Liberty Interactive ("Liberty" -- Ba3/stable/SGL-1) and QVC Inc. ("QVC" -- Ba2) ratings and stable outlook are not immediately affected by the company's announcement that it has entered into a definitive agreement to acquire zulily, inc. ('zulily') for approximately $2.4 billion. While the acquisition is considered strategically sensible, the acquisition multiple is high and the partly debt financed nature will modestly weaken credit metrics.

The acquisition of zulily is seen as a strategically sensible acquisition for Liberty, as this will meaningfully increase its ecommerce revenue as well as attracting a younger demographic than QVC's customer base. We also believe that each company's vendor relationships are strong and the combination of these two entities will meaningfully broaden and deepen these relationships and we believe this will further bolster the competitive position of both companies. We expect both brands will operate as separate consumer facing brands however we also expect the company to leverage areas such as sourcing, distribution, and technology to provide incremental synergies over time.

While the acquisition is strategic, it is fully priced, with the purchase price of $2.4 billion representing around 54 times zulily's fiscal 2014 EBITDA (as defined by zulily) of $44 million. The high multiple is partly mitigated by the funding strategy for the acquisition, as approximately 50% of the purchase price will be from newly issued Liberty shares, and approximately $300 million will be funded from zulily's existing cash balances. The company anticipates around $900 of the purchase price will funded from drawings under QVC's $2.25 billion revolving credit facility. Pro forma for the transaction we expect debt/EBITDA for Liberty Interest (as calculated by Moodys) to rise by approximately 0.25 from 5.0 to 5.25 times. This includes zulily's EBITDA, but excludes any potential synergies. Over time we expect leverage would moderate primarily due to earnings growth at zulily and QVC. We expect QVC's debt/EBITDA will be moderately in excess of the company's 2.5 times stated leverage target as well however we would expect the company to moderate debt financing until leverage returns closer to the target. The company has stated it intends to continue with share repurchases, at levels consistent with its recent levels, thus we don't anticipate cash flow will be used to reduce absolute debt levels. However given the increase in leverage there is limited flexibility for Liberty to pursue additional transactions that would result in further weakening of credit metrics at this time.