Diller to Wall Street: Go Get a ROOM

Hotels.com rallies after the mogul makes his latest buy-in offer.
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So now

USA Interactive

(USAI) - Get Report

gets a chance to test out its holding-company-discount theory.

The e-commerce outfit led by Barry Diller said Thursday it was acquiring the shares it doesn't already hold of majority-owned subsidiary

Hotels.com

(ROOM)

.

The acquisition will complete the process begun last year when USAI made its first formal offer to take full control of Hotels.com and two other subsidiaries, and removes the final obstacle to a richer valuation of USA Interactive's stock on the public market -- at least if you believe USAI Vice Chairman Victor Kaufman.

And maybe somebody does. Though the stock of companies announcing an acquisition usually declines on news of the deal, USAI's shares rose $1.56, or 6.2%, to $26.66.

Shares in Hotels.com, an online discount hotel room booking service, added $10.42, or 19.6%, to $63.72. USAI said that the transaction would "slightly" improve its budgeted adjusted earnings per share for 2003.

Expectations

The deal, under which Hotels.com shareholders will receive 2.4 shares of USAI stock in exchange for each Hotels.com share, represents a 13% premium for Hotels.com's shareholders, based on the closing prices for both companies' shares Wednesday evening.

That's less than half of the 30% premium that public shareholders of online travel site

Expedia

(EXPE) - Get Report

will receive in

USAI's similar takeover offer announced last month, based on stock prices on the eve of that deal.

In the weeks following that deal -- which itself followed USAI's acquisition of Ticketmaster -- USAI's shares have fallen, while Hotels.com's shares hit higher prices, fueled by investor expectations that a similar deal was coming through for Hotels.com. Based on the prices from the eve of the Expedia announcement, USAI's offer for Hotels.com represents a 19% premium.

But the most interesting premium going forward will be the share price boost, if any, USAI receives for changing its corporate structure. Because of the company's majority ownership of the three publicly traded subsidiaries, argued Kaufman last month, the market has a misperception that USAI is simply a holding company, not an operational company.

Bringing these companies in-house, said Kaufman, makes it easier to compare USAI to higher-valued Internet companies such as

Amazon.com

(AMZN) - Get Report

,

Yahoo!

(YHOO)

and

eBay

(EBAY) - Get Report

.

That comparison is favorable to USAI, said Kaufman, pointing out, for example, that USAI has twice eBay's free cash flow.