LYV - Live Nation Vs. Liberty Live: Which One Should You Own?

2023-11-27 03:03:45 ET

Summary

• Since the recent Liberty Live spin-off, Live Nation shareholders need to decide which ticker they prefer to invest in.
• Tracking stocks, the NAV discount, potential catalysts to close the discount – there are many questions to ponder.
• In this article, I will answer the main questions regarding the new, rather complex situation.

Scope of this article

Throughout this article I assume that you are familiar with the business of Live Nation ( LYV ), but might be not as familiar with the tracking stocks of Liberty Live Nation (LLYVA) (LLYVK) (LLYVB).

If you need a basic overview of Live Nation itself, recently there have been a few good articles on this site you can read for an introduction.

In contrast, there has been no article on Liberty Live Nation at all, which is why I will mainly focus on the tracking stocks and the related intricacies, caveats and their potential.

That said, Live Nation investors should absolutely understand Liberty Live Nation, its intentions and necessities, since they will likely have a profound influence on Live Nation itself.

After careful consideration, Live Nation shareholders, especially if they intend to hold the stock for the long term, might also decide that the Liberty trackers are the better option for them and switch.

What is Liberty Live's relationship with Live Nation?

Liberty Live owns 30% of Live Nation’s stock alongside some smaller investments. Given the large ownership, Liberty Media’s CEO Greg Maffei is the chairman of Live Nation's board of directors. There can be little doubt that Live Nation is ultimately controlled by Liberty Media, which means Live Nation investors should understand the many implications of Liberty Media’s necessities and likely objectives.

For example, as we will see below, Liberty Media is likely to push for capital returns either through buybacks or dividends from Live Nation, which should be a positive for the stock, but especially buybacks come with the caveat that they would probably shrink the float and increase Liberty Media’s ownership – potentially until Liberty Media can attempt a full takeover.

What is a tracking stock?

A familiar explanation sounds like an enigma: Tracking stocks give investors an opportunity to buy and sell shares that reflect the operations of particular businesses owned by a larger holding company, but don’t give the shareholders ownership rights in those particular businesses.

What do investors in Liberty Live own after all?

In the case of Liberty Live Nation, investors own a piece of Liberty Media , a holding company that owns, alongside the stake in Live Nation attributed to the LLYV trackers, 84% of Sirius XM ( SIRI ), attributed to the LSXM trackers ( LSXMA ) ( LSXMK ) ( LSXMB ) and all of Formula One, attributed to the Formula One trackers ( FWONA ) ( FWONK ) ( FWONB ).

The most recent form 10Q explains:

While the Liberty SiriusXM Group, the Formula One Group and the Liberty Live Group have separate collections of businesses, assets and liabilities attributed to them, no group is a separate legal entity and therefore cannot own assets, issue securities or enter into legally binding agreements. Holders of tracking stock have no direct claim to the group's stock or assets and therefore, do not own, by virtue of their ownership of a Liberty tracking stock, any equity or voting interest in a public company, such as Sirius XM Holdings, in which Liberty holds an interest that is attributed to a Liberty tracking stock group, the Liberty SiriusXM Group. Holders of tracking stock are also not represented by separate boards of directors. Instead, holders of tracking stock are stockholders of the parent corporation, with a single board of directors and subject to all of the risks and liabilities of the parent corporation.

Hence, LLYV investors own a piece of Liberty Media, but their stock’s performance should mainly depend on Live Nation’s business results. I wrote “should” and “mainly”, because we will see how complex the relationship really is.

Risks and opportunities of tracking stocks

When the pandemic hit Formula One and Live Nation, both businesses were in desperate need of cash infusions. At that time, the Live Nation stake owned by Liberty Media was attributed to the Formula One trackers. While Live Nation could find external financing, the problems of Formula One were solved by moving (selling) the Live Nation stake to the SiriusXM trackers in exchange for the needed cash.

In SiriusXM, Liberty SiriusXM owned the only asset of Liberty Media that during the pandemic continued to generate cash dividends, so it issued new shares through a rights issue to all LSXM tracker owners and raised the cash for the acquisition of the Live Nation stake from Formula One. (The stake was later converted, through a “hard spin-off” into a separate tracking stock.)

