-- New York City-based Internet company IAC/InterActiveCorp
plans to issue $500 million in senior unsecured notes due 2022. Proceeds will
be used for general corporate purposes.
-- We are raising our corporate credit rating on IAC to 'BB+' from 'BB'
based on our expectation that operating performance will remain solid, and
that the company will continue to maintain its relatively conservative
-- We are assigning a 'BB+' issue level rating to the proposed senior
unsecured notes with a '3' recovery rating, indicating our expectation of
meaningful (50% to 70%) recovery of principal for debtholders in the event of
a payment default.
-- The stable outlook is predicated on our assumption of market share
gains in key segments, supporting EBITDA growth and good discretionary flow.
On Dec. 17, 2012, Standard & Poor's Ratings Services raised its corporate
credit rating on New York-based Internet company IAC/Interactive Corp. (IAC)
to 'BB+' from 'BB'. The rating outlook is stable.
At the same time, we assigned our 'BB+' issue level rating (at the same level
as the corporate credit rating) to the proposed $500 million senior unsecured
notes due 2022 with a recovery rating of '3', indicating our expectation of
meaningful (50% to 70%) recovery of principal in the event of a payment
The upgrade is based on IAC's solid operating performance and our expectation
that financial policy will remain moderate. Although the proposed debt
issuance will raise pro forma debt leverage on a trailing 12 month basis to
1.5x from 0.5x, we do not expect debt leverage to exceed 2x, our leverage
target for the 'BB+' corporate credit rating.
Our corporate credit rating on IAC reflects our expectation that healthy
operating performance will continue. It also captures our view that IAC will
continue to maintain low debt, generate solid free cash flow, and maintain
"strong" liquidity, despite ongoing shareholder returns through share
repurchases and dividends. We view the company's business risk profile as
"fair,". Despite competition from dominant and better capitalized competitors
in the U.S. search market, IAC has been able to modestly grow its market share
over the past few years and benefit from overall search advertising growth.
Match.com's core operation has been solid, too, despite intense competitive
pressure. Risks that IAC faces include market share losses to innovations by
competitors that alter consumer Internet usage, and threats from competitive
alternatives such as mobile. Additional risks relate to the company's
investments in e-commerce startups---some greenfield and some acquired in an
early-growth period---that have no assurance of long-term viability. We view
the company's financial risk profile as "intermediate," because of its low
debt and good conversion of EBITDA into discretionary cash flow. We assess
management and governance as "fair" under our criteria, reflecting our view
that management's successful operational track record partially mitigates
risks of the outsized influence of the chairman, Barry Diller, who has a 43%
of voting stake in the company.
The company's search and application businesses (Search) accounted for more
than one-half of total company revenue, consisting of its toolbar businesses
(Applications) and destination Web sites. IAC distributes customized toolbars
directly to customers through social and entertainment applications
(Mindspark) or through partnerships with third-party software and media
companies which, in aggregate, generate half of total Search revenue. The
applications segment saw a year-over-year revenue increase of 38% in the third
quarter, benefiting from existing and new business partnerships and digital
products. Although we have not yet seen evidence of an impact, we believe the
toolbar model is less suitable for mobile usage, which we view as a
longer-term risk. The remainder of Search revenue is generated by websites
(such as Ask.com, Pronto.com and Dictionary.com). During the quarter, the
Website segment's revenue increased 49% as a surge in query volume more than
offset a decline in cost-per-click (CPC), a measure of pricing. The CPC
declined was attributed primarily to a mix shift toward international markets
and mobile, where CPCs are lower. According to comScore's Nov. 2012 rankings,
Ask.com's (IAC's main search Website) share of the U.S. search market
increased to 3.0%, up from 2.9% in November 2011. But the company remains a
niche player compared to Google Inc.'s 67.0% share, Microsoft Corp. at 16.2%
and Yahoo! Inc. at 12.1%.
The company's second-largest business segment, Match, accounted for more than
one-fourth of total revenue, provides subscription-based and ad-supported
online personal services. Match has had good double-digit percent organic
subscriber growth for many quarters, which we expect will moderate slightly.
