Fitch: Expedia's Rating Unaffected by Acquisition of HomeAway

NEW YORK--(BUSINESS WIRE)-- Expedia, Inc.'s (EXPE) 'BBB-' Issuer Default Rating (IDR) is not affected by the $3.9 billion acquisition of vacation rental/alternative accommodation website HomeAway, Inc., according to Fitch Ratings. We expect the company's leverage to moderately exceed our 2.0x target for the company at the 'BBB-' rating level. However, organic growth and Orbitz and HomeAway acquisition-related synergies should allow Expedia to reduce its leverage back under 2.0x over the one-to-two-year Stable Rating Outlook horizon. Expedia has a history of moderately increasing leverage to make acquisitions and reducing leverage to (or slightly below) its 2.0x target during the subsequent six-to-12 months. Fitch believes the company is committed to maintaining its low investment-grade rating.

Expedia will gain a solid beachhead in the so-called 'sharing economy' by acquiring HomeAway that will diversify its product offering in a manner that complements its existing customer base. HomeAway's website has over 1.2 million vacation rental listings in over 190 countries, which should appeal to Expedia's customers, who are increasingly looking for/open to alternative forms of vacation lodging.

Adding HomeAway will also reduce Expedia's supplier concentration at a time when hotels, for example, are capitalizing on strong industry demand by reducing their exposure to discounted inventory distribution channels (i.e. on-line travel agencies [OTAs]).

Fitch sees some execution risk to boosting HomeAway's monetization, which will likely require a transition away from the company's predominantly subscription-based business model to a more transaction-oriented approach that includes some upselling of products and services. Expedia's expertise in transaction-oriented business models, as well as its familiarity with HomeAway gained through their partnership during the last two years should facilitate the integration and mitigate execution risk.

The purchase will be immediately dilutive to Expedia's earnings. However, the company expects to more than double HomeAway's EBITDA by 2018 to $350 million from $120 million going in, primarily through organic growth and better monetization. HomeAway's monetization rate is approximately one-third the rate of Trip Advisor, Inc. and Airbnb, Inc.

On Nov. 4, 2015 Expedia announced it will purchase HomeAway, Inc. for $3.9 billion. HomeAway will be the company's largest acquisition, to-date. Expedia plans to fund the purchase with approximately $2.3 billion of equity issuance, $1 billion of cash (including $500 million of net cash at HomeAway) and $600 million of incremental borrowings. The latter could include an unsecured bond issuance or borrowings under its revolving credit facility.

CREDIT STRENGTHS

Credit strengths include:

--Expedia is one of the largest OTAs, with advantages in scale that have contributed to the company gaining significant share in the market for travel services over the past several years;

--Broad customer and geographic diversification have a positive impact on the stability of end-market demand for travel services which are inherently highly correlated to the macro-economic environment;

--Expedia benefits from the expected continuation of a secular shift toward use of OTAs which should support revenue growth in excess of both overall travel services and GDP growth;

--A relatively high-variable-cost model limits potential negative pressure on profitability during business downturns, although much of the variable-cost items are specific to marketing expense which, if reduced, could have a negative effect on the company's competitive position.

RATING CONCERNS

Ratings concerns include:

--Increasing competition from other online travel businesses including TripAdvisor & Google, as well as the potential for non-traditional suppliers to evolve into significant competitors in the future;

--Expedia faces a potentially significant contingent liability due to lawsuits related to hotel occupancy taxes;

--Ongoing pricing pressure in the OTA market combined with increasing competition with direct sales channels could negatively affect future revenue growth and profitability;

--Inherent volatility in travel service demands from macroeconomic drivers as well as the potential for significant volatility due to travel demand shocks;

--Liberty Interactive holds shares representing approximately 57% of the voting power in Expedia. While Liberty has given Expedia's Chairman of the Board, Barry Diller, a proxy to vote these shares, Fitch's ratings take into account Liberty's historical track record of shareholder-friendly actions;

--In a slower growth or negative revenue environment, the Fitch-defined net working capital deficit of $4.7 billion at June 2015 is expected to be a use of cash;

--Expedia competes directly with the online presence of its suppliers in the travel services industry, which could lead to future disruptions in the company's business model. Fitch believes, however, that OTAs represent a valued source of market information to, as well as being a marketing arm of, travel service providers.

RATING SENSITIVITIES

Positive: Future developments that may, individually or collectively, lead to positive rating action include:

--Positive rating action will likely be forestalled for the foreseeable future due to minimal business considerations to support the company maintaining a rating above 'BBB-' and certain secular challenges. These include an intensifying competitive environment, shifting consumer behaviors, and technological shifts. However, a more conservative financial profile coupled with increased revenue diversification from the growth of the Egencia segment and Ad and Media revenues could have positive implications for the rating.

Negative: Future developments that may, individually or collectively, lead to negative rating action include:

--An increase in expected volatility in profitability, potentially due to greater volatility in travel services demand or a higher fixed-cost component to Expedia's financial model;

--A secular decline in the OTA business model, potentially the result of a shift to direct bookings with travel providers;

--The potential for a substantial financial loss from any future conclusion of the occupancy tax lawsuits facing the company;

--A more aggressive financial policy, reflected through material debt-funded acquisition, share repurchase, or dividends that drive leverage sustainably above 2.0x.

FULL LIST OF RATING ACTIONS

Fitch currently rates Expedia as follows:

Expedia, Inc.

--IDR at 'BBB-', Outlook Stable;

--Senior unsecured bank credit facility at 'BBB-';

--$500 million in 7.456% senior unsecured notes due 2018 at 'BBB-';

--$750 million in 5.95% senior unsecured notes due 2020 at 'BBB-';

--EUR650 million in 2.5% senior unsecured notes due 2022 at 'BBB-';

--$500 million in 4.5% senior unsecured notes due 2024 at 'BBB-'.

Additional information is available on www.fitchratings.com

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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Fitch Ratings
Primary Analyst
Colin A. Mansfield, CFA
Associate Director
+1-212-908-0899
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Michael Paladino, CFA
Managing Director
+1-212-908-9113
or
Committee Chairperson
Megan Neuburger, CFA
Managing Director
+1-212-908-0501
or
Media Relations:
Alyssa Castelli, New York, +1 212-908-0540
Email: [email protected]

Source: Fitch Ratings

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