The story highlights some of the potential opportunities and risks associated with tracking stocks: When a crisis hits one of the trackers, the others might be involved. If Formula One had been alone, its prospects would have been dire, since selling a ticketing business while no shows were possible would have been a very bad deal. However, under the Liberty Media umbrella there were other options.

- But what about the Liberty SiriusXM tracking stock owners? They were not asked, because all tracking stocks come with three classes of shares: the “K” shares are the most liquid, but have no voting rights, the “A” shares have normal voting rights, but are far less, and the almost totally unavailable “B” shares have super-voting rights, thus they effectively call the shots. Thus, the owners of those “B” shares call the shots, and for all trackers this means media mogul John Malone.

Hence, the internal re-attribution of the stake did not come without controversies and massive conflicts of interest, and the consensus was probably that LSXM shareholders got a bad deal, while Formula One received a consideration for its Live Nation stake that would have been impossible to obtain in any external transaction at that point in time.

Effectively, a few months later it turned out a pretty good deal for both sets of shareholders, as Live Nation quickly recovered, and those shareholders that had subscribed to the rights issue enjoyed a solid rally of their cheaply acquired LSXM trackers.

That said, LSXM shareholders suffered a lot of volatility because they were in the same boat with Formula One and Live Nation (and, at that time, even the Atlanta Braves ( BATRK ) ( BATRA ) ( BATRB ), which were split off only much later). If LSXM had been a real, independent company, it could have issued new shares for far higher prices to go bargain hunting, since SiriusXM was barely affected by the pandemic.

In addition, the long history of Liberty Media and the various re-attributions of assets among the tracking stocks resulted in a complex web of intergroup interests. For example, until recently Formula One held 11% of the Atlanta Braves, while Liberty SiriusXM held 1.7% of Formula One and 2.9% of the Atlanta Braves. While these additional complexities have now been removed, something similar is quite likely to return over time.

The NAV discount: just a problem or even an opportunity?

As a result, tracking stocks usually trade at a complexity discount to their underlying assets, which, in the case of Liberty Live Nation is higher than 30%. Such a discount can be seen as an opportunity, if the tracked business unit takes advantage of it through repurchases of its own stock. However, this requires regular cash inflows – which Liberty Live Nation does not have.

In the case of Liberty SiriusXM the dividends received from SiriusXM have always been the only source of cash alongside debt issuance, and almost all available cash was used to repurchase shares. Alas, it was not enough to close the discount – which wasn’t even the goal of those repurchases, since Liberty Media management has a history of patiently profiting from such market inefficiencies to grow NAV per share, before ultimately trying to close the NAV discount in a tax-efficient way.

Such a transaction is currently likely between SiriusXM and its Liberty trackers, but it does not come without complications, which I strongly suggest to check in my recent article on the situation , since Live Nation might be involved in a similar transaction over time.

For example, there are calls for Live Nation to return cash to shareholders. If it started to issue dividends, Liberty will likely use the proceeds to repurchase its own discounted equity. This won’t move the needle, nor will it close the discount, given the likely small amounts of cash involved, yet it would be greatly accretive to NAV per share.

If Live Nation started to repurchase shares, Liberty would likely increase its percentage of ownership just as it happened with SiriusXM: Without using much of its own money, over many years, it ultimately owned almost all of the company. And this comes with some issues for SiriusXM shareholders: little liquidity of their stock, a high percentage of the small float sold short (as investors speculate on the closing of the NAV discount, they go long the tracker and short the underlying stock), the possibility of short squeezes, thus higher volatility, etc.

Leverage

Liberty Live Nation has its own attributed long-term debt of $1.2B, which consists of two debentures due in 2050 and 2053, respectively, both exchangeable into shares of Live Nation. Usually, Liberty Media redeems such debentures for cash at some point in time, while issuing new debt, but ultimately the money must be paid back.

Currently, debt is probably the main obstacle in the pending transaction with SiriusXM, since Liberty Media does not want to issue new shares to pay it off prior to a merger, nor does it want to sell some of its SiriusXM stock. So the only option would be to put it on SiriusXM’s balance sheet, which is no option for that set of shareholders either.

