By investing in the Liberty Braves' (NASDAQ:BATRA) (OTCQB:BATRB) (NASDAQ:BATRK) tracking stock you get more than just the sports team. You also get a real investment business and a piece of a growing media company that the market is currently allowing you to get for free. We always like free optionality, so let's dive right in before the market realizes its mistake.
First and foremost, time for a confession: we were drawn to the Liberty Braves because of our work on another opportunity involving the Liberty universe: the possibility to buy Expedia (NASDAQ:EXPE) through an investment in Liberty Expedia Holdings (NASDAQ:LEXEA) (NASDAQ:LEXEB) at a discount.
"Now, every time we see a public company owning part of another public company (…) we like to dig a little bit deeper (…)"
What we didn't say at the time was this: every time John Malone is involved in these situations, we tend to look twice as hard. The reasons are twofold: (I) corporate structures devised by John Malone are not for the faint-hearted and (ii) investing alongside John Malone is usually a great way to find yourself along the path to riches.
So, what's the story behind the Liberty Braves, what the heck is a tracking stock and why in the world should I want to own one?
The story of the Liberty Braves Group starts in April 2016, when Liberty Media Corp (NASDAQ:FWONA) (OTCQB:FWONB) (NASDAQ:FWONK) created three tracking stocks, one for each of its largest businesses: Liberty Media itself, SiriusXM (NASDAQ:LSXMA) (NASDAQ:LSXMB) (NASDAQ:LSXMK), and the Braves Group and delivered them to its shareholders.
By doing so, the parent - Liberty Media - intended to reduce or eliminate valuation discounts arising from the companies being mixed together by better differentiating the performance and making it easier to value each of the separate businesses, thus boosting the parent stock price. It has some of the advantages of a spinoff while the parent keeps the ownership of the businesses.
In possession of these tracking stocks, existing shareholders could choose to allocate their capital more efficiently between each of the pre-existing assets. Investors mulling an investment on the Liberty Braves were clearly interested on its main business: the professional sports franchise - the Atlanta Braves. What many failed to realize was that they were getting something else thrown in the mix:
- A Real-estate business
- A piece of a growing media company
This amalgamation of businesses is today valued by the market for how much? Well, let's see:
Source: Author using data from Liberty Media Corporation filings.
As part of the separation, Liberty Media retained a 15,5% interest in the Liberty Braves not reflected in the number of its outstanding shares. This interest is represented by a bunch of convertible Liberty Braves stock that is not accounted for in the official number of shares outstanding. As such, we have to add it to the "ex-Liberty Media retained ownership" market cap in order to get the real Liberty Braves market cap.
So, the market is valuing the whole Liberty Braves (including the real estate and the media businesses) at $ 1.2 B. But how much is it really worth?
To attempt a valuation of the Liberty Braves we should individually value each of the 3 components mentioned earlier.
Valuing the Atlanta Braves is not an easy task. There are no similar public companies, which means we can only get a feel for its valuation range when other teams (preferably ones that are comparable) are sold.
In the last 5 years, a few sales occurred, which are summed up on the following table:
Source: Author using data from Forbes.
So, without considering outliers, the average deal in the MLB in the last 5 years has been made for a 7.3x sales multiple and a ~30% premium to the Forbes valuation. Since there were only 2 closed deals and one rumored deal in the MLB space, we also computed average sales multiples and premiums for deals involving teams from all sports in the last 2 and 5 years.
Considering 2016 FY sales for the Atlanta Braves at $266 M and Forbes valuation at $1,175 M, a back-of-the-envelope valuation range calculation for the team would be between $1,300 M and $1,900 M.
So, The baseball team alone is worth the price paid to buy the Liberty Braves? Precisely!
OK, if that is the case, let's see what we get for free.
The first freebie is the real estate business.
As part of the development efforts around their stadium, the Braves invested $558 M in a real estate development they call the Battery Atlanta. This includes a series of real-estate retail, residential, office, hospitality and entertainment assets. They funded this investment with a mix of debt ($358 M) and cash ($200 M) and value the whole business at cost net of debt ($200 M).
The thing is, this is a very conservative valuation for the business and although we tend to like conservative valuations, in this case we think it is safe to value the business a bit higher than net cost.
To value the real-estate business, we need to determine two key components: the project's net operating income and the cap rate they can get for their investment.
As for the net operating income, we don't see Liberty making an investment that couldn't at least provide a 10% return on the investment. We think the RoR will be higher, probably in the mid-teens, but we will leave it at 10% to be conservative and to allow for the borrowing costs.
The average mixed cap rate in Atlanta has been gravitating between 7% and 8% for the last 10 years and rent prices are increasing at a good pace. We view the real-estate in the Battery Atlanta commanding a slight premium to historical average and ascribe it a 7% cap rate.
So, the $558 M investment should produce at least $55.8 M per year in NOI, which at a 7% cap rate values the business at $797 M. Less the $358 M in debt, we have an EV of $439 M for the real-estate business.
The second freebie is the Media company.
Major League Baseball Advanced Media - which is part-owned by every team in the MLB - operates the team's online exposure and ticket sales.
Last year, Disney (NYSE:DIS) bought a 1/3 stake in BAM Tech - MLBAM's streaming technology company - for $1 B with the option to purchase a majority stake. That means 66% of the company - worth $2 B - belongs to the 30 teams, valuing each team's stake at $60 M.
Jointly, these two businesses are worth roughly $500 M. After taking out Liberty's 15.5% stake, that leaves around $420 M for Liberty Braves owners, or about $8.5 per share. This is roughly 40% of the current market price of the Liberty Braves.
In conclusion, the market is currently valuing the Liberty Braves at $1.25 B. Adding up our value estimates for the Braves ($1.3 B - $1.9 B) and the "freebie" businesses ($420 M) we have a total value for the Liberty Braves tracking stock of $1.72 B to $2.32 B. This means that the tracking stock is currently trading for a discount of 27% to 46%.
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in BATRK over the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.