The move could presage a deal with Barry Diller's online travel group. 

by Chris Nolter

Liberty Interactive Corp.'s planned spinoff of Liberty Expedia Holdings Inc. fits neatly into John Malone's playbook of complicated, tax-free transactions.

The question is whether the spin of Liberty Interactive's stake in travel booking site Expedia Inc. and other online assets is routine spring cleaning designed to present Wall Street with a simpler bundle of assets to value or indicates larger moves to come. Liberty Interactive suggests in the prospectus for the split that the new group could merge with Barry Diller's Expedia. The divestiture of Liberty Expedia, and the planned spinoff of CommerceHub Inc., come as Liberty Interactive prepares to invest in a Malone vehicle linked to the merger of Charter Communications Inc. and Time Warner Cable Inc. Malone and Liberty Interactive's CEO Greg Maffei could be trying to clear out the company's mixed pantry of media assets to focus on the cable business.

"With Malone and Maffei, the only thing you know is you don't know," said FBN Securities Inc. analyst Robert Routh.

Liberty Expedia will hold a 15.7% equity interest and 52.2% voting stake in Expedia, which Diller's IAC/InterActiveCorp. spun out in 2005. The new entity will also own BodyBuilding.com, an e-commerce site and and online community based around pumping iron.

The prospectus, filed with the Securities and Exchange Commission on March 24, lists the value of the Liberty Expedia's newly created equity at $3.2 billion. Liberty Expedia will issue $350 million as part of the divestiture, and give parent Liberty Interactive $300 million in cash.

Through a longstanding agreement with Malone, Expedia Chairman Diller has a proxy to vote Liberty's shares in Expedia. Diller will continue to control the proxy for 18 months following the spinoff.

The prospectus suggest that Liberty Interactive trades at a discount to the underlying value of its assets, and that spinning out the Expedia shares will present shareholders with a simpler value proposition that would support a higher share price. In Malone's typical fashion, the spin out will simply distribute ownership of the web properties to existing shareholders and avoid the tax bill that a change of control would incur.

Determining the size of the discount is difficult because of Liberty Interactive's complex holdings.

Liberty Interactive has already created two tracking stocks to represent its various holdings.

QVC Group reflects retail and media operations such as shopping network QVC Inc., online retailer zulily llc and a stake in shopping channel HSN Inc.

Liberty Ventures Group represents the Expedia stake, Bodybuilding.com and CommerceHub. The group also owns a position in travel industry services provider Interval Leisure Group; florist FTD Companies Inc.; baby gear online retailer LMC Right Start Inc.; online lending group LendingTree Inc.; Internet invitation service Evite Inc.; minority stakes in Time Inc., Time Warner Cable and Time Warner Inc.; and other holdings.

Routh puts Liberty Venture's discount to the value of its public and private holdings at 41.79%.

Following the spin, the prospectus suggests that a merger of Liberty Expedia and Expedia would logically follow. After all, both equities would focus on the value proposition of Expedia. Diller's travel site could see the appeal of taking out its doppelganger and consolidating ownership. "Liberty Interactive believes that a combination of our company with Expedia could be beneficial for our stockholders, on the one hand, and Expedia, on the other hand, by eliminating the overhang associated with the current dual-public company structure," the prospectus states.

The timing of the Liberty Expedia prospectus gives rise to more questions about the strategy.

During a February earnings call, Maffei told investors that Liberty Interactive would submit a prospectus for CommerceHub in March, before Liberty Expedia. As March winds to a close, CommerceHub is yet to file.

"The question is why the change and how come we still haven't seen CommerceHub?" Routh asked.

The altered sequencing has caused speculation that Amazon.com Inc. or Alphabet Inc.'s Google Inc. could have taken an interest in the business, the analyst suggested. Representatives of the companies did not immediately respond to queries on Wednesday afternoon.

"Maybe it was just a matter of timing and they got the other one done first," Routh said.

The other looming matter for Liberty Interactive is the merger of Charter and Time Warner Cable.

Liberty Interactive agreed last year to invest $2.4 billion in Liberty Broadband Corp., a Malone venture that invests in Charter and supports the cable operators' merger with Time Warner Cable, valued at $78.7 billion including assumed debt. Charter is also rolling up Bright House Networks LLC.

