Diller's Hotwire Deal Singes Priceline

InterActiveCorp makes its next move a painful one for an online travel rival.
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With Barry Diller assimilating another company into his travel empire, Captain Kirk and his crew are on the defensive.

The Diller-led

InterActiveCorp

(IACI)

said Monday that it had agreed to purchase the discount travel Web site

Hotwire.com

for $665 million in cash.

Shares of InterActiveCorp -- which already owns travel sites Expedia and Hotels.com -- fell on news of the deal. But shares in Hotwire rival

priceline.com

(PCLN)

-- the travel site hawked by Star Trek veteran William Shatner -- fell even further, with investors perhaps rattled by the valuation implications for priceline.com or by the perceived futility of resisting IAC's competition.

Underscoring the efforts that IAC is making to address all segments in the online travel business, the company also announced Monday that it was establishing an IAC Travel division, which will be led by Expedia CEO Erik Blachford.

Shares in IAC fell $1.24 to $35.01, while priceline.com's shares dropped $3.36, or 9%, to $34.30.

IAC's deal for Hotwire casts a spotlight on a section of the discount travel market in which consumers buy their plane tickets or pay for their hotel rooms before they learn which airline they'll be flying or exactly which hotel they'll be staying at. Priceline.com calls the system its "Name Your Own Price" travel service, while IAC calls the market "opaque" travel.

While priceline.com appears to be bigger and more profitable than Hotwire, the priceline.com competitor appears to be growing at a faster pace. Priceline.com will likely report a gross profit of $150 million in 2003, along with 46 cents per share in earnings, according to Legg Mason analyst Thomas Underwood, who rates the company a hold. (His firm hasn't done underwriting for priceline.com.)

IAC says the privately held Hotwire should report 2003 net revenue -- equivalent to priceline.com's gross profit, says Underwood -- of $110 million. The transaction will be "slightly accretive" to IAC's "adjusted EPS" in 2004, says IAC.

Meanwhile, Hotwire had 7.5 million different U.S. visitors to its site in August, according to comScore Media Metrix, while priceline.com, which also operates other travel sites and offers personal financial services through a licensee, had 5.6 million visitors to its flagship site.

On the basis of the numbers in the IAC-Hotwire deal, plus other adjustments, priceline.com would be valued at $25 per share on the same basis, Underwood wrote in a Monday morning note. He says he expects priceline.com to trade down "modestly" over the next few days "as investors digest the implications of the Hotwire acquisition for Priceline with regard to both Priceline's valuation and the altered competitive landscape with Hotwire being owned by a deep-pocketed competitor."

Though IAC has traditionally used its stock as currency for acquisitions, the all-cash nature of the Hotwire deal shouldn't be interpreted as reflecting the sellers' negative opinion of IAC's stock, says Underwood. Given that Hotwire's current owners are the Texas Pacific Group investment firm along with several airlines -- American parent

AMR

(AMR)

,

America West

(AWA)

,

Continental

(CAL) - Get Report

,

Northwest

(NWAC)

, United parent

UAL

and

US Airways

-- the deal's currency more likely reflects the sellers' need for cash, speculates Underwood. He has a hold rating on IAC, and his firm is a 1% owner of the stock.

In its own comment on the deal, Standard & Poor's said the transaction doesn't affect its rating of IAC's debt. "Based on Hotwire's expected 2003 revenues of about $110 million, the purchase price is steep, and given Hotwire's short history of profitability, the time frame to achieve a return on investment is likely to be long," says the ratings service. "Standard & Poor's comfort with the acquisition therefore is linked to its moderate size and InterActiveCorp's experience in online travel."