Interesting valuation discussion
Internet Stocks Continue To Follow Lycos Lower
Cmgi Inc.
Dow Jones Newswires -- February 10, 1999
By Joelle Tessler
NEW YORK (Dow Jones)--Concerns that Lycos Inc. (LCOS) didn't get a premium in
its three-way deal with USA Networks Inc. (USAI) and TicketMaster Online
Citysearch Inc. (TMCS) have pushed Lycos' shares down sharply - and dragged down
the rest of the Internet sector - for the second straight day.
Under the complicated agreement announced Tuesday, Lycos will merge with USA
Networks' Internet and electronic commerce assets and with TicketMaster Online -
which USA Networks controls - to form USA/Lycos Interactive Networks Inc. USA
Networks will contribute its Home Shopping Network, TicketMaster and Internet
Shopping Network/First Auction to the new company.
Calling the deal a "take-under" for Lycos, Volpe Brown & Whelan analyst Andrea
Williams explained that many shareholders had pushed Lycos shares up sharply in
recent weeks on hopes that the company would be acquired at a substantial premium
and were quite disappointed when terms of Tuesday's deal were finally announced.
This disappointment quickly spread to many other Web names that have also run up on
takeover talk in recent weeks.
In active trading, Lycos shares were down 12 1/4, or 13%, at 82 on Nasdaq volume of
about 5.9 million, compared with average daily volume of 5.3 million. The stock plunged
33, or 25.9%, to 94 1/4 Tuesday.
Although a number of Internet stocks have started to turn around and move higher after
falling at the opening, others continue to slip Wednesday.
CNET Inc. (CNET) is one of the names that has been hardest hit over the past two
days by the disappointment over the Lycos/USA Networks deal.
CNET's shares climbed sharply last week on takeover speculation, even though General
Electric Co.'s (GE) NBC currently holds a 4.99% stake in CNET and a 19% stake in
its Snap! Web network.
As a wave of recent mergers has hit the Internet sector, analysts and investors have
been looking at the remaining players and guessing about who else will pair up. And
some had begun to speculate that NBC could acquire the rest of CNET or that CNET
could become a target for another Web company.
Reports that emerged late last week that NBC could take a stake in Lycos led investors
to speculate that such a deal could result in a merger of Lycos and Snap! Even though
Snap! is no longer on CNET's balance sheet, those rumors further fueled the rise in
CNET's stock.
But Tuesday's deal between Lycos and USA Networks effectively put an end to those
hopes.
There may be also some concerns on Wall Street that CNET, which provides
Internet-related television programming for USA Netorks' cable operations, may be left
out in the cold after the Lycos deal goes through.
CNET's shares were recently down 5 1/2, or 5.6%, at 93. The stock tumbled 25 3/4,
or 20.7%, to 98 1/2 Tuesday.
Yahoo! Inc. (YHOO) and America Online Inc. (AOL) are the stocks that are now
posting gains. In late morning trading, Yahoo was up 2 9/16 at 143 5/16 and AOL was
up 1 5/16 at 149 1/4.
The concerns about the terms of the deal between Lycos and USA Networks center on
how to value the new company being created in the complex transaction - USA/Lycos
Interactive Networks - since it will include substantial non-Internet assets, including the
Home Shopping Network. Those concerns have left many Lycos shareholders worried
that they are not getting much of a premium in the deal.
USA Networks and Lycos said Tuesday that USA/Lycos Interactive Networks had
pro forma revenue of about $1.5 billion in 1998. About $1 billion of that came from the
Home Shopping Network, according to Williams of Volpe Brown Whelan.
Williams is projecting USA/Lycos Interactive Networks will generate revenue of
roughly $2 billion in calendar year 1999. But because she said she believes 25% of that
at most will come from the new company's Web operations, Williams isn't sure whether
USA/Lycos Networks should receive an Internet stock-like valuation.
"Clearly the management team will be positioning the new company as an Internet
company, the question is whether investors will buy that positioning," she said. "This is
the first major Internet merger where most of the revenues of the combined entity will
come from offline sources."
USA Networks and Lycos said Tuesday that the new company will have a value of
about $22 billion, which - using Williams' $2 billion revenue projection for 1999 -
implies a price-to-revenue multiple of 11.
Yet, Williams said she believes that the best-case scenario would give the new company
a multiple that is somewhat less than Amazon.com Inc.'s (AMZN) multiple, which was
11.4 times revenue as of Tuesday's close.
"The Internet stocks have 10 times to 100 times revenue multiples, in part, because the
companies beneath them are growing at positively enormous rates - i.e., 100% to 300%
per year," CIBC Oppenheimer analyst Henry Blodget said in a research note.
But while the Internet assets of USA/Lycos are growing at a rate of more than 100%
annually, the Home Shopping Network is growing at about only 10% a year, he said.
And since that business accounts for such a large piece of the company's total revenue
stream, Blodget is estimating the new entity is growing at a rate of between 15% to 20%
a year overall.
Given the uncertainty over how to value the new company, Lycos shareholders are still
trying to determine if they come out ahead in the deal.
Using Williams' $2 billion 1999 revenue projection for the new company, USA/Lycos
Interactive would be worth $20 billion using a multiple of 10 and $16 billion using a
multiple of eight.
Lycos shareholders will initially own 30% of the new company. That would their stake
in the new company at between $4.8 billion and $6 billion. Using an estimated 52.3
million shares outstanding for Lycos, that would translate into between $92 and $115 a
share.
For Lycos shareholders, that's substantially below 127 1/4 - the price at which Lycos'
shares closed on Monday, before the deal with USA Networks was announced.
-Joelle Tessler (201) 938-5285 |
