Terra Lycos Experiment Heading for Closure

Spain's Telefonica unveiled a long-rumored bid to bring in the two-thirds of Terra Lycos ( TRLY) it sold in a 1999 IPO. The offer is less than half the price at which it took the unit public.

The phone giant offered to pay $6.25 in cash for each Terra Lycos share, or a maximum payment of $2.03 billion. The world's sixth-largest telecom company already owns about 38.6% of Terra Lycos.

The offer price represents a 15% premium above Terra Lycos' average price over the past six months, and it is 78 cents higher than Tuesday's close. Investors evidently liked what they heard, and Terra Lycos shares were recently up 95 cents, or 17%, to $6.42.

The offer values all of Terra Lycos -- the publicly held stake plus Telefonica's existing stake -- at $3.49 billion, according to Telefonica. Excluding Terra's hefty cash balance of $2.06 billion, the offer still represents a premium of 51% above Terra's business market value, Telefonica said.

But the price is still far short of the $5.5 billion Terra Networks paid for Lycos to create the company amid much hoopla in October 2000.

The price also is far short of Terra's IPO price of 11.8 euros for minority shareholders, a price that comes out to $14.04 in today's dollars, noted Juan Carlos Asitorres, an analyst at Ahorro Corp. in Madrid. Asitorres has a neutral rating on Terra and an overweight rating on Telefonica.

"The problem is you offer something to the market and you want to buy it back at a lower price. I think it's something legal but not very moral to do," Asitorres said. "Telefonica is taking advantage of the current situation, but they have ignored the rights of the shareholders that four years ago bought the shares." His firm hasn't done any banking with either company.

Indeed, the offer might just be the first step in Telefonica's effort to buy back Terra, and the price might still go up, Asitorres added.

Rumors of a purchase have long hounded both Terra Lycos and Telefonica, with analysts long questioning why Terra should operate as a separate company. Reeling from the downturn in the advertising market, the Internet firm has repeatedly pushed back its targets for breaking even while competitors such as Yahoo! ( YHOO) have posted EBITDA profit. The company lost $66.3 million on $136.6 million in revenue in the quarter ending in March.

Meanwhile, in Spain, Terra has been competing head-on with Telefonica -- and trailing -- in the high-speed Internet access market. Disgruntled shareholders demanded the ouster of Terra President Joaquim Agut at the company's annual meeting earlier this year.

But until now, Telefonica resisted suggestions that it buy out the troubled company. Less than two months ago, Telefonica President C¿sar Alierta told reporters that he was satisfied with Terra Lycos as a separate company. That was after Telefonica threw Terra Lycos a lifeline in February, promising revenue of 141.3 million euros a year after the German media company Bertelsmann withdrew from a partnership with Terra.

As a result of the deal announced Wednesday, Telefonica said it expects to improve its EBITDA by $320 million from 2003 to 2006. That's a paltry sum considering the telecom giant reported $646 million in net income in the three months ended in March. Telefonica said Terra will continue operating as a business line of Telefonica and that Lycos USA will be managed by Terra as a separate business.

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