Liberty TripAdvisor (NASDAQ:LTRPA) is a publicly trading holding company that is effectively the controlling shareholder of TripAdvisor, Inc. (NASDAQ: TRIP). Since the TripAdvisor stake is the company’s main asset, its fairly easy to track whether LTRPA stock is trading at a discount or premium to the current market value of TripAdvisor. Since 2018, Liberty TripAdvisor has traded at a discount to its Net Asset Value.
That should not come as a surprise. Holding companies tend to trade at a discount to NAV. But in this case, the only asset is a controlling stake in a public company, so we can ask ourselves which factor should be more powerful; the holding company discount versus the control premium?
But there is one element missing: Liberty TripAdvisor has relatively high financial leverage. You could argue that the implied blowup risk of the leverage should warrant a discount on the price investors should be willing to pay for the exposure to TripAdvisor. This definitely was the case but since events that have transpired during Covid-19, the structure of the leverage has is materially different today.
This is the primary problem with the whole LTRPA-to-TRIP-discount pitch. If someone tells you that TripAdvisor is cheap but Liberty TripAdvisor is cheaper, then he or she is representing the investment opportunity. Buying LTRPA is not a cheap way to get exposure to TRIP but rather a cheap way to leverage your exposure to TRIP.
But then again, that the leverage might not be so cheap after all.
From $3B to $100M in 6 Years
I’ll spare you the details, but here’s the short story:
When Liberty TripAdvisor was spun out of Liberty Interactive back in 2014, the NewCo took on a margin loan using TripAdvisor shares as collateral. The market value of Liberty TripAdvisor at the spin-off was around $3 billion.
As the market value of the TripAdvisor stock eroded the loan-to-value ratio of the Liberty TripAdvisor margin loan rose. In 2016, the company refinanced a part of its margin loan by borrowing $259 million against a Variable Postpaid Forward transaction. At the end of 2018, the margin loan obligation totalled $220 million and the VPF $267 million, or $487 million in total.
By 2019, Liberty TripAdvisor’s hand were increasingly forced. TripAdvisor paid out a special dividend of $3.50 per share in the fourth quarter of 2019, its first dividend since becoming a public company. It’s safe to assume that the primary reason for the dividend was Liberty TripAdvisor’s need for cash (Liberty TripAdvisor controls 58% of the shareholder votes at TripAdvisor and they share the same chairman).
Liberty TripAdvisor used the cash it received from the special dividend to pay off the VPF obligation. Earlier in 2019, the company had made certain amendments to the margin loans. As a result, at the end of 2019, Liberty TripAdvisor owed an outstanding amount of $355 million in margin loans, bearing 3.225% interest rate.
Then Covid hit and the margin loan got margin called…
The Certares Transaction
With few options available, Liberty TripAdvisor needed to act fast. On March 16, the company announced a deal with Certares Management, whereby Certares would purchase $325 million of a new 8% Series A Cumulative Redeemable Preferred Stock. The company would use the proceeds to pay down the margin loan.
The transaction would free Liberty TripAdvisor from margin call and offer the company flexibility in terms of how it would pay the 8% dividend (it can pay by issuing LTRPA stock). As a result, a blow-up risk was exchanged obligations with a higher cost of capital.
But Certares is not a charitable organization and when booking a knight in shiny armour at a short notice, you’ll inevitably have to fork out. In the filings accompanying the original press release, the cost was revealed: the Accretion Factor.
In short, the Preferred Shares have to be redeemed no later than five years from the issue date for a predefined Redemption Price. Certeris also has a Put Right that will them to enforce a redemption a year after the issue date. The redemption price will be adjusted by an Accretion Factor (see the image below).
The Accretion Factor increases the value of the Preferred Shares by a factor of 80% of the price appreciation of TripAdvisor from a base price of $17.08 per TripAdvisor share. Essentially, through this transaction, the Liberty TripAdvisor lowered the downside (blow-up) risk at the cost of sacrificing upside potential.
Liberty TripAdvisor’s NAV-scenarios
When I read the filing I made a simple model to track the NAV discount and to see the implied NAV adjusted for the Accretion Factor under different valuations of TripAdvisor stock (you can check out the model here).
One thing I noticed shortly after the Certares deal was that the discount would hover around 20-25% and then if the price of TripAdvisor would go up, the discount would close. Then it would go down and the discount would magically appear again. I found this odd until I realized that perhaps the marginal buyers weren’t factoring in the accretion (see this Seeking Alpha article as an example).
You can get non-recourse leverage by investing in TripAdvisor through Liberty TripAdvisor. And you can acquire LTRPA shares at a discount to NAV. At current prices, if you wanted to invest $10,000 in TripAdvisor, you could get the same exposure to TRIP by investing around $3,000 in LTRPA.
The problem is that you will not be getting the full benefit of the leverage on the upside. You will be sharing it with Certares. To put this into perspective, if TripAdvisor goes back to $50 per share, the Redemption Price of the Preferred Shares would increase by $500 million.
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