For our 2013 base case scenario, we are expecting organic revenue and EBITDA
to grow at a mid-teens percentage rate. Search will continue to be the main
growth driver but we expect the year-over-year comparison will become more
difficult. Factors that could preclude such growth include the potential for
increased investments in lower-margin businesses like Local, because of costs
associated with entering new international markets. Increased investments in
loss-making businesses in the Media and Other segments and higher promotional
spending at Search and Match could also affect profitability. Longer term, we
view growth in the EBITDA margin as dependent on improving profitability in
the Local business segment and maintaining efficient marketing spending at
In the third quarter of 2012, revenue and EBITDA (excluding noncash
impairments and stock compensation expense) outperformed our expectations,
growing at a very healthy rate of 38% and 40%, respectively, over the
prior-year period. Performance was led by a 43% revenue increase in the Search
business, resulting from solid growth in query volumes at Websites and
Applications segment. Within the Match segment, organic revenue increased 5%
as Core revenue and subscribers both increased by 8%, above our expectations.
For the 12 months ended Sept. 30, 2012, the EBITDA margin improved to 14.3%
from 12.3% in the prior-year period benefiting from strong performance at
Search and Match.
Pro forma for the proposed debt issuance, lease-adjusted leverage increased to
1.5x from 0.5x as of Sept. 30, 2012. We assess IAC's financial risk profile as
"intermediate" as the pro forma leverage is still well below the indicative
ratios of 2.0x to 3.0x in our criteria. Pro forma lease adjusted EBITDA
coverage of interest was 11.1x. For the 12 months ended Sept. 30, 2012, IAC
generated $375 million of discretionary cash flow and converted 81% of EBITDA
into discretionary cash flow. This represents a decline from 112% in the
prior-year period due to higher capital spending and dividend distributions.
The board doubled the dividend, effective with the third quarter of 2012,
amounting to 19% of EBITDA of the 12 months ended Sept. 30, 2012. We believe
the most probable uses of cash over the intermediate term will continue to be
share repurchases, acquisitions, and dividends. The rating incorporates the
assumption that the company will pursue a prudent shareholder return strategy
without a meaningful increase in debt leverage over the near to intermediate
In our view, IAC's liquidity profile is "strong". Our assessment incorporates
the following expectations and assumptions:
-- We expect sources of liquidity to exceed uses by well over 1.5x over
the next 18 to 24 months.
-- We believe cash sources would remain positive, even if EBITDA declines
-- In our view, IAC can absorb low-probability, high-impact events
because of its high cash balances and healthy cash flow generation.
-- We believe the company has a strong standing in credit markets.
Liquidity sources include cash and short term investment balances of more than
$1 billion (pro forma for the debt issuance) as of Sept. 30, 2012, the
expected completion of a new $300 million revolving credit facility due 2017
(not rated by us), and expected discretionary cash flow of more than $320
million in 2013. Cash is mainly used for share repurchases, dividends, and
acquisitions, as the company has very low working capital and capital
expenditure requirements. Near-term debt maturities are minimal.
Under IAC's new revolving credit facility, the company would be subject to a
maximum debt leverage ratio covenant of 3x, which does not tighten over the
life of the credit agreement. We expect that IAC will maintain a significant
cushion of compliance with this covenant.
For the complete recovery analysis, please see our recovery report on
IAC/InterActiveCorp., to be published on RatingsDirect.
The stable rating outlook is based on our view that operating performance will
remain healthy and that IAC will keep its debt leverage below 2x while
maintain adequate liquidity. We do not consider either an upgrade or a
downgrade as likely over the intermediate term. We could raise the rating if
IAC is able to increase its critical mass in Ask.com and Match, profitably
diversify into new segments, and decrease its revenue dependence on Google. On
the other hand, we could lower the rating if Ask.com loses market share and if
risks associated with developing businesses significant escalate.
Additionally, we could lower the rate if debt leverage exceeds 2x without the
prospect of a reversal. Such scenario would likely entail a decline in IAC's
Related Criteria And Research
-- Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
-- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
-- Use Of CreditWatch And Outlooks, Sept. 14, 2009
-- Criteria Guidelines For Recovery Ratings, Aug. 10, 2009
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
Upgraded; Outlook Action
Corporate Credit Rating BB+/Stable/-- BB/Positive/--
Senior Unsecured BB+ BB
Recovery rating 3 3
Senior Secured BBB BBB-
Recovery rating 1 1
$500 mil sr nts due 2022 BB+
Recovery Rating 3