S&P CUTS DEBT RATING TO JUNK STATUS
Expedia’s stock repurchase could cost as much as $3.5 billion
By Dennis Schaal
Expedia Inc. plans to repurchase 42% of
its common stock, or about 116.7 million
shares, at $27.50 to $30 per share, a transaction that could cost the company about
The company’s stock price soared 15%
two days after the announcement.
Still, Standard & Poor’s said it was cutting Expedia’s debt rating to junk status,
apparently fearing the deal would be funded by a huge increase in debt. Moody’s Investors Service added that it likely would
do the same.
But Barry Diller, Expedia Inc.’s chairman,
senior executive and controlling stockholder, was upbeat.
“With this action, we couldn’t be clearer
that the management and the board of this
company are confident in the value of Expedia and in its long-term future,” Diller
In that regard, management will not
be offering any of its own shares for sale.
But the debt-rating services took a dim
view of the increased leverage.
“This represents a dramatic change in
Expedia’s previously investment-grade financial policy,” Standard & Poor’s stated.
“Upon completion, the tender offer will
increase debt leverage, reduce liquidity and
curtail discretionary cash flow.”
The tender offer, in the form of a “
modified Dutch auction,” is expected to begin
June 25 and expire around Aug. 6, four days
after Expedia announces its second-quarter
earnings. Stockholders can indicate how
many shares of common stock they seek
to sell and at what price within the $27.50
to $30 range. Expedia then determines the
lowest price at which the company can buy
Expedia’s tender offer
may make the company
a less attractive
acquisition target for
a private equity firm.
The Hertz Green Collection
will contribute $1 million to the
Diller’s voting control of the company will
The company didn’t immediately specify
how it would raise the cash for the transaction, but further details about the tender
offer were expected this week.
At the end of the first quarter of 2007,
Expedia had $638 million in cash and long-term debt of $500 million. One analyst,
who declined to be identified, said Wall
Street believed that Expedia was underleveraged and that its capital structure, with
more cash than debt, was inefficient.
Many other public companies have much
more debt than cash, and “Expedia is adding value to the company by taking advantage of an underleveraged balance sheet,”
the analyst said.
At the same time, Expedia’s tender offer may make it a less attractive acquisition target for a private equity firm. That’s
because Expedia is performing the kind of
debt transactions that private equity firms
like to sweep in and do.
“With the buyback, Expedia has taken
some of its capacity to borrow and ability
to create value off the table because they
are doing it themselves rather than letting
someone else do it,” the analyst said.
With the tender offer, Expedia’s net leverage could increase from about 4. 5 times
earnings before interest, taxes, depreciation
and amortization, or EBITDA, to around
4.9 times EBITDA, according to the analyst’s projections.
With dramatically fewer shares outstanding, the company’s earnings per share also
could rise significantly.
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