What Are Liberty Media’s Plans for Braves and SiriusXM?

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

We finally have the answer to one important question:  How long before SiriusXM loses its prize star, Howard Stern? On December 8, it was announced that SiriusXM had reached an agreement with Howard Stern to extend its exclusive rights to broadcast The Howard Stern Show for another five years. ¹ Now that direct and indirect investors in SiriusXM can breathe a sigh of relief about that, we want to address a different question of interest to these and other investors:  How long before Liberty Media Corporation (Liberty Media) can separate its controlling interest in the Braves from its controlling interest in SiriusXM and its other holdings? And, a related question, what might be its intentions for SiriusXM?

Liberty Media shares are divided among three tracking stocks—Liberty SiriusXM (including NASDAQ:  LSXMA), Liberty Braves (including NASDAQ:  BATRA) and Liberty Formula One (including NASDAQ:  FWONA)—each corresponding to the principal underlying holdings associated with the stock.  The SiriusXM tracking stock is largely associated with Liberty Media’s approximate 74 percent ownership of Sirius XM Holdings Inc. (NASDAQ:  SIRI). ² The Braves tracking stock is largely associated with Liberty Media’s ownership of the Atlanta Braves Major League Baseball Club.  The Formula One tracking stock is largely associated with Liberty Media’s nearly 100 percent ownership of Delta Topco Limited, the parent company of Formula 1, which hosts a series of auto racing events. ³ Also attributed to the Formula One tracking stock is Liberty Media’s approximate 32 percent interest in Live Nation Entertainment, Inc. (NYSE:LYV) (Live Nation). ⁴ Each of the three tracking stock groups is then further broken down among three classes with different voting rights (low-vote Series A, high-vote Series B and no-vote Series C). ⁵ 

Especially since the significant price recently paid for the New York Mets, ⁶ it is believed that the Liberty Braves tracking stock trades at a significant discount to the value of the underlying assets attributed to it. ⁷ More obviously, the Liberty SiriusXM tracking stock trades at a significant discount to the stock of SiriusXM. ⁸ In view of the John Malone-controlled companies’ history of successive tax-free spin-off transactions, investors are interested to see what Liberty Media will do and when it will do it.

We should note that while we are using the generic term spin-off, such term actually refers to a pro-rata distribution of Spinco stock to Remainco shareholders, usually treated as a dividend in-kind from a state corporate law standpoint.  In fact, a split-off is the type of transaction that one should expect for a company such as Liberty Media whose capital structure consists of tracking stocks.  While there are complex intracompany/intergroup assets and liabilities, one should think of (for example) a Braves separation as a split-off of Braves Splitco to only those holders of Liberty Braves tracking stock in exchange for their Liberty Braves shares (not pro rata to all Liberty Media shareholders).

In terms of the requirements for a tax-free spin- or split-off transaction under Section 355 of the Internal Revenue Code (IRC), the central focus of the timing issue from a technical standpoint is the requirement under Section 355(b) that the Spinco (or Splitco) and the Remainco each be engaged in an active trade or business (ATB) that has been continuously carried on for at least five years (and was not acquired during the five-year period in a taxable transaction).

In the most recent quarterly earnings conference call, Liberty Media CEO Greg Maffei confirmed that, in the company’s view, it has achieved five-year ATB status with respect to the Braves, and it expects to achieve five-year ATB status for Formula One in January 2022 (presumably the five-year anniversary of its January 23, 2017 ⁹ purchase of the parent company). ¹⁰ 

From the standpoint of the timeline of your average spin-off, January 2022 is not so far off.  In fact, if Liberty Media decided to start the process of a full separation of the Braves, it could announce that fact in early 2021 and set a target completion date of January 24, 2022, the day after achieving a five-year holding period for Formula One.  (More questionable, perhaps, would be what the name of the Atlanta baseball team will be at that time.)

