News

USA Talks Up E-Commerce Deals

2/03/2002 7:00 PM Eastern

In its first quarterly report since landing a deal to sell its entertainment assets to Vivendi Universal S.A., USA Networks Inc. unveiled an ambitious three-year plan to become the No. 1 interactive-commerce company.

USA said it intends to capture 20 percent of the total interactive commerce market, mainly through acquisitions. It made that revelation in a Securities and Exchange Commission filing last week.

The company plans to make between five and 10 acquisitions per year for the next three years, at an aggregate cost of about $9 billion, USA added. That kind of growth would increase USA's cash flow by $290 million, $590 million, and $990 million in each of the next three years, respectively, according to the SEC document.

USA chairman Barry Diller, in a conference call with analysts, declined to elaborate on what his company might buy. But one thing he said he doesn't feel he needs is distribution.

"We have studied it and talked about distribution, née portals, incessantly," Diller said. "Our feeling at the moment is, unlike traditional media, interactivity is not going to have, midterm or long-term, the toll bridges that have been erected by virtue of an oligopical network effect on one side, MSO concentration effect on the other side. None of those issues seem to us to be, on any level, insurmountable."

WANTED: SENSIBLE DEALS

In its budget plan, USA said it could make acquisitions for as much as 13 times forward cash flow, with 65 percent cash and 35 percent USA stock.

USA vice chairman Victor Kaufman cautioned that the company will only make acquisitions that it feels makes sense.

"We're going to be as careful in doing these acquisitions as we have been the past six years," Kaufman said on the analyst call. "There is virtually no acquisition that we won't be willing to walk away from if we feel the price is too high."

Kaufman called the 13-times multiple for acquisitions a blueprint. Actual acquisitions, depending on their balance sheets, could be picked up for less, he said.

"On businesses that have real cash flow, the multiple will be closer to 10," Kaufman said. "That then gets increased because of the businesses that are turning around and that, we anticipate, would take two years to get to that 10 multiple.

"We chose an average of 13. Obviously, we believe, over time we should have a security that the marketplace will view as worth higher than the multiple we paid for these acquisitions because of the way we intend to integrate them overall into our businesses."

The call was Diller's first appearance before the analyst community since he announced the $11.7 billion deal with Vivendi Universal. As part of that transaction, USA will offer up its USA Networks and Sci Fi Channel cable properties, along with its Studios USA movie studio, to a new entity called Vivendi Universal Entertainment.

Vivendi will contribute its Universal Studios to the partnership. In return, Vivendi will surrender its 41 percent interest in USA Networks and $1.62 billion in cash. USA Networks will have a 5.4 percent interest in VUE.

After the deal is completed — likely sometime in April — USA Networks will change its name to USA Interactive, and will include the online properties TicketMaster Online-CitySearch, Match.com and television shopper HSN.

Diller said that establishing USA Interactive would allow him to capitalize on one of the economy's fastest-growing sectors.

"We've got a real opportunity to become a seriously large company," Diller said.

Diller has been rumored to be looking at several smaller interactive online properties — like Overture Services Inc., an Internet search engine formerly known as GoTo.com — and Sabre Holding Co., which owns the online travel reservation service Travelocity.com.

UBS Warburg LLC media analyst Christopher Dixon said the company's goals, while lofty, are not unachievable.

"Although management's target of capturing 20 percent of all online activity seems ambitious, a strong management team and proven operating model should not be underestimated," Dixon wrote in a report.

CABLE NETS DECLINE

For the fourth quarter, USA reported pro forma revenue growth of 17 percent and cash flow rose 25 percent.

But USA included results from a pending acquisition — Expedia.com — and did not factor in the results of its advertising-dependent cable networks, which will become part of the VUE venture.

Cash flow at USA Network was down 20 percent in the quarter to $84.9 million on revenue of $184.7 million, off 7 percent. At Sci Fi, cash flow dropped 13 percent to $26.1 million on a revenue decline of 8 percent to $71.4 million.

USA attributed the downturn to a weak advertising market.

"The ad market is just like it was before, which isn't good," Diller said in a conference call with reporters.

September