Keith Benjamin says he likes USAI in his 2/12/99 web report. Excerpts:
A MONSTER IS BORN – The New Lycos Network – The formation of the USA
Lycos Interactive Network is the biggest move among media and Web
companies to date, in our view. USA Networks is contributing its Home
Shopping Network (HSN), Ticketmaster “Off-line”, Internet Shopping
Network (ISN) and First Auction businesses. Lycos and TicketMaster
Online-CitySearch are merging into the new company. We are not
surprised that USA Networks did not buy Lycos and TMCS, given the high
valuations of Internet stocks versus media multiples. We are positively
surprised by the scale of the transaction; however, there is some risk
that the deal requires approval of each shareholder base. CMG appears to
be price sensitive, with a big, but not controlling, vote. We believe
investors will come around to appreciate the strategy and vote for the
deal. The pure Web companies bring local and international content and
community. The off-line companies bring mass-market audience reach and
commerce.
WAS USA UNDERVALUED OR LCOS/TMC OVERVALUED? – The confusing part of the
deal is that USA is asking for a premium valuation for the combination
of its larger, but slower growing off-line commerce businesses and its
small but emerging on-line businesses. USA is delivering the marketing
power of its USA Networks and HSN. On the other hand, we are hard
pressed to justify the valuations of Lycos and TMCS.
The announcement of the transaction effectively shifted value from
LCOS/TMCS to USAI. Prior to the announcement, LCOS was trading at $6.3
billion, TMCS $4.0 billion, and USAI $5.9 billion. As of Thursday's
close, LCOS was $5.3 billion, TMCS $2.7 billion, and USAI $6.1billion.
The Lycos stock effectively represents the trading price for the new
company, as each LCOS share will convert evenly into one new share. LCOS
will own 30%, TMCS 8.5% (excluding USAI's interest), and USAI 61.5%.
With approximately 170 million shares of the new company, the implied
market capitalization will be roughly $20 billion, depending on LCOS's
stock price.
IS IT BAD TO BE AN ONLINE/OFFLINE HYBRID? - We are more enthusiastic
about the competitive positions of Lycos and TMCS as part of this
monster network, than as independent companies. Of course the problem
of adding over $1 billion in revenues from HSN and TicketMaster
“Off-line” is that the new company's revenue multiple may decline.
There may also be some cannibalization of revenues, a process already
occurring at TicketMaster, as consumers are given the choice to avoid
waiting in line for tickets. At HSN, we expect on-line revenues will be
more incremental as the brand reaches new customers.
I WANT A FULL SERVICE NETWORK – I want easy access to information to
help me decide what to buy and I want a quick transaction. LCOS and
TMCS provide the content and communities of advice. Successful
e-tailers will build big businesses by combining well-known brands,
selection, and service. We believe price is less important than getting
what you want fast. While some consumers will compromise for price, we
expect the mass market to want full service. We believe HSN's access to
product inventory and fulfillment capabilities will provide strong
competitive advantages on line, where few companies other than
Amazon.com have invested in inventory management capabilities.
WHAT'S THE BRAND? – The new network will reach over 70 million homes
between USA Television Network and HSN, which should facilitate brand
building. However, as much as we like the concept, we have a problem
with the name, USA Lycos Interactive Network. It is almost worse than
TicketMaster Online-CitySearch, as we see it. Even Lycos alone was
better, although we wonder if the dog and eskimo advertisements are a
clear or confusing image. In our view, the biggest challenge will be to
promote and/or consolidate these multiple brands. We are willing to bet
on depth of media and Internet management experience with this combined
team. We want to own this new monster. |
