Liberty Media to Split Off Atlanta Braves, Create New Liberty Live Tracking Stock

By Stuart E. Leblang, Michael J. Kliegman and Amy S. Elliott

Liberty Media Corporation (Liberty Media) announced November 17 that, in the first half of 2023, it plans to separate off (by way of a non pro rata split-off) the assets and liabilities associated with the Atlanta Braves Major League Baseball (MLB) team into a standalone, newly formed public company (Atlanta Braves Holdings, Inc.), doing away with the Braves tracking stock.^[1]Liberty Media also plans to recapitalize the remaining tracking stock structure—which is currently divided up by its three principal holdings ² Liberty SiriusXM (NASDAQ:  LSXMA), Liberty Braves (NASDAQ:  BATRA) and Liberty Formula One (NASDAQ:  FWONA)—to create a new Liberty Live tracking stock largely associated with its approximate 31-percent interest in Live Nation Entertainment, Inc. (NYSE:  LYV), which is currently grouped with the SiriusXM tracking stock.

We have written extensively about the Liberty Media businesses and the tax issues associated with Liberty Media’s tracking stock structure.  Most relevant to this announcement, in our December 28, 2020 report, we explained that, because a tax-free split-off requires at least two five-year active trades or businesses (ATB), the fact that Formula One should have satisfied the ATB requirement ³ earlier this year ⁴ means that Liberty Media can separate off Braves Splitco tax-free to the Braves tracking stock holders.  In our August 9, 2021 report, we suggested that such a split-off could be a precursor to selling the baseball team in a going-private deal with an individual or family. ⁵ (Relevant prior reports ⁶ are appended.) ⁷ 

Liberty Media is pursuing these transactions in its continued push to reduce the discount at which its tracking stocks trade relative to the underlying net asset value of its interests in various public companies attributed to its tracking stock groups (including some 82.3 percent of Sirius XM Holdings Inc. (NASDAQ:  SIRI) ⁸ attributed to the SiriusXM tracking stock).  It also wants to “better enable potential future business combinations,” according to slides from Liberty Media’s investor day presentation. ⁹ A November 2 public letter to the Liberty Media board from Breach Inlet Capital, LP ¹⁰ —a self-described “patient and supportive shareholder of Liberty Braves . . . for almost six years”—attracted some attention, but mainly was indicative of the growing restlessness by investors generally (and apparently by Liberty Media management).

These contemplated transactions are subject to certain conditions, including shareholder approval, MLB approval and the receipt of a favorable split-off private letter ruling (PLR) from the Internal Revenue Service (IRS). ¹¹ Although it can take up to six months for a taxpayer to receive a PLR from the IRS on a complex tax-free split-off transaction, the corporate division of IRS Chief Counsel is piloting a program to fast-track many PLR requests, so there is the potential that it could be turned around in approximately 12 weeks. ¹² 

Both the Braves split-off and the tracking-stock recapitalization are expected to be tax-free to shareholders and to Liberty Media.  In the split-off, existing Series A, Series B and Series C Liberty Braves common stock holders will exchange each share of Braves tracking stock for one share of the corresponding series of Atlanta Braves Holdings, Inc. common stock (an exchange that is expected to qualify as a tax-free exchange under Internal Revenue Code Section 355).  In the recapitalization, existing SiriusXM and Formula One tracking stock holders will have their shares reclassified into shares of new Liberty SiriusXM tracking stock, new Liberty Formula One tracking stock and/or Liberty Live tracking stock—with the exact ratios determined at a later date.