But could it happen sooner? On the same earnings call, Maffei indicated that Liberty Media’s percentage ownership of SiriusXM had been increasing largely as a result of public stock buybacks by SiriusXM and that Liberty Media intended to get to an 80-percent ownership level.

Asked whether this goal was focused on meeting the ATB requirement under the Section 355 tax-free spin-off rules, Maffei indicated that achieving ATB status in Formula One in January 2022 should be soon enough.  He said that the main reason Liberty Media wanted to get to 80 percent ownership in SiriusXM was to achieve tax consolidation and enter into a tax-sharing agreement.  He added that reaching the 80-percent threshold “allows us to move capital in a tax-free manner up to” Liberty SiriusXM. ¹¹ 

Presumably, Maffei is coveting SiriusXM’s $2.7 billion of U.S. federal net operating losses (NOLs), which can be accessed to offset Liberty Media’s taxable income once they are able to join in a consolidated tax return. ¹² Under the terms of a tax-sharing agreement, Liberty Media would compensate SiriusXM for its use of the NOLs.  The timing of the compensation payments is a matter for negotiation (e.g., in many cases, payment is not made until such time as the NOL subsidiary could have otherwise used the NOL to offset its separate company tax liability).

This implies that (1) Maffei is in no hurry to separate SiriusXM from Liberty Media, and (2) a separation of the Braves after January 23, 2022 is a real possibility.  Management’s keen interest in getting access to SiriusXM’s NOLs suggests plans to retain at least one other business expected to generate a stream of taxable income for several years, or alternatively, the potential taxable disposition of one or more assets in the nearer term.

Liberty Media holds about 32 percent of the common stock of Live Nation as well as portfolio holdings in other publicly traded media companies, including iHeart Media, Inc. (NASDAQ:  IHRT) and AT&T Inc. (NYSE:  T).  According to its most recent annual report, while the Live Nation holding seems to be strategic, the other holdings are described as “non-core” and the subject of likely tax-efficient monetization transactions (the company says it intends further monetization transactions, including sales).^[13]It is possible that management might have in mind offsetting income from Formula One, but that seems unlikely since much of those operations are outside of the United States.

Will anti-tax loss trafficking rules impede Liberty Media’s ability to use SiriusXM’s NOLs to offset taxable income that it generates after reaching the 80-percent ownership level? The limitation rules under Section 382 come into play when there is a more-than-50-percent increase in ownership over a rolling three-year testing period.  Liberty Media has held more than 50 percent of the stock of SiriusXM since at least January 18, 2013, ¹⁴ so, other than a limitation on Pandora NOLs resulting from that acquisition, if there has been any limitation on SiriusXM NOLs under Section 382, it would have been in effect back several years.  There is also a general “facts and circumstances” anti-abuse rule under Section 269, which can come into play when there is an acquisition of control with the principal purpose to take advantage of tax benefits from the acquisition.  Control for this purpose is defined as 50 percent or more of the voting power or value of outstanding stock, so, regardless of the intention, the expected increase in Liberty Media’s ownership from 74 percent to 80 percent should not implicate Section 269.

A provision that seems more targeted to what might occur if Liberty Media were to use SiriusXM’s NOLs to offset gain on the disposition of portfolio holdings is Section 384.  That provision generally prevents a corporation with a net unrealized built-in gain from using an acquired loss corporation’s NOLs to offset its recognized gains.  Under a relevant exception, the limitation does not apply where the two corporations are members of a more-than-50-percent “controlled group” for the five years preceding the acquisition. ¹⁵ Given the long affiliation of Liberty Media and SiriusXM, this controlled group exception should be applicable.

