USA Networks Agrees to Acquire Control Stake In Expedia From Microsoft

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USA Networks Inc.

July 17, 2001USA Networks Inc. announced plans to buy a controlling stake in Expedia Inc. from Microsoft Corp. on terms that work out to be well below the Internet-travel concern’s recent market price.

Expedia shares dropped 7.8% on the news, but USA Networks stock rose 4.9%, as analysts said the deal made sense given the company’s strategy of expanding in interactive commerce.

Expedia’s controlling shareholder, Microsoft Corp. , has agreed to sell its 70% stake, although Expedia’s public shareholders also will get the chance to sell their stock.  USA Networks said it would buy from 67% to 75% of Expedia in a deal that will make the cable-TV concern a major force in the online-travel market.

USA Networks said it planned to launch a cable-TV channel this year focused on travel-related commerce. USA said it had discussed teaming up with other companies in the Liberty Media Group family on the channel. USA Networks also confirmed its proposed acquisition of National Leisure Group Inc., a closely held cruise and vacation package agency, for an undisclosed price.

USA Chairman and Chief Executive Barry Diller and Expedia Chief Financial Officer Greg Stanger both declined to put a value on the offer. USA said the offer had a “hard” value of $35 a share, or about $1.3 billion, not including the warrants.  Terms of USA’s offer for Expedia were complex and subject to varying valuations. USA is offering a mix of its common shares, preferred stock and warrants.

Microsoft sells controlling stake in Expedia.comPaul Keung, an analyst covering Expedia for CIBC World Markets, estimates the transaction’s full potential value at $39 to $44 a share. At either valuation, the offer is below Expedia’s 4 p.m. price Friday of $48.70, although the stock had jumped almost 11% on Friday alone. Expedia shares have enjoyed a healthy run-up since October, when they traded as low as $7.75.

Expedia previewed its fiscal fourth-quarter results, indicating the company’s performance would be much stronger than expected. For the three months to June 30, Expedia predicted a loss of 11 cents to 15 cents a share. Excluding certain unspecified noncash items, the company forecast a profit of 20 cents to 23 cents a diluted share, substantially higher than the nine cents expected by analysts surveyed by Thomson Financial/First Call. Expedia also said revenue for the quarter more than doubled from a year earlier and gross bookings surged 78% to $802 million.

Even though Expedia is profitable on a cash basis, the company still has been generating some accounting losses that were a drag on Microsoft’s books — one reason Microsoft may have been willing to unload its stake for a relatively low price. Those accounting losses stemmed from goodwill charges associated with Expedia’s acquisitions of VacationSpot.com Corp. and Travelscape.com Inc., as well as separate charges relating to employee stock options.

“I’m delighted,” said Ken Londoner, general partner of New York-based hedge fund Red Coat Capital Management LLC, which also is an Expedia shareholder. He said the deal with USA gives Expedia “enhanced strategic value.”  Mr. Diller “is probably the best manager to bring into the situation at this juncture,” given his track record on interactive commerce and television, Mr. Londoner said.

Despite the absence of a premium to the stock price, some Expedia shareholders said they were happy with the deal. Robert Zuccaro, president of the Grand Prix Fund, one of Expedia’s largest shareholders, said the Wilton, Conn., fund was pleased and intends to hold on to its investment. “It’s basically a fair-market-value offer,” Mr. Zuccaro said. He noted Expedia’s underlying fundamentals are strong and the stock has quadrupled so far this year, an ascent he expects to continue. “Look at the revenue and earnings growth; it’s powerful,” he said.

SG Cowen Securities Corp. analyst Ed Hatch noted that launching a new travel-cable channel could be costly, although he said USA’s ownership of other cable networks could help make it more economical. Another way to reduce the potential expenses would be to find partners. Mr. Diller told analysts USA was “certainly desirous of taking in other players.”

On a conference call with analysts, Mr. Diller noted that travel was the single largest retail category online. He said USA concluded that interactive travel would be an ideal fit with its other businesses.