Will Atlanta Braves Be Sold Before Team Changes Its Name?

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

With news that the Cleveland Indians baseball team will be changing its name to the Cleveland Guardians, ¹ other sports teams with Native American-oriented names once again face questions about whether similar changes are in store for them.  For the Atlanta Braves, this may be less acute than the question of whether, and how, the team will be sold by Liberty Media Corporation (Liberty Media), which owns 100 percent of the Braves ² and whose Braves tracking stock (NASDAQ:  BATRA) tracks the businesses, assets and liabilities attributed to the Braves.

We have previously written about Liberty Media’s prospects with respect to its three principal holdings and their associated tracking stocks—Liberty SiriusXM (NASDAQ:  LSXMA), Liberty Braves and Liberty Formula One (NASDAQ:  FWONA).  In our December 28, 2020 report, ³ we pointed out that, despite much attention on a possible transaction involving SiriusXM, it seems to be management’s intention to raise its ownership in Sirius XM Holdings Inc. (NASDAQ:  SIRI) (SIRI) above 80 percent but not with a view to spinning it off anytime soon.  We noted that the Braves apparently satisfies the five-year active trade or business (ATB) requirement under Section 355 of the Internal Revenue Code (IRC).  And a second business to satisfy the five-year period will be Formula One in January 2022, Liberty Media having acquired its parent company on January 23, 2017.

So what, if anything, will the company do in early 2022? Note that if the company were truly itching to do a spin-off as soon as possible after the five-year anniversary of the Formula One acquisition, it could commence that process, including a public announcement, as soon as now.  A spin-off ordinarily takes many months to move from announcement to execution, and there is no prohibition on moving to implement a tax-free spin-off prior to satisfying the five-year ATB period, provided the actual distribution only occurs after the five-year anniversary date.

As a reminder of what we previously discussed in the December 28 report, apart from Liberty Media management’s statement indicating an intention to preserve Liberty Media’s connection with SIRI, the manner in which Liberty Media has moved to increase its ownership in SIRI to 80 percent—taxable redemptions by SIRI from public shareholders—is not an acceptable method to acquire control from an ATB standpoint. ⁴ So the presumptive candidate for a spin-off from the group would be the Braves.

But does it make a lot of sense for Liberty Media to spin off the Atlanta Braves as a stand-alone public company? ⁵ It’s worth remembering that John Malone’s ownership (through Liberty Media) of the Braves was apparently the result of happenstance more than desire.  In February 2007, Liberty Media exchanged appreciated stock in Time Warner Inc. for stock in a corporation holding the Braves and $960 million of cash in a cash-rich split-off under IRC Section 355. ⁶ The baseball team is also not nearly as large an asset as the others held by Liberty Media.

So it would make sense for Malone to wish to sell the Braves.  We do not know what Liberty Media’s tax basis is in the Braves, but it would have taken a carryover of Time Warner’s historical basis in the team in the 2007 cash-rich split-off.  Time Warner, in turn, acquired the Braves when it acquired Turner Broadcasting System in 1996 ⁷ (Ted Turner had purchased the team back in 1976). ⁸ In other words, the tax basis is low.

Professional sports teams are predominately owned privately or sometimes by a public company controlled by an individual or family.  In the latter category, the New York Knicks and Rangers are owned by Madison Square Garden Sports Corp. (NYSE:  MSGS), controlled by the Dolan family.  Similarly, Manchester United is owned by Manchester United plc (NYSE:  MANU), controlled by the Glazer family.  If John Malone did have a desire to own the Braves, certainly a split-off distribution to him would do the job.  But absent evidence of such a motivation on his part, we are more likely looking at a process that will see the team end up controlled by one or more business moguls, presumably (but not necessarily) with a connection to Atlanta.

We should ordinarily start with the simplest possibility:  Liberty Media runs an auction and sells the team for cash, paying significant income tax based on the very low tax basis.  If it were to do this, it should probably do so very soon, in view of the likelihood that corporate tax rates could go up to as high as 28 percent next year.  Looking instead at a more tax-efficient transaction, the company could split off the Braves to holders of the Braves tracking stock.  But we doubt that being a stand-alone public company is the long-term fate of the Atlanta Braves, in view of the pattern referred to above of sports teams being owned privately or by public companies controlled by a single individual or family (which could be motivated in part by league policies restricting team ownership and control).

