BATRA - Liberty Braves: Potential Trophy Asset Sale At A Significant Premium

Summary

• Liberty Media is set to split-off MLB team Atlanta Braves into an asset-backed stock.
• The split-off will open the door for a potential sale of the franchise.
• Given precedent industry transactions, the Braves might fetch north of $50/share in a sale - a 47%+ upside.

This is an interesting split-off play with a potential to turn into a company sale. There are a number of interesting aspects in this setup, including favorable industry M&A dynamics, low relative valuation and involvement of two activists. Most importantly, the about-to-be split-off company is a trophy asset which will likely garner multiple buyout interests. The idea was first highlighted to Special Situation Investing subscribers last month.

Liberty Media (LBTYA) is a mass media company holding ownership stakes in private companies Formula One (FWONK), SiriusXM (LSXMK) and MLB team Atlanta Braves ( BATRA ). In 2016, Liberty created tracking stocks for the three assets, allowing investors to gain exposure to each of the business segments. Tracking stock is a type of equity security issued by a company which tracks the business performance but does not entail actual ownership of the underlying assets. In Nov’22, Liberty Media announced plans to split-off the Atlanta Braves into a separate asset-backed stock. BATRA holders are set to receive shares of the new entity which will own the MLB franchise as well as the surrounding mixed-use development project the Atlanta Battery. The split-off, which will require approval from Liberty’s common stockholders, is set to be completed in H1’23.

The situation seems to present an opportunity for substantial potential upside. BATRA is currently trading at 4.6x TTM revenues. While such a multiple might seem quite generous, it is very important to keep in mind that the Atlanta Braves is a trophy asset - the club is the oldest professional sports franchise in the US and one of the most successful MLB teams in recent history. Moreover, the current valuation multiple pales in comparison to seemingly worse MLB/NFL/NBA company acquisitions where the target teams were valued at 6x-9x revenues. Given that a sizable portion of investors cannot hold BATRA due to its tracking stock status, the stock might very well re-rate closer to or above these levels after the conversion into an asset-backed stock. At a much more reasonable 6x revenue multiple BATRA would be valued at $50/share or 47% above trading levels.

Two prominent activists and BATRA shareholders, Mario Gabelli’s GAMCO (owns 6% of BATRA) and Breach Inlet, also see substantial upside potential in BATRA, catalyzed by the upcoming conversion. The activists have highlighted that the planned split-off seems to have a decent rationale behind it. The split-off announcement back in Nov’22 came rather shortly after the activist investor Breach Inlet sent a public letter to Liberty Media’s board, claiming that BATRA has been trading below its intrinsic value given its tracking stock status. Another reason for the discount noted by the activist has been Liberty’s rather convoluted capital structure (e.g. intercompany obligations, multiple share classes and special voting rights of LM’s management), a part of which is BATRA. The activist has claimed that Liberty should pursue a separation of Atlanta Braves in order to unlock the discount. Liberty’s management has recently explained the rationale for the move along similar lines - from the S-4 filing (emphasis mine):

" Separating SplitCo will allow the Split-Off business to receive greater market recognition in the hands of a standalone issuer and is expected to provide greater transparency for investors with respect to SplitCo’s dominant business, the Braves, which is expected to result in a trading price of the SplitCo common stock that reflects a reduced valuation discount than that currently applied to the Liberty Braves common stock . The Split-Off is also expected to reduce the trading discount currently associated with the Liberty SiriusXM common stock. The historical discount to Liberty’s tracking stocks is due to the complexity of the Liberty Media capital structure and uncertainty of future corporate opportunities , among other things, and by reducing such complexity through the separation of SplitCo and continuing to explore opportunities to simplify its portfolio of assets, Liberty Media believes the trading prices of the SplitCo common stock and the New Liberty SiriusXM common stock will reflect a reduced valuation discount than that currently applied to the Liberty Braves common stock and the Liberty SiriusXM common stock , respectively, although there can be no assurance that this will occur."

Importantly, the planned Atlanta Braves split-off might open the door for a potential company sale. According to Forbes , “companies with tracking-stock structures have to convert them into asset-backed stocks before the companies can be sold”. While I am no tax expert, it appears that the split-off would let the company avoid/minimize paying corporate tax if the team is sold down the road - this has been explicitly noted by Liberty’s CEO:

[But] what it does mean is if somewhere down the road the team is to ever be sold, we can avoid corporate-level tax. We have no plans to [sell], but the opportunity for an investor to purchase or come and look is probably cleaner now.