There is a set of rules under the consolidated return regulations that would come into play as an obstacle to freely using SiriusXM NOLs to offset Liberty Media income.  The separate return limitation year (SRLY) rules would generally limit the Liberty Media consolidated group’s use of SiriusXM’s NOLs to the amount of taxable income that the SiriusXM companies generate during the period that they are included in the Liberty Media group. ¹⁶ The SRLY rules do not apply when the combination that brings the SRLY loss member into another group occurs within six months of a Section 382 ownership change. ¹⁷ 

Since we do not expect that Liberty Media’s ownership in SiriusXM reaching the 80 percent level would bring about a Section 382 ownership change—and since this would occur more than six months after SiriusXM’s 2019 acquisition of Pandora—this overlap rule would not apply and the SRLY rules would have to be considered.  Ordinarily, the SRLY rules are not difficult to plan around, particularly where the SRLY group member is wholly owned.  However, since in this case SiriusXM will continue to have its own public stock outstanding, any such planning is likely to have some commercial consequences (e.g., moving taxable income from a Liberty Media group member to a SiriusXM group member).

Notwithstanding this evidence indicating management is not looking for a way to be able to spin off either the Braves or SiriusXM prior to January 2022, we offer some comments on what could be done to satisfy the ATB requirement before the five-year anniversary of the Formula One acquisition.

1. Acquiring an 80-percent interest in SiriusXM via cash purchases of its stock by Liberty Media or SiriusXM itself will not enable Liberty Media to satisfy the ATB test by reference to SiriusXM. The reason for this is that, for a business acquired during the past five years, the business must have been acquired in a nontaxable transaction.
2. We do not think the tax rules are entirely clear about this, but although a portion of Liberty Media’s current stock holdings in SiriusXM were acquired in taxable transactions, it is possible that the requirements of the statute could be met if Liberty Media were to increase its holdings to 80 percent or more in a tax-free transaction. Such a transaction could include one of the following:
3. Liberty Media contributes assets to SiriusXM in exchange for SiriusXM stock of sufficient value to obtain 80 percent control. This would require a fairly significant amount of value to be contributed, and of course, the assets would have to be of a nature as to make sense for SiriusXM to hold.
4. SiriusXM could recapitalize, creating high- and low-vote common shares having the same economic features as one another (perhaps similar to those currently issued by Liberty Media), with Liberty Media receiving a disproportionate amount of the high-vote shares. This might be viable from Sirius XM’s standpoint, since the position of its public shareholders—as minority shareholders with only those governance rights that are provided by corporate and securities laws and any additional rights negotiated with the majority shareholders—would be substantially the same as if there were no recapitalization.  Second, as a prelude to a potential subsequent split-off to Liberty Media’s shareholders, there would be logic to mirroring the different Liberty Media voting classes in the stock of SiriusXM.
5. Liberty Media could acquire all or at least 80 percent of SiriusXM in a tax-free reorganization, solely in exchange for Liberty Media stock. Presumably, the currency would be Liberty Media’s SiriusXM tracking stock, but that would not be an essential requirement.  Given the discount at which the SiriusXM tracking stock trades relative to actual Sirius XM Holdings Inc. stock, this would seem unappealing from a corporate finance standpoint.
6. Liberty Media could potentially merge downstream into SiriusXM. In one variation of this transaction, Liberty Media could fully wire a split-off of the Braves to holders of the Braves tracking stock to take place immediately after consummation of the merger of Liberty Media into SiriusXM.
7. Shifting attention away from SiriusXM, Liberty Media could acquire another active business company in a tax-free reorganization.

^{[1] SiriusXM, Howard Stern sign five-year contract extension, AP, Dec. 8, 2020 (https://apnews.com/article/business-howard-stern-069543aecfefa432aa1c10a01f6ecc8e).}

^{[2] Sirius XM Holdings Inc., Quarterly Report (Form 10-Q), at 11 (Oct. 22, 2020) (https://www.sec.gov/ix?doc=/Archives/edgar/data/908937/000090893720000043/siri-20200930.htm).}

^{[3] Liberty Media Corporation, Annual Report (Form 10-K), at II-6 (Feb. 26, 2020) (https://www.sec.gov/ix?doc=/Archives/edgar/data/1560385/000155837020001494/lmca-20191231x10ked33ee.htm).}

