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To: Jeffrey S. Mitchell who wrote (17944)	5/29/2003 11:48:05 AM
From: Jeffrey S. Mitchell	Respond to of 32871

Telefonica Offers $2.05 Billion For Rest of Lycos Owner, Terra By CARLTA VITZTHUM Staff Reporter of THE WALL STREET JOURNAL May 29, 2003 MADRID -- Telefonica SA, Spain's dominant telecommunications group, made an all-cash €1.73 billion ($2.05 billion) offer for the 62% of U.S. portal Lycos' owner Terra Networks SA that it doesn't already own. The offer ends months of speculation over the future of the Internet-service provider and portal operator. If the bid succeeds, as expected, it will cap an era in which Spain's biggest banking and telecom companies spent billions of euros building up Internet businesses at home and in Latin America. Access to a Spanish-speaking market of more than 350 million people was expected to give these companies a competitive edge over other European competitors operating in much smaller local markets. But the aggressive foray into the Internet world hasn't paid off as expected. No company represents the heady days of Spain's Internet boom better than Terra, which was created by bringing together all of Telefonica's Internet assets in Spain and Latin America. When it went public in 1999, Terra was priced at €11 a share. By the end of its first day of trading, the shares closed at €37, and then rose steadily to reach a high of €157 in February 2000. At that time, Terra was the fourth-largest company by market capitalization on the Madrid Stock Exchange, after Telefonica and Spain's two largest banks. Later that year, it merged with Lycos Ltd. Caught up in the Internet frenzy, hundreds of Spaniards invested their savings in the company and most lost money: Terra closed Wednesday in Madrid at €5.45, up 21%, or 93 European cents. Terra's American depositary receipts rose 18%, or $1, to $6.47 in 4 p.m. Nasdaq Stock Market trading. Telefonica rose 1.6%, or 15 European cents, to €9.52 in Madrid trading. Today, Terra offers Internet access and operates portals in Spain, Portugal and Latin America under the Terra Lycos brand. It also operates portals in the U.S. and other European countries under the Lycos brand. But Terra continues to lose money and has little prospect of breaking even before 2005. Revenue has been flat or declining for more than two years, hurt by the world-wide downturn in advertising and currency turmoil in Latin America. About 60% of Terra's revenue comes from online advertising and other portal services, and the remainder comes from providing Internet access. In Spain, Terra had to compete with Telefonica to provide broadband services -- a business that requires increasingly heavy investments in transmission capacity and technology, Telefonica said. Reflecting the sinking fortunes of Europe's Internet industry, German media group Bertelsmann AG announced earlier this year that it wouldn't exercise an option to purchase as much as $675 million of advertising from Terra over a three-year period. To compensate for the loss, Telefonica agreed to buy services from Terra over six years at a guaranteed level of €78.5 million a year. Telefonica is offering €5.25 for each share of the company -- a premium of 15% on Terra's average share price for the past six months. The bid, which values the company at €2.1 billion, is conditional on Telefonica gaining control of 75% of Terra's shares. Because Terra holds €1.731 billion in cash -- the equivalent of €3.09 a share -- the real premium for shareholders will be 51% over the market value of its business, Telefonica said. "Terra is really a pile of cash with a small business attached," said Santiago Fernandez, Telefonica's chief financial officer. "Telefonica didn't want a share deal because it would have had to issue shares just to acquire cash, and it would have been dilutive for [Telefonica] shareholders." The takeover -- through cost cutting and the elimination of overlap -- would contribute €269 million to earnings before interest, taxes, depreciation and amortization, Telefonica said. It also would give Telefonica access to Terra's cash pile, as well as some €700 million in tax credits. Telefonica said it would manage the U.S. Lycos unit as an independent company, a move analysts said could facilitate the sale of the portal operator to a larger competitor. Write to Carlta Vitzthum at carlta.vitzthum@wsj.com URL for this article: online.wsj.com Hyperlinks in this Article: (1) mailto:carlta.vitzthum@wsj.com (2) online.wsj.com (3) online.wsj.com (4) online.wsj.com Updated May 29, 2003