The Groupon Inc. application as displayed on an Apple Inc. iPhone (Photo credit: Michael Nagle/Bloomberg) 

In a Global Credit Research report on August 17, 2015, Moody’s Investors Service stated, “While Liberty/QVC’s acquisition of zulily is strategic, it is fully priced, with the purchase price of $2.4 billion representing around 54 times zulily’s fiscal 2014 EBITDA (as defined by zulily) of $44 million.” Assuming Alibaba paid 54.0x EBITDA for Groupon, implied enterprise value is $3.5 billion dollars ($64.76 million of trailing-twelve-month EBITDA multiplied by 54.0x). Adding back $800 million of cash to implied enterprise value gives us a market capitalization of $4.3 billion, which when divided by 584.49 million shares outstanding suggests a per share valuation of $7.35.

‘Moving The E-Markets’ Valuation Index suggests Groupon’s stock is worth $2.75, not $7.35

Absent Alibaba’s disclosure that it purchased a 5.6% stake in Groupon, it’s reasonable to assume Groupon’s enterprise value would be $1.38 per share (12.5x EBTIDA) plus approximately 1.37 of cash equal to $2.75. If you’re thinking of buying the stock at its current level of $4.14 a share (in hopes that it may go to $7.35) be careful, because my read is that the market has already priced in a 100% buyout premium ($2.77 of enterprise value instead of $1.38). In other words if Alibaba were to take a step away from Groupon (e.g. sell its shares) shares could fall by 50% (from $4.15 to $2.75).

What is Groupon worth to Alibaba?

In The Art & Science Of Valuation: 10 Factors That Affect Your Firm’s Value I describe how sophisticated strategic buyers reach value conclusions. Since Groupon’s shares are publicly traded and the company is required to disclose certain business and financial information to the public, it was relatively easy for me to conclude that Groupon is worth $2.75 a share to a financial buyer. What we don’t know is how valuable Groupon is to Alibaba.

Why is Groupon important to Alibaba?

The best analysis I’ve read on the subject comes from fellow Forbes Contributor Doug Young in Alibaba Eyeing Buyout Bid with Groupon Investment?. In the article Doug concludes, “The biggest reason Alibaba would be interested in acquiring Groupon relates to concurrent developments in China, where Alibaba is dumping its relatively large stake in a leading local group buying site Meituan-Dianping.  Alibaba’s reasons for selling the stake are complex, but the bottom line was that it didn’t get along with top management at the company, which was formed last year by the merger of the industry’s two leading players. Thus a Groupon buy could help Alibaba to quickly re-enter the group buying space, even though geographically Groupon has little or no operations in China.”

All Eyes on Demand, Purpose for Alibaba Mega-Loan

According to an even more recent story by Doug Young, All Eyes on Demand, Purpose for Alibaba Mega-Loan “Alibaba will come close to meeting the top end of its target of raising $3-$4 billion with a new bank loan, and chances are as much as 50-50 that it will use the funds to make bids for Groupon.”

Alibaba’s first substantial attempt to break into the U.S. retail market failed

As you may remember, Alibaba launched 11 Main to grow its U.S. presence before its record American IPO in June of 2014 (see Forbes). However one short year later the companyannounced it was selling 11 Main to rival marketplace OpenSky. At the time Scot Wingo, Executive Chairman of ChannelAdvisor summed up the problem, “11Main never seemed to get much traction with either buyers or sellers.”  After such a setback, I’m almost certain Alibaba’s board wouldn’t have a problem over-paying for Groupon if it meant it could control the 3rd largest web-only retailer in the U.S (Amazon and eBay hold 1st and 2nd place, respectively).

Bottom Line

Assuming Alibaba paid 54.0x EBITDA (same multiple QVC paid for zulily) for Groupon, market capitalization is $4.3 billion, which when divided by 584.49 million shares outstanding suggests a per share valuation of $7.35. In my opinion, Absent Alibaba’s disclosure that it purchased a 5.6% stake in Groupon, shares of the company are worth $2.75.

If you’re thinking of buying the stock at its current level of $4.14 a share (in hopes that it may go to $7.35) be careful, because my read is that the market has already priced in a 100% buyout premium. At the same time there are compelling strategic reasons for Alibaba to buy including re-entery into the group-buying space, and opportunity to catapult its size ranking in the web-only U.S. retail market.