Should Liberty Expedia Holdings Even Exist?

Liberty Expedia Holdings (LEXEA and LEXEB) is a holding company that was spun out of Liberty Interactive in 2016. The company owns two main assets, a controlling stake in Expedia Group and its wholly owned subsidiary Bodybuiding.com.

A Classic John Malone Spin-off

You might ask yourself why does Liberty Expedia Holdings even exist? The company owns shares in Expedia Group worth about $2.9 billion as of this writing, which means that more than 99% of the company’s assets consist of Expedia stock. Since Expedia is public, is there any reason why the company should not just dissolve and distribute the shares to its shareholders?

A spin-off of such as this one is actually a signature move of John Malone, the controlling shareholder of Liberty Ventures and Liberty Expedia Holdings. Malone has frequently used tracking stocks and spin-offs as a tax-efficient tool to unlock value when his conglomerates have traded at a discount to their Net Asset Values.

Control and the Barry Diller Proxy

Although Liberty Expedia Holdings’ economic interest in Expedia Group is only 15.6%, 12.8 million shares of the 23.6 million shares that the company holds in total are Class B supervoting shares. Each Class B share has 10 votes against 1 vote per Common Expedia Group share. As a result, Liberty Expedia Holding effectively has control over Expedia Group with a 52% voting interest.

At the time of the spin-off and as part of a long-standing agreement between John Malone and Barry Diller, the Chairman of Expedia, Diller has held a proxy to vote Liberty’s shares in Expedia Group. As of March 2018, the proxy agreement expired.

Correlation between LEXEA and EXPE

Since Liberty Expedia Holdings (LEXEA) began trading, the shares have moved in tandem with the shares of Expedia Group (EXPE). Given that 99% of Liberty Expedia’s Assets consists of common shares in Expedia Group, this should not come as a big surprise.

Although the asset side of Liberty Expedia’s balance sheet consists almost entirely out of Expedia stock, their balance sheet is leveraged. When Liberty Expedia was spun off from Liberty Interactive (where it belonged to the Liberty Ventures tracking stock), the Company borrowed $350 million through a margin loan secured by shares of Expedia Group and distributed approximately $299 million to Liberty Interactive.

In June 2017, the Company refinanced by issuing $400 million of Exchangeable Debentures. The Company used the proceeds of the Debentures to repay the outstanding borrowings under the margin loan. At the end of 2017, the Company held a cash balance of $109 million.

Liberty Expedia Discount to NAV

There are various reason for Liberty Expedia to trade at a discount to the net value of its holding in Expedia Group:

• Expedia is a much bigger entity than Liberty Expedia Holdings. This makes EXPE more susceptible to inclusion into indexes, giving it a wider range of potential investors.
• There are currently 34 analysts covering Expedia Group, compared to 1 analyst coverage of Liberty Expedia Holdings.
• There are additional costs for operating the separate holding company, which should diminish the absolute return of LEXEA relative to EXPE.

But is LEXEA trading at a discount to NAV? The current market capitalization of Liberty Expedia Holdings is about $2.46 billion:

The mark-to-market value of it’s Expedia shares is a little less than $2.9 billion. With a net debt at the corporate level just under $300 million, the Net Asset Value of Liberty Expedia Holdings currently about $2.6 billion. This corresponds to a discount to NAV of about 5%:

Conclusion: Currently No Arbitrage Opportunity

Taking into account the additional cost and eventual tax inefficiencies of the holding company structure, we believe that the value of the Expedia stake is close to fully reflected in the current market valuation of Liberty Expedia Holdings.

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