Quite interestingly, in January the activist GAMCO also highlighted that Atlanta Braves might be a potential takeover candidate as a number of MLB and NFL companies are currently up for sale. Given the limited supply of professional sports franchises (as noted by GAMCO) and increasing number of billionaires in the US (up from 607 in 2019 to 735 in 2022), the activist’s conclusions are not exactly shocking. Other than increasing demand for scarce professional sports assets, potential sale might be likely given more favorable MLB-wide regulations. Since 2019, the league has allowed institutional investors to take minority stakes across multiple franchises. The changed rule implies that institutional investors, aside from investing in franchises themselves, might help potential acquirers by writing large checks needed for acquisitions. Another noteworthy aspect is that since 2018 NFL owners are allowed to own a different professional sports team in cities that have an NFL team. Perhaps not surprisingly, sports team M&A dynamics have also been highlighted in the Liberty’s latest investor presentation published after the split-off announcement.

Valuation

Relative valuation suggests there is ample room a potential acquisition offer above current share price levels. Precedent transactions (also highlighted by the activist Breach Inlet) are provided below:

• Miami Marlins - acquired at 6x revenues in 2017.
• New York Mets - bought at over 7x sales in 2020.
• Denver Broncos - acquired at 9x revenues in 2022.
• Minnesota Timberwolves - bought at 7.5x sales in 2021.

It is worth noting that Miami Marlins has been among the least competitive/lowest attendance MLB teams whereas transaction multiples have increased since 2017. Meanwhile, New York Mets were initially set to be acquired for 8x revenues before the previous transaction failed in 2019. Finally, Denver and Minnesota - the home markets of the Broncos and Timberwolves - have been ranked as only 16th and 14th largest TV markets in the US compared to 7th position of Atlanta. From a competitive standpoint, while Broncos has had a fair amount of success in NFL, Timberwolves have been far less successful than the Braves. These arguments suggest Braves might actually warrant a higher than 6x sales multiple.

As another reference point, in 2022 Forbes valued Braves at $2.1bn - in line with the company’s current adjusted EV (which excludes the Atlanta Battery). According to data as of 2020 (referenced in this VIC write-up ), 50 transactions of professional sports franchises have been performed at around 30% premium to the value ascribed by Forbes. On an earnings basis, BATRA currently trades at a 22.4x TTM adjusted OIBDA multiple.

Atlanta Braves

Investors are currently able to own three series of Atlanta Braves’ tracking stock, including BATRA, [[BATRK]] and [[BATRB]]. The three series differ by voting rights - BATRA holders are entitled to one vote per each share, compared to 100 for BATRB and 1/100 for BATRK. BATRA and BATRK are significantly more liquid compared to BATRB.

Aside from the sports franchise, after the split-off Atlanta Braves’ shareholders will own assets and liabilities related to the Braves’ stadium as well as the surrounding mixed use development project the Battery Atlanta. The new entity is also expected to receive $159m in cash offset by $601m in gross debt.

The Atlanta Braves have been among the most successful MLB teams recently. In 2021, the team won the World Series. As of 2022, the team has won NL East (one of MLB’s divisions) for the fifth consecutive year. The Atlanta Braves are profitable, with $77m-$92m in YTD adjusted OIBDA as of Sep’19, Sep’21 and Sep’22. There is clear seasonality in the team’s financial performance, with revenue generation significantly skewed towards the second and third quarters.

Liberty Media

Creating shareholder value through company split-/spin-offs is a rather common playbook for Liberty Media. The media company previously completed a number of spin-/split-offs, including Starz, DirecTV and CommerceHub, among others. Most of the separated companies performed better than the benchmark one year after the transactions took place (see below).

Risks

A couple of risks worth noting:

• Braves’ revenues in recent years have been boosted by the club’s good performance on the field (partially due to a higher number of games played). For reference, Braves group generated $568m/$637m in 2021/TTM revenues compared to 2018-2019 levels of $476m-$442m. In less successful years for the club, revenue generation might be slightly lower than recently. Having said that, the Braves have signed contracts with some of its core players into the 2030s, potentially suggesting the team’s superior results might continue for years to come.
• Situation-related risks include uncertain and potentially prolonged timeline until the sale materializes. Worth highlighting that in Nov’22 Liberty Media’s CEO stated that while the split-off would likely better facilitate a potential sale, there were no immediate plans to sell the franchise.

Conclusion

BATRA currently presents an interesting investment opportunity as the planned split-off might lead to a share price re-rate and a subsequent asset sale. At current prices BATRA shares are undervalued, especially assuming a sale scenario down the road. While there are risks involved, the setup appears to offer quite a substantial upside for event-driven investors.

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