H & Q Recommendation: Buy
by: absolutely_nominal 20555 of 20982Here's what H&Q analyst Paul Noglows put out on today's deal:
Valuation: The Wall Street Journal and New York Times ascribed an $18-$20 billion market capitalization to the combined company based on simple math that if Lycos, with a market capitalization of $5.3 billion, represents 30% of the combined company than the entire company must be worth $18-$20 billion. On the conference call this morning, USA Networks pegged the value of the combined company at $22 billion. Following this logic, Lycos shares would be expected to trade close to yesterday's closing price of $127.25.
However, if we apply Internet trading multiples to the combined companies' 1998 revenue of $1.5 billion, the value of Lycos' stake ratchets up significantly. Considering that America Online and Amazon.com both trade at about 27 times their respective 1998 revenue, such a multiple applied to USA/Lycos Interactive Networks would give the combined company a market capitalization of $40 billion. That would make Lycos' 30% stake worth about $12 billion or a whopping $285 a share.
Even so, Home Shopping Networks—USA's traditional cable TV shopping channel--accounts for north of $1 billion of the combined $1.5 billion of revenue and it is questionable whether Internet investors will ascribe a pure Internet multiple to that portion of revenues (HSN is growing at about 14% per year and currently trades at about 13 times cash flow of $188 million). Yet even if we discount the trading multiple applied to home shopping revenues by 50% (13.5 x $1 billion) while applying an AOL/AMZN multiple to the $500 million of pure Internet revenue (27 x $500 million), this gives the combined company a market cap of $27 billion, making Lycos' 30% stake worth $8.1 billion or $193 a share. Let's take it one step further and discount the trading multiple applied to the home shopping portion of revenues by 75% (6.75 x $1 billion) and we still come up with a combined market capitalization of about $20 billion making Lycos' stake worth about $6 billion or $143 a share. Given that the company has significant plans to build Internet e-commerce revenues at both TicketMaster and HSN going forward, we think it foolish not to view this combined company as significant Internet player long-term. It should be noted that that if the combined companies' market capitalization trades between $25 billion and $45 billion during a set period of time, Lycos receives another 1%-5% of the company bringing its stake to as much as 35%.
While the WSJ and NYT articles are putting significant downward pressure on the stock price in the near term, over the long-term, we believe the upside potential for Lycos shareholders is significant.
Summary and Recommendation: With this move, we believe Lycos has made the transition from an advertising-supported portal/Internet search service to become a multi-dimensional e-commerce powerhouse. Home Shopping Networks brings more than 10 million customers across 70 million homes in the U.S. while TicketMaster CitySearch gives the company significant entrée into the local market (which has yet to develop, but will be significant). TicketMaster sells over 70 million tickets to over 150,000 events worldwide. While the deal has yet to pass shareholder vote, we have learned that CMG Information Services, the largest shareholder in Lycos, has already approved the merger. With Lycos CEO Bob Davis and CFO Ted Philip at the helm of USA/Lycos with new five-year employment contracts, we expect the new company to have the same focus on cost-containment and profitability that Lycos has been known for since its inception. Couple that with Chairman Barry Diller's grand vision for interactive services and it becomes clear that Lycos shareholders should BUY into this deal and USA/Lycos Interactive Networks Inc. for the long-term.
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Posted: Feb 9 1999 5:57PM EST as a reply to: Msg 1 by YahooFinance |
