Lesson 2 of 7
What a tracking stock is
A tracking stock follows one group's results and gives its holder no legal claim on that group's assets. The company's own filing says so, in one sentence.
By Javier Sanz
Founder of ValueScreener. Built Ninety Nine, a securities services provider, and sold it to a tier-one global bank; ran operations and internationalization at Alpaca, the brokerage API.
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In one minute
- A tracking stock is common stock of the parent company that is intended to reflect the results of one group of businesses.
- The attribution is an accounting convention, published as an unaudited exhibit. It does not move legal title to assets or responsibility for liabilities.
- A holder is a shareholder of the whole company and carries the risks of all of its businesses, whichever ticker they bought.
The instrument looks like a share in a division and is not one. What it is, and what it is not, is set out by the issuer itself in the annual report, which is the only place to read it.
One parent, three tracking stocks, one balance sheet
- Attributed to the Liberty SiriusXM Group362$m
- Attributed to the Braves Group151$m
- Attributed to the Formula One Group1,733$m
- Consolidated Liberty2,246$m
What the issuer says it is
The filing defines it plainly: a tracking stock is a type of common stock that the issuing company intends to reflect, or track, the economic performance of a particular business or group, rather than the economic performance of the company as a whole.
Then it says what that does not mean, and this is the sentence to keep. Notwithstanding the attribution of assets, liabilities, revenue, expenses and cash flows to the groups, the tracking stock capital structure does not affect the ownership or the respective legal title to the company's assets, or responsibility for its liabilities. Holders of each tracking stock are holders of the company's common stock and are subject to the risks associated with an investment in the company and all of its businesses, assets and liabilities.
Reading the attributed accounts
The attributed statements are real work and are published as an exhibit, with their own balance sheet, cash flow statement and inter-group eliminations. At 31 December 2022 the exhibit attributes 1,554 million dollars of current assets to the SiriusXM Group, 274 million to the Braves Group and 2,023 million to the Formula One Group, and it carries a separate line for intergroup interests of 282 million and 219 million that eliminates to nothing at the consolidated level.
The stub, which is the opposite structure
A stub is the other instrument readers meet in this family, and it is worth naming beside a tracking stock because the two are so easily confused. A stub is what remains of the common equity after a recapitalisation, a large special distribution or a spin-off has moved most of the value out and usually left debt behind. It is a real claim on a real company, and it is a thin one.
A tracking stock and a stub therefore fail in opposite ways. The tracking stock looks like a claim on part of a company and is a claim on all of it. The stub looks like ordinary equity and behaves like an option on the enterprise value clearing the debt.
What this means when you value one
The structure was set up by a reclassification in April 2016 that created three tracking stock groups, and one of them was renamed the following January. A reader valuing one of these instruments is doing a sum of the parts on a group whose boundary is drawn by the issuer and can be redrawn by the issuer.
That is not a reason to refuse to look. It is the reason the terms come before the arithmetic in this kind of situation: the discount a tracking stock carries to its attributed value is partly a discount for exactly this, and a reader who has not read the attribution note cannot say how much of it is.
Check yourself
What does a tracking stock give its holder a claim on?
- The assets of the tracked group only
- The parent company as a whole, with the tracked group's results reflected in the stock's terms
- A fixed dividend from the tracked group
Show the answer
Answer: B.
The filing states that the structure does not affect legal title to assets or responsibility for liabilities. Holders are holders of the parent's common stock.Where do the attributed group accounts appear?
- In the audited primary statements
- In an unaudited exhibit to the annual report
- They are not published
Show the answer
Answer: B.
The attributed financial information is published as Exhibit 99.1, unaudited, alongside the consolidated statements that are audited.What is an intergroup interest in these accounts?
- A loan from an outside bank
- An attributed interest of one group in another that eliminates on consolidation
- A dividend paid between groups
Show the answer
Answer: B.
The exhibit shows intergroup interests attributed to two groups and an equal elimination, so the line exists inside the attribution and not at the consolidated level.Sources
- Liberty Media Corporation, Form 10-K for fiscal 2022, Exhibit 99.1, "Unaudited Attributed Financial Information for Tracking Stock Groups", filed 2023-03-01: the definition of a tracking stock, the statement that the structure does not affect ownership or legal title, the attributed balance sheet at 31 December 2022, and the April 2016 recapitalisation into three groups.
What this leaves out
- The figures are one issuer's attributed cash and current assets on one date, from an unaudited exhibit.
- Tracking stock terms differ by issuer and by charter. What one company's filing says about votes, conversion or reattribution does not describe another's.
- This structure is described as it stood in a 2022 filing. Group boundaries and the instruments themselves have changed since, and any reader must check the current filings.
- Nothing here is advice about any security.