Although we have not yet seen the transaction documents or a detailed disclosure to investors, it is expected that Atlanta Braves Holdings, Inc. will be prohibited from taking certain actions (including discontinuing the active conduct of a core business or redeeming any of its stock) during the two-year period following the split-off.  As we have previously written, because of the anti-Morris Trust rules of Section 355(e), as well as certain other requirements under Section 355, a split-off of the Braves cannot generally be combined with a plan to sell control of Braves Splitco (although the Section 355 regulations make clear that negotiations ¹³ for a sale may begin as soon as six months following completion of the split-off). ¹⁴ 

Indeed, based on November 17 comments made by Liberty Media CEO Greg Maffei on CNBC’s “Squawk on the Street,” it seems fair to assume that the Braves split-off is just a precursor to another deal.  Maffei said:  “By creating a separate asset-backed Braves . . ., we have an opportunity to highlight the value of those assets . . . and create future flexibility for any kind of transaction we might want,” noting that separating off the Braves into a standalone public company creates “a crisper structure.” ¹⁵ 

Stock Buyback Excise Tax

As we previously noted, while the Inflation Reduction Act’s 15-percent alternative minimum tax (AMT) on companies’ book income may apply to the financial statement gain reported in connection with tax-free split-offs, the new tax may not apply specifically to Liberty Media based on the income tests in the statute. ¹⁶ However, there is concern that another new tax stemming from the Inflation Reduction Act—the 1-percent excise tax on corporate share repurchases also referred to as the stock buyback tax—could potentially apply to a Braves split-off, absent guidance from the IRS to the contrary. ¹⁷ 

For a quick refresher, the stock buyback excise tax in new Section 4501 applies to publicly traded companies that repurchase more than $1 million of their stock during the taxable year.  The tax is paid by the company and is equal to 1 percent of the fair market value of any stock repurchased during the taxable year netted against the value of any new stock issuances.  There are exceptions to the new tax, and one of the exceptions should arguably apply to exempt a Braves split-off.  Namely, to the extent the buyback is tax-free to the investor (specifically, it is part of a reorganization within the meaning of Section 368(a)—which a tax-free Section 355 split-off generally is), then it should not be subject to the 1-percent tax (the so-called Reorganization Exception). ¹⁸ 

The New York State Bar Association (NYSBA) recently weighed in on the concern associated with split-offs and the stock buyback excise tax. ^19]Although it acknowledged that “a Split-Off that qualifies for tax free-treatment should fall within the Reorganization Exception,” NYSBA went on to explain that “a Split-Off could constitute a repurchase that is potentially subject to the Excise Tax” if, for example, the Section 355 transaction is tax-free to the redeemed shareholders but happens not to be effected as part of a reorganization within the meaning of Section 368(a) as described in the exception.  It remains to be seen whether the complete redemption of the entire class of Braves tracking stock occurring in connection with the separation of Braves Splitco will qualify for the Reorganization Exception.

Presumably anticipating the recently announced transaction, Liberty Media’s Senior Vice President Tax Tim Lenneman wrote a letter to the Treasury Department and the IRS back in September urging the agencies to issue broad guidance providing that the stock buyback excise tax doesn’t apply to corporate split-offs. ²⁰ Lenneman requested that the guidance be issued as soon as possible.  We expect that since Liberty Media is requesting a PLR on the split-off, they would include a requested ruling on the stock buyback tax as well. ²¹ 

Ownership of the Braves

In the title of our August 9, 2021 report (“prior Braves report”), we asked whether the Atlanta Braves would be sold before the team changed its name.  We won’t speculate on possible changes in the political Zeitgeist that may have eased pressure on the name-change issue, but the announcement of a split-off leaves unresolved the question of when (or how) a sale of the team will occur.

As we observed in the prior Braves report, sports teams are predominately privately owned or controlled by an individual or family.  In the limited cases where a team is owned by a publicly traded corporation, such corporations are controlled by an individual or family.  For example, both the New York Knicks (basketball) and the New York Rangers (hockey) teams are owned by Madison Square Garden Sports Corp. (NYSE:  MSGS), which is controlled by the Dolan family, and the Manchester United (English football) team is owned by Manchester United plc (NYSE:  MANU), which is controlled by the Glazer family.  We see no evidence that, at this stage of his life, John Malone will reveal an overwhelming urge to scratch a hitherto unnoticed itch to sit in the owner’s box at Truist Park.

This leaves roughly three possibilities.  One, a split-off of the Braves owned by a public company but continuing to be significantly controlled (for MLB purposes) ²² by one person.  The second is the same as the first, but with a general expectation that, in the reasonably near future, an investor group will make an offer to purchase the public company and take the team private.  Third, during the coming months, Liberty Media will negotiate a deal with an investor group to undertake a sponsored split-off transaction, leaving the investor group with an approximate 49-percent interest (i.e., less than 50 percent but de facto control) and all Liberty Braves shareholders with a 51-percent interest in the new Braves Splitco.

