Oct 4 - Fitch Ratings has affirmed the Issuer Default Rating (IDR) for
Expedia, Inc. (Expedia) at 'BBB-' with a Stable Outlook.
Expedia's ratings reflect a mix of credit strengths and concerns coupled with a
reasonably conservative balance sheet. The company has significant exposure to
economic cyclicality and its impact on travel demand which is countered by
strong secular growth trends as an increasing mix of travel reservations are
made through OTAs (online travel agents). Expedia has solid geographic and
customer diversity but Liberty Interactive (Liberty) retains a controlling stake
in the company (although its shares are voted by Expedia Chairman, Barry Diller)
which Fitch views as posing significant event risk for the credit.
Expedia as a credit is weaker following the 2011 spin-off of TripAdvisor.
However, the credit could be strengthened if Liberty's majority control is
eliminated. In March 2012, Liberty entered into a forward sale of 12 million
shares, approximately 35% of its total economic interest in the company although
it retains control of 55% of the voting shares. Liberty has also assigned its
Expedia holdings to a new tracking stock, Liberty Ventures, which Fitch views as
lessening the near-term risk of a sale of the remaining stake either in the open
market or back to the company.
Fitch expects that Expedia will remain a moderately leveraged credit while the
competitive landscape and changing technology trends of the OTA market remain in
flux. Google's intent in the travel market is uncertain while the ability and
willingness of hotels to compete for direct bookings is uncertain although both
are considerable long-term threats. Fitch views Expedia, as the largest OTA in
the world with a meaningful secular tailwind and significant financial
flexibility, as having the capacity to manage these potential challenges over
the foreseeable future.
Fitch expects leverage, currently estimated at 1.7x, to remain at or below 2x
(excluding the potential for temporary spikes for strategic acquisitions) so
long as Liberty and its affiliates retain control of the company.
Fitch believes that the company's consideration of enabling consumers to choose
to pay upfront for certain hotels under a merchant model or paying at the time
of a stay under an agency model could have a meaningful impact on cash flow and
working capital over time. Fitch believes Expedia will follow a controlled
roll-out of this new feature so as to better understand its consumer appeal and
to insure that it does not pose a challenge to liquidity. As of June 30, 2012,
Expedia had cash and short-term investments of $2.4 billion versus a working
capital deficit of $2.9 billion which is almost entirely related to hotel
bookings under a merchant model. Fitch does not expect the merchant model to
decline to an extent that would challenge liquidity over the next few years but
expects this trend will need to be monitored. The current rating assumes that
share repurchase activity would be curtailed if the expected working capital
deficit reduction were to accelerate.
Credit strengths include:
-- Expedia is the largest OTA with advantages in scale that have contributed to
the company gaining significant share in the market for travel services over the
past several years;
-- Broad customer and geographic diversification positively impact the stability
of end-market demand for travel services which are inherently highly correlated
to the macro-economic environment;
-- Expedia benefits from the expected continuation of a secular shift towards
use of OTAs which should support revenue growth in excess of both overall travel
services and GDP growth;
-- A relatively high variable cost model limits potential negative pressure on
profitability during business downturns, although much of the variable cost
items are specific to marketing expense which, if reduced, could have a negative
effect on the company's competitive position.
Ratings concerns include the following:
-- Liberty Interactive holds shares representing approximately 55% of the voting
power in Expedia. While Liberty has given Expedia's Chairman of the Board Barry
Diller a proxy to vote these shares, Fitch's ratings take into account Liberty's
historical track record of shareholder-friendly actions;
-- Increasing competition from other on-line travel businesses including Google
as well as the potential for non-OTAs such as TripAdvisor to become significant
competitors in the future;
-- Expedia faces a potentially significant contingent liability due to lawsuits
related to hotel occupancy taxes. The company could also face negative pressure
on profitability if municipal tax rules are amended to specifically apply to the
retail rate charged by Expedia;
-- Ongoing pricing pressure in the OTA market combined with increasing
competition with direct sales channels could negatively impact future revenue
growth and profitability;
-- Inherent volatility in travel service demands due to macroeconomic drivers as
well as the potential for significant volatility due to travel demand shocks;
-- Expedia competes directly with the online presence of its suppliers in the
travel services industry, which could lead to future disruptions in the
company's business model, although Fitch believes OTAs represent a valued source
of market information to, as well as being a marketing arm of, travel service
-- Prior debt financed share repurchase programs.
Liquidity as of June 30, 2012 was solid with $1.3 billion in cash and an undrawn
$750 million senior unsecured revolving credit facility which expires in August
2016. Free cash flow has averaged over $500 million annually for the past five
years which Fitch expects to remain similarly strong in 2012. Expedia has a
working capital deficit of $2.9 billion which peaks seasonally in the June
quarter and should decline through the end of the year utilizing approximately
$600 million to $800 million of the company's existing cash balance. Expedia
does have an additional $1.1 billion in short-term investments to partially
offset the working capital deficit.
Total debt as of June 30, 2012 was $1.2 billion and consisted of $500 million in
7.456% senior unsecured notes due August 2018 and $750 million in 5.95% senior
unsecured notes due August 2020.
Fitch has affirmed the following ratings for Expedia:
--IDR at 'BBB-';
--Senior unsecured bank credit facility at 'BBB-';
--$500 million in 7.456% senior unsecured notes due August 2018 at 'BBB-';
--$750 million in 5.95% senior unsecured notes due August 2020 at 'BBB-'.
WHAT COULD TRIGGER A RATING ACTION
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.
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 resulting from a
shift to direct bookings with travel providers;
-- A substantial financial loss from any future conclusion of the occupancy tax
lawsuits facing the company.
Additional information is available at 'www.fitchratings.com'. The ratings above
were solicited by, or on behalf of, the issuer, and therefore, Fitch has been
compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology', Aug. 8, 2012;
--'Evaluating Corporate Governance', Dec. 13, 2011;
--'Rating Global Technology Companies Sector Credit Factors,' Sept. 20, 2010.
Applicable Criteria and Related Research:
Rating Technology Companies
Corporate Rating Methodology
Evaluating Corporate Governance