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Fitch Rates Expedia's Announced Senior Unsecured Euro Notes 'BBB-'
May 28, 2015 / 1:41 PM / 2 years ago

Fitch Rates Expedia's Announced Senior Unsecured Euro Notes 'BBB-'

(The following statement was released by the rating agency) AUSTIN, May 28 (Fitch) Fitch Ratings has assigned a 'BBB-' rating to Expedia, Inc.'s (Expedia) announced issuance of senior unsecured Euro notes. A full list of ratings follows at the end of this release. Expedia plans to use the note proceeds for a portion of the Orbitz acquisition and other general corporate purposes, which may include capital returns to shareholders, or prefunding of the potential Trivago call option in first quarter 2016 (1Q16). KEY RATING DRIVERS Fitch calculates pro forma unadjusted leverage of 1.9x-2.0x for the notes offering and both eLong and Orbitz transactions, up from 1.8x for the last-12-month period ending March 31, 2015. There is headroom for leverage to spike above 2.0x due to strategic acquisitions, so long as Fitch viewed the transaction as favorable and was comfortable that leverage would be reduced within a 12-18-month period. This note offering and the Orbitz acquisition fall within that context, but there is now less headroom for any additional leveraging transactions, including material debt-funded acquisitions or return of capital to shareholders. Offsetting this pressure is additional liquidity from the recent sale of majority stake in eLong. In February, Expedia agreed to acquire Orbitz in a transaction valued at $1.6 billion and a 10.25x EV/EBITDA multiple. Approvals have been received from both companies' board of directors and Orbitz's shareholders, but approval by regulators remains outstanding. The deal follows on the heels of Expedia's $612 million acquisition of Wotif Holdings Ltd., $280 million acquisition of Travelocity, $270 million investment in Decolar, and $229 million purchase of corporate offices. Management has commented publically that they are comfortable with leverage temporarily increasing above 2x due to an acquisition, and debt-funded acquisitions are consistent with management's historical actions (Wotif was largely debt-funded). On May 22, Expedia entered into an agreement to sell its entire 62.4% stake in eLong Inc. to several buyers, including Ctrip.com, for roughly $671 million. Divestitures have not been a common occurrence under management's current strategy. Fitch believes Expedia can maintain commercial relations to continue sourcing supply through eLong while also providing global supply, maintaining access to the China market. However, the terms of the commercial agreement and how it evolves over time are unclear and is complicated due to Ctrip's affiliation with Priceline. Additionally, the asset sale clouds the company's strategy with respect to the China market. Another upcoming potential use of cash is the call option on Trivago in 1Q16, whereby Expedia can purchase up to 50% of the minority shares. Expedia currently owns 63% of Trivago and the redeemable non-controlling interest balance was carried on its balance sheet at $527 million as of March 31, 2015. Fitch views the Orbitz transaction as strategically sound, as larger competitors within the industry benefit from economies of scale and smaller players are increasingly unable to compete as effectively on items such as marketing and technology spend. Management expects an annual run-rate of $75 million in synergies, which Fitch anticipates will be achievable (eliminating duplicative functions). The integration of Orbitz is a larger endeavor than its recent acquisitions: Orbitz's 2014 gross bookings were $12.5 billion while Expedia's 2014 gross bookings totaled $50.4 billion. However, mis-execution concerns are offset by Expedia's historic track record of successful integration. Further, Expedia should be close to completing the Wotif integration by the Orbitz transaction close, alleviating concerns of missteps resulting from overextending in an attempt to integrate too many brands into its platform in too short a time. The deal will give Expedia access to Orbitz's base of air travel customers, significantly increasing the size of the segment. While the unit economics on air ticket sales is not as favorable as hotel sales, Fitch believes that capturing a larger airline customer base is prudent over the longer term as it adds to the comprehensiveness of Expedia's broad offerings while providing opportunities to cross-sell other products or bundles to generate revenue synergies. As the competitive and technological landscape continues to change, traditional online travel agents (OTAs) will vie to increase their global share and maintain their relevance in the face of other travel providers moving down the purchase funnel (i.e. TripAdvisor's instant book). Fitch expects Expedia to continue growing organically and by acquisition. LIQUIDITY AND DEBT STRUCTURE At March 31, 2015, Expedia had $1.7 billion in cash and generated $1 billion in free cash flow (FCF) during the trailing 12-month period. With FCF expected to be in the $800 million - $1 billion range, and an increase in cash from this note offering, Fitch believes Expedia will be able to continue capital returns to shareholders at a pace similar to 2014 while maintaining leverage around 2.0x or below (Expedia paid $85 million in dividends and repurchased $538 million of shares on a gross basis during 2014). If operating performance is weaker than expected, Fitch expects Expedia would consider reallocating capital from share repurchases to debt reduction in an effort to remain within the current rating. KEY ASSUMPTIONS --Fitch projects strong revenue growth in the double-digit range thanks to organic growth and continued strategic acquisitions. --EBITDA margins hold steady in the 17%-18% range through leveraging of fixed cost on aggressive revenue growth offset by the levels of investments in sales and marketing expense that support a longer term view. --No additional debt raised through the forecast period as future acquisitions are in the $400 million range and funded through cash flow from operations. --Fitch assumes share repurchases of $550 million annually, consistent with 2014 gross levels, and steady dividend increases to $109 million annually. RATING SENSITIVITIES Positive: Future developments that may, individually or collectively, lead to positive rating action include: -- Fitch believes there are minimal business considerations to support the company maintaining a rating above 'BBB-' which will likely forestall positive rating action for the foreseeable future. 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. Fitch currently rates Expedia as follows: --IDR 'BBB-'; --Senior unsecured bank credit facility 'BBB-'; --$500 million in 7.456% senior unsecured notes due 2018 'BBB-'; --$750 million in 5.95% senior unsecured notes due 2020 'BBB-'; --$500 million in 4.5% senior unsecured notes due 2024 'BBB-'. The Rating Outlook is Stable. Contact: Primary Analyst Timothy Lee Associate Director +1-512-215-3741 Fitch Ratings, Inc. 111 Congress Avenue, Suite 2010 Austin, TX 78701 Secondary Analyst Michael Paladino, CFA Managing Director +1-212-908-9113 Committee Chairperson Michael Weaver Managing Director +1-312-368-3156 Media Relations: Alyssa Castelli, New York, Tel: +1 (212) 908 0540, Email: alyssa.castelli@fitchratings.com; Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email: elizabeth.fogerty@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 28 May 2014) here Additional Disclosures Solicitation Status here <a href="https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context =2&detail=31">Endorsement Policy ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. 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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