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Diller's USA to Buy 75% of Expedia

Internet: The media company agrees to take over the online travel service for $1.4 billion.


USA Networks Inc. agreed Monday to acquire 75% of Expedia Inc., the Internet travel services company controlled by Microsoft Corp., for about $1.4 billion in stock.

The deal pushes USA, which is controlled by media mogul Barry Diller, one step closer to its goal of becoming the leading Internet commerce company. The Expedia acquisition would vault USA over Inc. to become the second-largest Internet retailer after Inc.

Expedia's approximately $650 million in annual sales would give USA, which already owns online hotel reservations, ticketing and shopping businesses, about $1.4 billion in online revenue. That is less than half of Amazon's $3.4 billion but more than Priceline's $1.2 billion.

For Microsoft, the sale is part of an effort by President Steve Ballmer to redirect resources away from content development and toward the company's core technology and software businesses. Microsoft sold MSN Sidewalk, the much-ballyhooed Internet city directories, to USA in 1999 and, after founding Expedia in 1996, spun it off to the public in late 1999.

Under Monday's deal, Microsoft would exchange its shares for a 3% to 5% interest in USA Networks. Microsoft also extended for four more years its contract to carry Expedia over MSN, its Internet service.

The acquisition also underscores the supportive role in USA's expansion of the company's largest shareholder, Vivendi Universal. Vivendi Chairman Jean-Marie Messier told The Times last month that he was encouraging Diller to take advantage of bargain prices during the consolidation of Internet companies to become a bigger factor in electronic retailing.

Vivendi bought a 45% stake in USA as part of its acquisition of Seagram Co., which used its veto power to prevent USA from making large acquisitions that would have diluted its ownership.

Diller has been talking with Yahoo Chief Executive Terry Semel about a merger of the two companies, but so far has been unsuccessful in persuading the Internet service to give up control, according to sources close to the discussions.

In addition to Expedia, USA also announced Monday plans to buy online travel company National Leisure Group Inc. and to start a travel channel for cable. Expedia, National Leisure and USA's existing stake in Hotel Reservations Network Inc. would become the foundation for the new USA Travel Group, which the company said would be the leading travel source on the Internet.

With $4 billion in annual bookings, USA Travel would handle 16% of the $14 billion worth of travel transactions booked online in 2000.

Wall Street applauded the acquisitions, driving USA stock up $1.26 to $26.52 on Nasdaq. Shares of Expedia fell $3.81 a share to $44.89 on Nasdaq after rising 369% this year on takeover speculation. Microsoft shares closed at $71.18, down 16 cents, on Nasdaq. Analysts valued the purchase at $40 to $44 a share, as much as 18% less than Expedia's price Friday.

Separately, Expedia forecast a fiscal fourth-quarter loss of 11 to 15 cents a share. Profit before stock option expenses and amortization will be $12 million to $14 million, or 24 to 29 cents a share, more than earlier forecasts, the company said.

"This is a very logical transaction, and USA is getting $1.6 billion in assets for $1.4 billion," said Ed Hatch, an analyst at S.G. Cowan. "Expedia is a leader in its category, but partnered with USA, bigger things are to come."

He said Diller could leverage his other assets to build USA's travel bookings. For instance, Hatch said that before launching an independent cable channel, at a cost of $500 million or more, USA probably would devote time periods to travel programming on one of its existing networks, such as Home Shopping Network.

USA also owns the USA Network, Sci Fi Channel and Trio cable channels.

It's not the first time Diller has tried to buy a company without paying a premium. Two years ago, USA Networks aborted a plan to buy Internet search service Lycos Inc. after Lycos shares plunged as investors protested.

Expedia had been looking for other partners, Chief Executive Richard Barton said in a conference call. Barton would report to Diller, who becomes chairman of Expedia.

Under the deal, USA Networks would buy as many as 37.5 million Expedia shares. Microsoft agreed to sell all of its 33.7 million Expedia shares and warrants.

If Expedia investors hold onto the stock, there would be a warrant that would increase the value to $44.50 to $45 a share.

Expedia shareholders could choose to exchange each share for $17.50 in USA Networks common stock; 0.3873 to 0.4524 of a seven-year warrant to acquire shares of USA Networks common stock at an exercise price of $35.10 a share; and 0.35 share of a new series of USA convertible redeemable preferred stock, with a $50 face value.

Expedia shareholders who don't exchange their stock for USA shares would keep their Expedia stock and receive 0.192 of a new Expedia warrant with a seven-year term and an exercise price of $52 a share.

At the close of the purchase, USA Networks would own as much as 75% of Expedia's outstanding shares and more than 90% of the voting interest.

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