It is not uncommon for companies embarking on a spin-off transaction to conduct a parallel M&A sale process and ultimately compare the after-tax benefits of one course versus the other.  While we think this might occur strictly in the context of the third scenario mentioned above, we do not see a taxable sale of the team by Liberty Media as a likely possibility.  As we explained in the prior Braves report, we think that Liberty Media has an extremely low tax basis in the Braves, and it is difficult to see the otherwise tax-savvy Liberty Media management surrendering that tax cost in the absence of other viable alternatives.

Assuming, as we do, that the other tests for a tax-free split-off are met, a central issue in planning for the optimal result is the anti-Morris Trust rule in Section 355(e), which generally imposes corporate tax on the otherwise tax-free distribution if the split-off occurs as part of a plan resulting in Liberty Media shareholders not owning more than 50 percent of the vote and value of both the Splitco and the Remainco.  Generally, this precludes Liberty Media entering into a transaction in which the split-off is combined with all or a controlling interest passing to a new group of investors.

How long must an investor wait in the wings after the split-off before inviting negotiations for the purchase or even a controlling investment? One often sees references to a two-year waiting period.  This is a valid suggestion, but in practice, it is longer than necessary.  Section 355(e) itself sets up a presumption that a distribution and acquisition occurring within a two-year period are part of a plan. ²³ However, that presumption has all been written out of the law by detailed and rather generous criteria and safe harbors in regulations. ²⁴ In fact, provided there were no negotiations about the transaction during the one-year period prior to the split-off and for at least six months after the split-off, the a subsequent acquisition can avoid taxation under Section 355(e). ²⁵ 

In fact, as we discussed in a report last spring, ²⁶ it seems clear that Broadcom Inc. (NASDAQ:  AVGO) initiated discussions to acquire VMware, Inc. (NYSE:  VMW) around seven months following consummation of the spin-off of VMware by Dell Technologies Inc. (NYSE:  DELL).

The two-year period does show up consistently in the tax-related provisions of distribution and separation agreements.  These ordinarily prohibit the Spinco and Remainco from entering into transactions that could implicate Section 355(e) with two years following the distribution, unless there is either a PLR or an opinion of counsel concluding that the subsequent transaction does not run afoul of Section 355(e).

One aspect of any likely acquisition of control of the Braves is that, while sports teams in the United States may be most commonly held in partnerships, which are pass-through entities for U.S. tax purposes, any eventual owner of the Braves will hold shares in a U.S. corporation with a carryover of Liberty Media’s historical tax basis in the underlying tangible and intangible assets (assuming the sale is tax-free).  Whereas the purchaser of a ball club from a private partnership can ordinarily provide a buyer with a step-up in tax basis to the purchase price, with corresponding depreciation and amortization deductions, this will not be the case for a purchaser of the stock in Braves Spinco.

In many cases, a public company considering divestiture via spin-off or sale can be reasonably confident that the after-tax interests of shareholders will be met by doing the spin-off and then “letting nature take its course,” i.e., letting buyers emerge in the competitive world of the public markets.  This is easier in cases where the Spinco is already reasonably self-sufficient.  The more work necessary to carve out and establish a free-standing company that most naturally should not be one, the more compelling an M&A transaction will be.  Those separation issues aside, the prospect of multiple changes in ownership of the Spinco, including regulatory (in this case, MLB) approvals, can be anticipated and overcome.

So we do think it is reasonably possible that in the coming months Liberty Media could be approached by an investor that wants to own the Braves, and that investor (or group) could be the Anchor Investor (as referred to in the prior Braves report) that could take a less-than-50-percent interest in a post-split-off publicly traded Braves entity with at least a de facto controlling investor.

