ATLANTA Expedia Inc (EXPE.O), the largest online travel agency, said it plans to split into two publicly traded companies through a proposed spin-off of its TripAdvisor business, and its shares shot up 13 percent in after-hours trading.
Analysts said the plan could help unlock value for the high-growth TripAdvisor travel site business as Expedia invests in product enhancements that would bolster its competitive positioning.
"While Expedia still makes the majority of the profits of the two companies, the TripAdvisor advertising-based model seems to be the future of the industry," Morningstar analyst Warren Miller said by email. "I expect the move should allow TripAdvisor to flourish a little more outside of the Expedia brand."
Expedia, whose chairman is media billionaire Barry Diller, joins a host of companies that have set plans to split and spin off units this year, including diversified manufacturer ITT Corp (ITT.N) and food company Sara Lee Corp SLE.N.
The separation "allows the two businesses to be pure plays and to operate with the proper amount of focus to grow respectively," Chief Executive Dara Khosrowshahi told Reuters on Thursday.
He said no big changes were expected from a management perspective, and added there were no plans to sell TripAdvisor.
Under the separation, the new TripAdvisor would include operations of the current TripAdvisor Media Group travel advisory business that includes 18 popular travel brands, and Expedia Inc would continue to comprise transaction brands such as Expedia.com, Hotels.com, Hotwire and carrentals.com.
The transaction, intended to be tax free, is expected to take the form of a spin-off of TripAdvisor stock to Expedia shareholders or a reclassification of Expedia shares, with holders receiving a proportionate amount of TripAdvisor stock, Expedia said.
Frederick Moran, an Internet analyst with Benchmark, said Expedia shares have trailed rival Priceline.com (PCLN.O) in performance because of weaker-than-expected earnings growth as it looks to reinvest in its business.
Expedia's stock was down about 10 percent so far this year before the Thursday announcement, while Priceline.com has gained 27 percent. Orbitz Worldwide (OWW.N), which is in a distribution dispute with AMR Corp's AMR.N American Airlines, is down about 39 percent this year.
Moran said Expedia's 2011 forecast was below expectations and called for essentially no growth in earnings because of needed investments in technology in the face of higher competition.
"Priceline has shown tremendous growth over in Europe and Asia and Expedia has fallen behind them in that regard," Moran said. "So Expedia not only wants to protect their leading market share in the U.S. but also wants to globalize in order to compete and investment is required to do so."
Moran added: "Unlocking TripAdvisor into its own enterprise clearly could help the recognition of hidden shareholder value at a time when the stock has obviously underperformed."
Yet debt-rating agencies Fitch and Standard & Poor's warned they may cut certain Expedia ratings. S&P said it believed the separation of TripAdvisor could "reduce Expedia's growth rate, EBITDA mrgin and discretionary cash flow generation."
Expedia said the proposed spin-off of TripAdvisor is expected to be completed in the third quarter, and said the plan is subject to shareholder and final board approval.
Shares of Expedia were up 13.6 percent at $25.45 in extended trading after the bell from their $22.40 close on Nasdaq. (Reporting by Karen Jacobs, with additional reporting by Kyle Peterson in Phoenix, editing by Matthew Lewis, Bernard Orr, Gary Hill)