Was it the best deal Lycos could do? for the long term we think so.
Morning Report
Wed Feb 10
Spiderman:
Inside Lycos' Exit At What Cost?
By Steve Harmon
Senior Investment Analyst
Internet.com
"Where Wall Street Meets The Web"
Lycos' (NASDAQ:LCOS - news) merger with USA Networks (NASDAQ:USAI - news) and
Ticketmaster Online-Citysearch (NASDAQ:TMCS - news) left Wall Street scratching its head trying to
value what happened. Here's one take.
USA Networks' Internet assets -- Ticketmaster and Internet Shopping Network/First Auction -- will be
rolled into the new USA/Lycos Interactive Networks. USA Networks will also toss in its Home
Shopping Network.
The combined market value of the 3 amigos was $20 billion February 8, the day before the deal. The
firms themselves have said the combined value of the 3 in their minds was $22 billion. Wall Street had
a different opinion. By the time investors got wind of the merger February 9 LCOS and TMCS lost
about 25% each. USAI gained 9%.
The drop came as the new entity splits became known: Upon the closing of the transaction, USAI will
own 61.5 percent, Lycos shareholders will own 30 percent and TMCS shareholders other than USAI
will own 8.5 percent of the USA/Lycos equity (TMCS shareholders, including USAI, will receive in the
aggregate approximately 19 percent of the USA/Lycos equity).
Additionally, Lycos shareholders can increase their ownership another 5 percent, to a total of 35
percent, and TMCS public shareholders can increase their ownership by 0.15 percent, to a total of
8.65 percent, should the initial USA/Lycos shares achieve an average market value of $45 billion over
specified periods.
According to reports, Lycos shareholders are slated to get 1 new share in the new outfit for each
LCOS share while TMCS shareholders are on tap for .4464 of the new firm's share for each TMCS
share.
To be fair, LCOS shares have risen dramatically this year, largely driven on takeover talk. LCOS was
up 70% since December 31, 1998. Lycos' allocated value of the $22 billion package above -- 30% or
$6.6 billion -- seems in line with what @Home agreed to pay for Excite. That deal was initially valued
at $6.7 billion.
We think part of the problem LCOS shareholders have is they may have wanted more of a premium
past the rapid run LCOS has already had. Or they expected an NBC to cut a check. The benefit of
USA Network wasn't evident, which some say makes Lycos an ecommerce powerhouse. We say not
so fast.
USA Network is quick to point out its 90% broadcast reach in the U.S. and its cable carriage. But we
know from having been a media financial analyst that those "homes passed" or "coverage area"
percents are meaningless. The only numbers that matter are actual homes viewing USA Network
programs or channels. Far less than 90% of U.S. homes tune in.
Let's focus on the $22 billion value ascribed here. If USAI owns 61% pro forma that implies $13 billion
valuation for its contribution. For Internet Shopping Network/First Auction using uBID (NASDAQ:UBID
- news) , Egghead.com (NASDAQ:EGGS - news) and ONSALE (NASDAQ:ONSL - news) as
comparables we come up with $565 million average. USA's stake in TMCS is about 67%. So we can
get to $3.2 billion value already. That implies $10 billion value on Home Shopping Network.
The combined entity would have generated $1.5 billion in revenue, however, and the overwhelming
majority of that is from Home Shopping Network. That's a 6.7x revenue multiple given to this cable
property, on the high side for cable properties we'd say.
We can justify a premium though on the leverage that its revenue and cash flow brings to two smaller
revenue enterprises: Lycos and Ticketmaster Online-Citysearch. LCOS generated about $25 million in
revenue in its latest quarter while TMCS posted $13.6 million revenue for 1998.
Said another way, USA Networks, with its $1.5 billion revenue being thrown off, has the cash.
Electronic retailing was $776 million of USA's $2 billion revenue for the nine months ending
September, 1998. And the oldest rule on Wall Street is 'he who has the cash makes the rules.'
Some of the benefits of the merger center on ecommerce. Again, however, easier said than done.
Lycos is not an ecommerce powerhouse now, nor is TMCS. Lycos is almost 100% ad supported, not
transaction supported.
What the three can do is cross promote ecommerce across the mediums and venues, however, turn
traffic into shopping.
Overall we think just as when Ticketmaster Online and Citysearch merged that there were pieces to
be added to make this a complete multi-media etail and ecommerce experience. Lycos adds the wide
Internet reach element that TMCS lacks and USA Networks never had.
Knowing USA Network chairman Barry Diller, the man who built Fox TV and invented the TV movie,
the same one who wanted to acquire a Big 3 broadcast network four years ago, knowing all this, as
well as the fact USA Networks sold debt recently, we could see that more acquisitions may be on
tap. We think Diller could acquire a larger broadcast group or network yet, if not a movie studio along
the way. That's the kind of multi-media player Diller is.
But another point not mentioned is that cable Internet services are growing. With its cable, Internet
programming now at its fingertips--combined with home shopping expertise--USA/Lycos could be a
programming and etail leader in this space. What they've done, more than @Home-Excite, is raise
the ante between cable and Internet, broadcasters and Internet, to merge to create multi-platform
commerce and content.
One last point on valuation: both Lycos' and Excite's deal values make what Disney paid for 43% of
Infoseek, $430 million, seem cheaper by the minute. Was it the best deal Lycos could do? for the
long term we think so.
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