There is another possible route that the company could take to enable a tax-free split-off of the Braves but with ownership (and especially management) of the team being more conventional (in the sense of having an identified individual or consortium at the helm).  This would involve Liberty Media entering into a partnership transaction with the Anchor Investor, along with a cash investment by Anchor Investor and actual control of the partnership.  Liberty Media would split off to its shareholders a Braves Splitco that would essentially be a majority limited partner in the Braves partnership.  Ownership of the partnership interest would satisfy the ATB rules, ²⁷ and because the former Liberty Braves shareholders would continue to own a majority (indeed, all) of the shares in Braves Splitco, it should not violate Section 355(e). ²⁸ 

^{[1] Press Release, Liberty Media, Liberty Media Corporation Announces Plan to Split off Atlanta Braves and Create New Liberty Live Tracking Stock Group (Nov. 17, 2022) (https://www.libertymedia.com/investors/news-events/press-releases/detail/479/liberty-media-corporation-announces-plan-to-split-off).}

^{[2] Note that, in the current structure, both the SiriusXM group and the Formula One Group hold intergroup interests in the Braves Group. Upon completion of the transactions, “no group will initially have an intergroup interest in another group,” according to the Press Release.}

^{[3] See Internal Revenue Code (IRC) §355(b), which requires that Spinco (or Splitco) and Remainco each be engaged in an active trade or business that has been continuously carried on for at least five years (and was not acquired during the five-year period in a taxable transaction).}

^{[4] Because Liberty Media acquired Formula 1 on January 23, 2017. See slide 9 of the 2020 Liberty Investor Day presentation, which states:  “Braves are currently an ATB...F1 will be an ATB in January 2022.” (https://d1io3yog0oux5.cloudfront.net/_a69c4133fc07485acdc43ac2872c4ebd/libertymedia/db/1987/19307/pdf/Liberty-Media-Corp-Thursday-November-19-2020.pdf).}

^{[5] As it turns out, others now agree. See, e.g., Mike Ozanian, Are The Atlanta Braves For Sale? Owner John Malone Appears To Be Taking A First Step In That Direction, Forbes, Nov. 17, 2022 (https://www.forbes.com/sites/mikeozanian/2022/11/17/atlanta-braves-split-to-asset-backed-stock-likely-precurser-to-teams-sale/).}

^{[6] “What Are Liberty Media’s Plans for Braves and SiriusXM?” (Dec. 28, 2020); Will Atlanta Braves Be Sold Before Team Changes Its Name?” (Aug. 9, 2021).}

^{[7] While management has stated that it believes that Liberty Media’s more-than-80% interest in SiriusXM also satisfies the ATB test (see slide 11 of the 2021 Liberty Investor Day presentation), we have indicated that we are skeptical about that. Inasmuch as the company is not at this point planning a transaction dependent on that ATB issue (such as separating SiriusXM from the other holdings), it does not appear to require resolution. See our discussion of this issue in our report “Tax Considerations of Berkshire Hathaway’s Exchange of SiriusXM Stock for Liberty SiriusXM Tracking Stock” (Nov. 10, 2021). (For the 2021 Liberty Investor Day presentation, see https://d1io3yog0oux5.cloudfront.net/_a69c4133fc07485acdc43ac2872c4ebd/libertymedia/db/1987/19584/pdf/Investor+Day +2021+-+Liberty+Media.pdf.)}

^{[8] For example, the SiriusXM tracking stock was trading at a 37% discount to underlying net asset value (NAV) as of Nov. 16, 2022 (https://www.sec.gov/Archives/edgar/data/1560385/000110465922120790/tm2230730d5_425.htm).}

^{[9] Excerpts of Slides from Liberty Media Corporation 2022 Investor Day Presentations Regarding Proposed Transactions (https://www.sec.gov/Archives/edgar/data/1560385/000110465922119899/tm2230730d4_425.htm).}

^{[10] Press Release, Breach Inlet Capital, LP, Breach Inlet Capital Sends Public Letter to Board of Liberty Media (Nov. 2, 2022) (https://www.businesswire.com/news/home/20221102005674/en/Breach-Inlet-Capital-Sends-Public-Letter-to-Board-of-Liberty-Media).}

