NEW YORK (The Deal) -- On Wednesday, TripAdvisor (TRIP) CEO Steve Kaufer will provide investors with a first-quarter earnings report for the company that bills itself as the world's largest travel site. A couple of days later, Liberty TripAdvisor Holdings (LTRPA) CEO Greg Maffei will review the first quarter for ... the company that bills itself as the world's largest travel site.
Liberty TripAdvisor owns a 22% economic stake and 57% voting position in TripAdvisor, as well as BuySeasons, which has a big Halloween sales rush but accounts for a sliver of the company's value. The value of the holding company is closely tied to TripAdvisor.
If the whole setup seems redundant, it is. The arrangement, however, is not permanent.
John Malone chairs Liberty TripAdvisor, or L-Trip, and the company bears the hallmarks of the Englewood, Colo., mogul's dealmaking. Public statements by Maffei and Liberty TripAdvisor's filings with the Securities and Exchange Commission make it clear that the company was formed with an exit in mind.
"What Greg has said [is] it is most likely that ultimately they will recombine L-Trip with Trip in the future," said Robert Routh of FBN Securities. "It would probably be a stock deal, where TripAdvisor gives them new TRIP shares to buy L-Trip, but in effect they are issuing their stock to buy back their own stock, including the B shares," Routh added.
"If Priceline or Google or Microsoft or whoever else comes out and says I want to own TripAdvisor and they throw a stupid number on the table, of course Greg considers it," said Routh.
At an October 2014 investor conference at FBR Capital Markets, an analyst asked Maffei if spinning out the stake from Liberty Interactive (QVCA) would facilitate a merger with TripAdvisor or a sale to a party seeking control of TripAdvisor. "Both those are possible," he said.
Robert Willens, of tax analysis firm Robert Willens, said a "downstream merger" with TripAdvisor is the most likely outcome. Spinning out the stake from Liberty Interactive facilitates a deal.
"If it had distributed the stock directly to shareholders, both Liberty and the shareholders would have been taxed." Willens said. "By putting the TripAdvisor stock in Liberty TripAdvisor with a spinoff followed by a downstream merger, you accomplish the same objective you could have accomplished directly but without the tax consequences."
One catch is that the spin and merger cannot be part of a prenegotiated plan. That might appear problematic since the prospectus for the Liberty TripAdvisor spin contemplated such a deal.
"Liberty believes that separating our company from Liberty's other businesses will help facilitate a potential combination of our company with TripAdvisor by eliminating any negotiations regarding the valuation of Liberty's other businesses, thereby making it more likely that a potential agreement could be reached," the filing states. Liberty added that the deal would benefit TripAdvisor by "eliminating the control of a large stockholder and the overhang associated with the current dual-public company structure," the filing explains.
"As long as you can establish that the merger wasn't agreed to or substiantially negotiated during the two year period prior to the spinoff, and I would assume it hadn't been, then no matter what, the merger and spin would not be considered a plan," Willens said.
Other requirements are that the acquired company continues its business and that shareholders of the target primarily receive stock.
Another suitor -- say, Priceline -- could come forward with a tax-friendly stock deal of its own.
"It's true that Priceline could acquire Liberty Trip in a tax-free transaction, but that wouldn't eliminate the potential tax on the TripAdvisor stock that Priceline would acquire in the acquisition," Willens said. Priceline would inherit Liberty Trip's low basis in the TripAdvisor stock, he explained. If it disposed of the stock, Priceline could be taxed on the gain that accrued while Liberty Interactive owned the TripAdvisor stock.
"The only way to forever avoid taxation of that gain is through a downstream merger of Liberty Trip with and into TripAdvisor," Wilens said. "That's why TripAdvisor is the 'preferred' acquirer of Liberty Trip. Only it can eliminate forever any tax on the gain inherent in the TripAdvisor stock."
Routh noted that a buyer would incur the tax if it sold the acquired shares for cash, but not if it exchanged the stock for other equity.
If all of this seems complicated, well, that is another hallmark of Malone's dealmaking style. Whether Liberty TripAdvisor winds up as part of TripAdvisor or winds up in the hands of a third party, the nuances of the tax treatment will be a critical element.