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NEW YORK (Reuters) - Internet conglomerate IAC/InterActiveCorp IACI.O said on Monday it will spin off four of its biggest divisions, including the HSN cable shopping network, and retain 30 of its fastest-growing businesses to better capitalize on Web media and services.
IAC shares closed 7.5 percent higher on the news, which also included a five-year advertising deal with Web search leader Google Inc (GOOG.O) to provide sponsored search listings for its Web properties. IAC said the arrangement would yield in excess of $3.5 billion in advertising revenue for the company.
IAC said it will spin off HSN, its Ticketmaster box office service, the Interval vacation and time-share business and LendingTree online mortgage service. The transactions are expected to close in the second or third quarter of 2008 and will be tax-free to IAC and its shareholders.
IAC kept its media and subscription-related businesses because their earnings will allow the company to invest in emerging Internet businesses. They include the Ask.com Web search unit, Evite, Match.com dating service, online video site Vimeo and virtual world Zwinky.
Chairman and Chief Executive Barry Diller will remain in those positions at IAC, and the heads of the units being spun off will keep their positions, the company said.
"We've been undervalued, I think, since the very beginning," Diller told analysts and reporters. "We can now stand on our own."
Diller will be involved with one or two of the spun off companies, but he said the precise ownership structure of the divisions was still being worked out.
He explained the unraveling of his Internet conglomerate, which had grown to over 60 brands, as a way of allowing investors to better navigate its main businesses that have diverged in terms of growth and profitability.
HSN has conducted a lengthy overhaul of merchandise and television programming while the mortgage business has been hurt by a deteriorating U.S. housing market.
"By shrinking the company down to a core of Internet businesses going forward, they will be valued much more on an Internet multiple," said Sanford C. Bernstein analyst Jeffrey Lindsay. "It's a very clever deal."
IAC shares closed at $31.84 on the Nasdaq after rising as high as $33.36 in the session. The stock is trading at about 18 times the average Wall Street forecast for fiscal 2008 earnings, compared to Yahoo Inc's YHOO.O 59 times and Google Inc's 35 times, according to Reuters Estimates.
The spinoffs could unwind part of a long-term partnership between media veteran and Internet investor Diller and cable mogul John Malone, chairman of Liberty Media LINTA.O.
Liberty owns a majority voting stake in IAC, but has let Diller vote those shares and exert control over the company. That proxy arrangement will remain intact for IAC, but the voting structure of the spinoffs was not clear and Diller would not elaborate on those arrangements.
Diller and Malone had discussed merging HSN with its larger rival QVC, owned by Liberty, but had not reached an agreement on the value of the unit.
Diller said on Monday he was still open to other options for the units, but doubted an HSN deal would happen.
"We're up for anybody talking to us about anything," he said. "Anything can happen between the announcement of this and going out as five separate companies."
Malone, a member of the IAC board, voted in favor of the spinoffs at a meeting on Friday, both companies said.
"It would be hard for us to criticize him (Diller) for doing something that has worked for us," Liberty spokesman John Orr said. Liberty has divided its holdings into separate tracking stocks for investors.
On HSN, Liberty remains open to talks about its future. "I don't think it affects our ability to continue to have discussions," Orr said.
Scott Devitt, analyst at Stifel Nicolaus, said he believed HSN could still be sold to Liberty, but the spinoff would first let investors independently assess the value of the business.
IAC last week reported that its retail segment, including HSN, posted a 26 percent drop in operating profit in the third quarter. LendingTree posted an operating loss of $5.6 million, while Ticketmaster saw operating income rise 7 percent.
The media and advertising business reported a 40 percent rise in revenue and $15.4 million in operating income during the third quarter, reversing a loss from a year ago.
After the spinoff, IAC shareholders will own 100 percent of the equity in all five companies. Separately, Diller exercised options in October to buy 9.5 million shares in the company, raising his stake to 27.2 percent from 25.4 percent.
Additional reporting by Robert MacMillan; Editing by Leslie Gevirtz/Tim Dobbyn