^{[11] Notably, according to the press release, “the Split-Off is not dependent upon the approval of the Reclassification and may be implemented even if the Reclassification is not approved.”}

^{[12] Rev. Proc. 2022-10.}

^{[13] Note that unilateral intention concerning a post-distribution acquisition generally does not constitute a plan.}

^{[14] See Treas. Reg. §1.355-7(d).}

^{[15] https://www.cnbc.com/video/2022/11/17/liberty-media-ceo-greg-maffei-sits-down-with-cnbcs-david-faber-at-the-companys-annual-investor-day-to-discuss-why-the-company-plans-to-split-off-the-atlanta-braves-a nd-the-overwhelming-demand-for-tayl.html}

^{[16] Because Liberty Media’s net income appears to fall below the the Applicable Corporation threshold (which is $1 billion/year averaged over a three-year period), as explained in “REVISED:  Could Book Income AMT Impact Potential Liberty Media 'Spin-Off'? Liberty May Not Be in Scope” (Oct. 25, 2022).}

^{[17] We think it is more clear that the buyback tax should not apply to the recapitalization that will create the new tracking stock.}

^{[18] See IRC §4501(e)(1).}

^{[19] For Report No. 1469 of the Tax Section of the New York State Bar Association discussing the section 4501 excise tax on repurchases of corporate stock, dated Nov. 1, 2022, see https://nysba.org/app/uploads/2022/11/1469-Report-on-the-Section-4501-Excise-Tax-on-Repurchases-of-Corporate-Stock.pdf.}

^{[20] The Liberty Media letter was published by Tax Analysts:  https://www.taxnotes.com/tax-notes-today-federal/excise-taxes/companies-warn-excise-tax-stock-repurchases-overbroad/2022/10/12/7f7kc}

^{[21] Regarding the timing of the PLR, we note that internal IRS administrative procedures could slow down the turnaround time for the ruling if the excise tax on stock buybacks is brought in.}

^{[22] Assuming the Nov. 17, 2022 announcement proceeds as planned and there are no other developments, this would presumably be the outcome of the Braves split-off. Per Liberty Media’s Form 10-K filed Feb. 25, 2022, “each [MLB] club is required to appoint one ‘Control Person’ who is acceptable to MLB and the other clubs and who has significant authority over club operations and the club’s interaction with MLB.” According to press reports, the Braves’ “Control Person” has been and will continue (after the split-off) to be Terry McGuirk, Chairman and CEO of Braves Holdings, LLC (AJC Sports, Braves’ Terry McGuirk to remain ‘control person’, The Atlanta Journal-Constitution, Nov. 18, 2022 (https://www.ajc.com/sports/atlanta-braves/braves-terry-mcguirk-to-remain-control-person-in-split-off)). The “Control Person” for MLB purposes is different than having voting control over Splitco. Also per the Form 10-K, “no person may own 10% or more of the number of outstanding shares of Liberty Braves common stock unless . . . such person is expressly approved by the [MLB] Commissioner or qualifies as an exempt person (which is generally defined to include our Chairman John C. Malone, Chief Executive Officer Gregory B.}

^{Maffei, the Chairman of Braves Holdings, LLC Terence McGuirk and certain of their related persons).” The Form 10-K also states that Liberty Media’s “current charter includes restrictions on the share ownership of Liberty Braves common stock by certain persons, which if triggered would result in an immediate transfer of the applicable number of shares to a trust for the benefit of the holder.” Note that when there is a proposed change in ownership of a team, MLB owners must vote to approve the change.}

^{[23] IRC §355(e)(2)(B).}

^{[24] Treas. Reg. §1.355-7.}

^{[25] Treas. Reg. §1.355-7(d)(1).}

^{[26] “Broadcom:  How to Buy a Company 7 Months Post Spin” (May 24, 2022).}

^{[27] See Rev. Rul. 2007-42.}

^{[28] Regulations make is clear that the partnership in such a situation would not be treated as a successor to Braves Splitco such that ownership by new investors in the partnership would need to be taken into account in testing the Section 355(e) 50 percent vote and value test. See Reg. § 1.355-8(b)(2)(ii) and -8(c)(2).}