If you think about buying a LLYV tracker, you should absolutely familiarize with the exact terms of the debentures. For example, the most important debenture carries these terms:

The number of shares of Live Nation common stock attributable to a debenture represents an initial exchange price of approximately $104.91 per share. A total of approximately 11 million shares of Live Nation common stock are attributable to the debentures. Interest is payable quarterly in arrears on March 31, June 30, September 30 and December 31 of each year, commencing December 31, 2023. The debentures may be redeemed by Liberty, in whole or in part, on or after September 30, 2028. Holders of the debentures also have the right to require Liberty to purchase their debentures on September 30, 2028.

Since Liberty does not have any source of cash, we have to ask how it will finance interest payments. Currently, it has $315m of cash and little corporate expenses, plus about $100m worth of other monetizable investments, which means it can simply pay interest from cash on hand for several years. Yet, sooner or later, some source of cash needs to be found: either cash dividends from Live Nation, or it needs to lever up to buy some other cash-generating asset, or it needs to sell some of the smaller investment assets that came under its umbrella with the recent re-attribution.

Moreover, in 2028 Liberty Live Nation might need to refinance most of its debt, if its creditors require the redemption of their debentures. This might cause financing costs to spike substantially.

What is the investment thesis?

Clearly, Liberty Live Nation looks like a pretty unattractive stock. Besides the fact that it trades at a large 30%+ discount to its assets, we also know that nothing in the near term will probably reduce this discount.

Even if we believe that, from now, both Live Nation and its Liberty trackers are likely to follow the exact same path, while the tracking stocks also hold the promise of an additional ~40% return to close the discount at some point in the (not so near) future, an investment in the trackers comes with a lot of complexity and uncertainty.

On the other hand, even by opting for Live Nation directly, we are not immune from issues created by Liberty Media’s complexities, as they might ultimately determine some choices by the company we have chosen to own.

For example, in the recent Liberty Media earnings call, Greg Maffei stated that

our first goal would probably be to build a strategy and maybe in conjunction with Live Nation around things that, are incremental and additive that we could own that we think are positive that could somewhere potentially be valuable to Live Nation as well.

SiriusXM shareholders, for example, often voice concerns that the company is ultimately managed for the benefit of Liberty Media, and these concerns clearly affect trading of the equity.

This might mean that the couple Live Nation / Liberty Live Nation is headed for a double trading discount.

Given that there is only the dim hope of a hard spin-off far in the future, there is little hope for quick gains for the tracker investors.

That said, all the negatives we have seen are no secret at all. The fact that several months after the creation of the LLYV trackers Seeking Alpha doesn’t have a single article about them speaks for itself.

Many investors have probably sold their LLYV trackers shortly after the spin either because its value was too small, or to focus on their main holding (i.e. the LSXM trackers with their near-term catalyst), or simply because they don’t intend to hold a stock that is virtually certain to remain “dead in the water” for a long time.

Such situations usually create an opportunity. If everybody wants to get rid of something, the price must fall – and maybe too low.

In addition, the underlying asset, i.e. Live Nation itself, might have been indirectly impacted by investors afraid of added complexity.

This is probably what motivated Berkshire Hathaway ( BRK.A ) ( BRK.B ) to buy more of the Live Nation trackers in Q3, a detail that has largely gone unnoticed. (Readers of my recent article on Berkshire's investment portfolio knew.)

All this makes an undervaluation rather likely. The question that remains to answer is how quickly the market will re-evaluate the stocks.

If there is mainly a technical overhang because of too many sellers after the spin, there could be a quick recovery once the investor base has completed its changeover. Although this obviously also depends on the performance of Live Nation itself. If it tanks, the trackers are unlikely to perform better. Overall, I would not bet on quick gains.

Given the large initial discount and Liberty Media’s history of profiting from such discounts, while ultimately closing them in a tax-efficient manner, over the long term, investors in the trackers are likely to do better than Live Nation shareholders – but holding the trackers comes with a lot of additional work and uncertainties.

Personally, I don’t feel certain enough that Live Nation itself is currently undervalued or fairly valued at best. The extremely high demand for concerts might be just a post-pandemic effect and come back down to lower levels within a few years. Therefore, I have decided to keep watching the situation. Since the NAV discount is very likely to persist at high levels, there might be opportunities down the road for a more certain and faster result.

For further details see: