TRIP exposure and potentially adjusting it as prices move. Due to the embedded holdco leverage, the sensitivity of LTRPA NAV varies depending on TRIP share price levels. E.g. at TRIP=$27, LTRPA NAV sensitivity to TRIP share price stands at 3.6x, meaning that a 1% change in TRIP price causes a 3.6% change in LTRPA NAV. But, as depicted in the table below, this sensitivity will change substantially with moves in TRIP share price.

ltrpa sensitivity

While dynamic hedging would theoretically be the most optimal strategy to maximize returns, it’s very difficult to implement. But simply hedging at a fixed 3.6x ratio (i.e. $1000 long LTRPA matched with $3600 short TRIP) should result in a favorable outcome as long as the discount to NAV narrows from the current 30% either due to any transaction or with a simple reversion to the mean.

The table below depicts various outcome scenarios of the 3.6x hedged trade with various end-states for TRIP share price and eventual LTRPA discount. The return percentages are calculated relative to the LTRPA long position and using today’s starting prices TRIP=$27.2 and LTRPA=$1.4.

ltrpa profit loss table
* Note: Due to leverage LTRPA equity value (i.e. NAV) becomes zero when TRIP share price drops below $21. Obviously, in such scenarios, LTRPA share price doesn’t go to zero, but continues to trade as an option on TRIP share price recovery (see the historical NAV and share price graph above). Historically the trading range during zero NAV periods used to be around $0.3-$0.6/share. Thus, actual returns in scenarios at low TRIP share price levels ($23 and under) would be more favorable than those illustrated above in the table.

Even though I think that any transaction would promptly eliminate/narrow the discount between the stocks, my focus is specifically on TRIP/LTRPA arbitrage rather than the buyout and valuation of TRIP per se. Nevertheless, given large exposure on the short leg of the trade, it is worth considering at what price could TRIP’s buyout happen. In the recent VIC article (Dec 2023), the base case target was $30/share (suggesting minimal losses on the short leg from current levels) and the bullish target stood at $40/share. At the higher valuation, the arbitrage would result in losses only if the discount widens from today’s 30%.

Before the Feb 12 disclosures, TRIP price stood at $22.4/share and LTRPA’s at $0.8/share. At the time, the tracking stock was trading at a premium to NAV (priced as an option, as per the note above). In the scenario where these stocks would return to pre-announcement levels, this arb would still result in 10-20% gain. However, following the transaction TRIP released strong Q4/annual results recently with annual revenue reaching record levels and 20% YoY growth, while EBITDA grew 13% YoY. Thus, pre-announcement prices might no longer be relevant.

The important thing to consider is that due to the uncertain timeline and very large short TRIP exposure, the wait for any transaction or discount mean reversion could become quite uncomfortable if TRIP share price continues to climb up, while the discount to NAV persists or even widens. This is a risk, however, I think scenarios in the bottom left corner of the table above are a bit draconian and counterintuitive – it’s hard to imagine a scenario where TRIP spikes upwards (potentially due to further news on potential transaction), but LTRPA discount only widens. Also, historically, discounts of 50% and similar levels never held on for more than a few weeks and then returned to minimal levels or even premium to NAV promptly. I think the same would probably happen here and any larger losses on the hedged position should only be temporary.

 

A few more notes/risks

  • A full sale of TRIP/LTRPA might fail to materialize and instead, LTRPA shareholders might get screwed in some kind of different transaction or might be left with no deal at all. Liberty has had numerous tracking stocks and some of those structures were eventually eliminated rather cleanly, e.g. the spin-off of BATRA last year (covered on SSI) or this year’s merger of LSXMK into SIRI at NAV or the merger of LSTZA and LCAPA in 2011. Others, e.g. Liberty Interactive in 2017 had a much more complex structure that involved a merger, a split-off and some further asset transfers between the affiliated Liberty companies. What I’m a bit worried about is that if the TRIP sale does not materialize, the nearing maturities of LTRPA’s debt/preferreds will force management to come up with some kind of a messy transaction to restructure and transform LTRPA’s balance sheet. This could completely derail the current setup making the outcome difficult to predict.
  • Malone himself is long out of LTRPA, whereas his protege Greg Maffei has a rather poor track record of creating shareholder value. This has been well overviewed in this post on YAVB. Maffei controls 38% of the voting power in LTRP, although his economic interest is just 6%.
  • LTRPA might face additional tax liabilities in case the sale of the owned TRIP shares is not structured efficiently. However, Liberty has been an expert in structuring tax-favorable deals for shareholders. The recent LSXMK collapse into SIRI at NAV will also be tax-free. There is a solid chance Liberty/management will figure out how to set up any LTRPA/TRIP transaction in a tax-efficient way.
  • There might be other risks or caveats that I’m missing. Feedback in the comment section would be highly appreciated. LTRPA/TRIP arbitrage is not something new and undiscovered. Liquidity on both stocks is also decent. So it is quite likely the market prices the risks correctly.