Because of the anti-Morris Trust rules of IRC Section 355(e), as well as certain other requirements under IRC Section 355, a split-off of the Braves could not be combined with a plan to sell control of the Braves Splitco.  Therefore, it would seem to be necessary to work through the rigorous process of separating out the Braves as a fully independent public company, with a view to maintaining this position for an indefinite period of time.  After a respectable period of time (and regulations under IRC Section 355(e) help define what is respectable), suitors could seek to buy the public Braves Splitco, or the company could even initiate an auction process. ⁹ Under safe harbors provided in the regulations, negotiations for a sale could begin as soon as six months following completion of the split-off. ¹⁰ 

What could make more sense is to negotiate a tax-free split-off with an individual or group that would be an anchor investor for the Braves Splitco, along the lines of a sponsored spin-off.  There are various approaches through which such a transaction could be effected, but the essence is that Liberty Media would split off Braves Splitco to its Braves Series shareholders and the new investor group (Anchor Investor) would make an investment through which it would acquire a 49-percent interest in Braves Splitco.  Under one approach, Braves Splitco is first leveraged, with the Anchor Investor investing cash into Braves Splitco immediately following the split-off for its 49-percent interest.  Another alternative is for Liberty Media or its shareholders to sell a 49-percent interest in the Braves tracking stock to the Anchor Investor, which it would exchange along with the other tracking stockholders in the split-off.

The question of how satisfactory this arrangement would be to an Anchor Investor that wishes to “own” a baseball team is a real one.  On the one hand, even full control of a public company is a different proposition than being general partner of a private partnership, though perhaps dealing with a diffused public shareholder group could be easier than dealing with a small group of vocal co-investors.  Is 49 percent enough to have an adequate degree of control? Probably.  Without locking in board control, which would not be permitted under the IRC Section 355(e) rules, the initial management organization to run the team would certainly be put in place.  Additionally, while there cannot be a plan in place for new investors to acquire a 50-percent-or-greater interest, there is in fact no prohibition on new investors ever purchasing more shares, if circumstances should arise making that a necessity.  Also, Malone would presumably surrender his high-vote shares in the split-off, though as an historical shareholder in the distributing corporation, his retention of a disproportionate degree of control in support of the Anchor Investor could make sense.

^{[1] Cleveland changing name from Indians to Guardians after 2021 season, ESPN, July 23, 2021 (https://www.espn.com/mlb/story/_/id/31868331/cleveland-changing-name-indians-guardians).}

^{[2] Liberty Media Corporation owns the Atlanta Braves Major League Baseball Club and associated real estate (including the stadium) indirectly through its wholly owned subsidiary Braves Holdings, LLC.}

^{[3] “What Are Liberty Media’s Plans for Braves and SiriusXM?”}

^{[4] According to the May 7, 2021 SiriusXM Form 10-Q, Liberty Media owned approximately 78% of the outstanding common stock of SiriusXM as of June 30, 2021 (https://www.sec.gov/ix?doc=/Archives/edgar/data/1560385/000155837021006439/lmca-20210331x10q.htm).}

^{[5] Although we are using the term “spin-off,” bear in mind that any such transaction would presumably take the form of a non pro rata split-off to holders of the relevant tracking stock.}

^{[6] Liberty Media completes Atlanta Braves purchase, Reuters, May 17, 2007 (https://www.reuters.com/article/us-braves-liberty/liberty-media-completes-atlanta-braves-purchase-idUSWEN819520070517).}

^{[7] Time Warner to displace Walt Disney as world's biggest media company, CNNMoney, Oct. 10, 1996 (https://money.cnn.com/1996/10/10/deals/time_warner_a/).}

^{[8] Yachtsman Turner Purchases Braves, N.Y. Times, Jan. 7, 1976 (https://www.nytimes.com/1976/01/07/archives/yachtsman-turner-purchases-braves-yachtsman-buys-braves-for-at.html).}

^{[9] Of course, both for the split-off and for a subsequent sale transaction, any sale would have to win approval of the other Major League Baseball team owners.}

^{[10] See Treas. Reg. §1.355-7(d).}