^{[4] Live Nation Entertainment, Inc., Definitive Proxy (Schedule 14A), at 21 (April 23, 2020) (https://www.sec.gov/Archives/edgar/data/1335258/000133525820000069/lyv-proxyx2020.htm). Interestingly, as summarized in a Nov. 19, 2020 press release, Liberty Media also recently formed a special purpose acquisition company (SPAC), Liberty Media Acquisition Corporation (LMAC), to search for a target in the entertainment, media and communications industries. Wholly owned by Liberty Media now, LMAC will be approximately 20% owned by Liberty Media after its IPO. Press Release, Liberty Media, Liberty Media Corporation Launching Corporate-Sponsored SPAC:  Liberty Media Acquisition Corporation (Nov. 19, 2020) (https://www.sec.gov/Archives/edgar/data/1560385/000110465920127122/tm2036350d1_ex99-1.htm).}

^{[5] Supra note 3.}

^{[6] In early Nov. 2020, Steve Cohen reportedly closed on his $2.4 billion purchase of the New York Mets baseball team (Billionaire Steve Cohen closes takeover of New York Mets, Reuters, Nov. 6, 2020 (https://www.reuters.com/article/us-baseball-newyork-mets-cohen-idCAKBN27M2NN)).}

^{[7] “Liberty Braves Group . . . is now valued at about $1.2 billion, a sizable discount to both Forbes’s valuation of the team of $1.8 billion and the price for the Mets,” as reported by Andrew Bary, Deal for the Mets Makes Liberty Braves Stock Look Attractive, Barron’s, Sept. 15, 2020 (https://www.barrons.com/articles/deal-for-the-mets-makes-liberty-braves-stock-look-attractive-51600180604).}

^{[8] “Liberty Sirius also trades at a 17% discount to the value of its holding in Sirius XM,” according to a Dec. 21, 2020 article by Gene Marcial in Forbes, Finding Value In The Stock Market In 2021 (https://www.forbes.com/sites/genemarcial/2020/12/21/finding-value-in-the-stock-market-in-2021/).}

^{[9] Press Release, Liberty Media, Liberty Media Corporation Completes Acquisition of Formula 1 (Jan. 23, 2017) (https://www.sec.gov/Archives/edgar/data/1560385/000156038517000004/lmca-20170123ex991483c15.htm).}

^{[10] Transcript of Liberty Media Nov. 5, 2020 Earnings Conference Call as provided by Seeking Alpha (https://seekingalpha.com/article/4386422-liberty-braves-group-batra-ceo-greg-maffei-on-q3-2020-results-earnings-call-transcript).}

^{[11] Id.}

^{[12] According to the income tax footnote (17) of the 2019 financial statements found SiriusXM’s annual report, the company has gross federal NOL carryforwards of approximately $2.694 billion. The company notes that $1.287 billion of NOLs came over in the 2019 acquisition of Pandora Media, Inc. While there is a limitation on use of the Pandora NOL under Section 382, the company does not expect that limitation to prevent full use of the NOL during the carryover period. Sirius XM Holdings Inc., Annual Report (Form 10-K), at F-40 (Feb. 4, 2020) (https://www.sec.gov/ix?doc=/Archives/edgar/data/908937/000090893720000011/siri-20191231x10k.htm).}

^{[13] Supra note 3, at I-21, where it says, “These are assets that were previously acquired (some in tax-efficient transactions) and are currently held as non-core assets. . . . We intend to continue to monetize these investments, which may include further derivative and structured transactions as well as public and private sales.”}

^{[14] Liberty Media Corporation, Annual Report (Form 10-K), at I-2 (Feb. 28, 2013) (https://www.sec.gov/Archives/edgar/data/1560385/000156038513000012/lmc1231201210k.htm).}

^{[15] IRC §384(b).}

^{[16] Treas. Reg. §1.1502-21(c).}

^{[17] Treas. Reg. §1.1502-21(g).}