21 Comments

21 thoughts on “Liberty TripAdvisor (LTRPA) – Discount to NAV – 45% Upside”

  1. Any way to structure this as a collar or similar to cap the downside in case TRIP rallies?

    Reply
    • I have not looked at structuring this trade via options. It’s complicated enough with TRIP equity short, however, if you find a cheap way to reduce the risks, I’m all ears.

      Reply
  2. Too much uncertainty on the transaction. They might spin off Viator (which could be valued at 2-3bn usd alone, based on private comps like GetYourGuide or Klook). They might extend the Cetares pref maturity (but gives them a bigger cut…)? Very hard to tell

    Reply
    • My questions is, because Cetares economics is tied to the Stock Price of TRIP, why did LTRPA make such announcement that drives up TRIP stock prices? Or are they obliged to disclose such “potential discussion”?

      Reply
      • That’s part of the mystery. I do not think there was any obligation to release such information (especially with specifics of how all shares would receive equal cash consideration). Quite often the company discloses discussions only after rumors are leaked. Maybe this is just a way for Maffei to put TRIP in play and attract interested parties. So hard to tell if there is any interest in acquiring the companies or whether this is just ‘For Sale’ sign.

  3. Have they commented on whether trip is an actively traded business (ATB)

    How else do they get a sale/merger done w/out tax impact?

    Reply
    • I am not able to shed more light on potential taxation leakage, however, Liberty has done a number of tax-free transactions with their tracking stocks (the current SIRI/LSXMK is one of these) and I assume Maffei will a way to structure one here as well.

      Reply
  4. Thanks for bringing this to our attention. I remember the trade well from August of 2022 (although I couldn’t find my old spreadsheet). Interestingly, assuming no change in TRIP’s price, the NAV of LTRPA has fallen by about $0.30 (I assume that is due to its heavy debt burden).

    Reply
    • Correct, the change in NAV since August 2022 is primarily due to the increase in holdco net debt:
      – Holdco debt increased from $371m to $383m.
      – Holdco cash decreased from $33m to $23m.
      – Combined this is a $22m difference, which is around $0.28 per LTRPA share.

      On top of that, the total LTRP share count (including class B stock) increased from 75.6m to 77.2m.

      At lower TRIP prices (under $25), change in NAV would also be affected by accumulated unpaid dividends on Certares preferreds. At higher TRIP prices, these dividends are not relevant as the value of preferreds is calculated based on the accretion factor.

      Reply
  5. Whole sit reminds of LSXMK/Siri. Apparent spread but trade (at least net long LSXMK) has not been a slum dunk this year.

    Reply
  6. is there mistake in variable prepaid forward value? 27.2 * 2.4m = $65.28m, so original discount is 35% if no other numbers are intact? or I missing something? can you also please help me in understanding how accretion factor 1.47 can be calculated and cash 23m?

    1
    Reply
    • If I understand this ‘Variable Prepaid Forward’ correctly, then:
      – Liberty would need to deliver less than 2.4m shares (or equivalent dollar amount) to the creditor if TRIP price is below $23.64. i.e. liability is less than $57m.
      – If TRIP price is between $23.64 and $29.24, then LTRPA would still only repay dollar equivalent amount of $57m (i.e. as if TRIP was trading at a $23.64 floor price).
      – Only if TRIP price moves above $29.24, the required repayment would increase together with the value of TRIP shares.

      VPF liability is recorded on balance sheet at $53m (which is what I have included in my calculations), so to fully account for the pending repayment, this liability would need to be increased to $57m. Subsequently, LTRPA’s NAV would be reduced by $4m or 2.5%, negligible difference. For TRIP prices above $29.24, the change would be higher (equivalent to the value of 2.4m shares), but if there is a TRIP buyout at higher prices from today’s, this trade would be a big win regardless of the exact calculations of VPF liability.

      Do you see this differently?

      1
      Reply
    • And your two other questions:
      – The accretion factor is calculated as 80% of the change in TRIP share price above $17.08/share.
      – $23m of cash is the difference between LTRPA and TRIP cash (as LTRPA consolidates both entities).

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      Reply
  7. This is just a general question that does not pertain to LTRPA in particular, but what news sources do y’all check to see if there have been any material updates on a given security? Yahoo Finance, Google News, Business Wire are my regular go-tos, but I am fairly new to this, so I imagine there may be better options…

    Reply
    • Obviously, regulatory filings and company press releases are essential. The sources that you’ve listed are fine. I would also add the Seeking Alpha news feed, it tends to catch the news/rumors that other platforms miss. Twitter is also nice, although there can be a lot of noise sometimes.

      Reply
  8. I am closing LTRPA / TRIP arbitrage idea. After yesterday’s sell-off in both stocks, the discount has been eliminated and LTRPA now trades close to its fair value.

    This trade worked out well for the 4th time – a nice 24% gain in 1.5 months (if the return is calculated relative to the long LTRPA position).

    Look forward to the fifth one.

    3
    Reply
    • There is always option value in LTRPA equity part even if TRIP stake is not sufficient to cover the debt. So it will likely trade at $0.3-$0.6/share as it did in the autumn of 2023.

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