Fitch Affirms Expedia's IDR at 'BBB-'; Outlook Stable
NEW YORK -- October 1, 2013
Fitch Ratings has affirmed the Issuer Default Rating (IDR) for Expedia, Inc.
(Expedia) at 'BBB-' with a Stable Rating Outlook.
KEY RATING DRIVERS
Expedia's ratings reflect its solid credit profile and reasonably conservative
balance sheet offset by event risk concerns. 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's leading
market position as an OTA is a significant credit strength enhanced by its
solid geographic and customer diversification. Event risk concerns are
material and reflect Liberty Interactive's (Liberty) controlling stake in the
company (although its shares are voted by Expedia Chairman, Barry Diller).
Expedia's credit profile would be strengthened if Liberty's majority control
is eliminated, all else being equal. In March 2012, Liberty affected a sale of
12 million shares, approximately 33% of its total economic interest in the
company although it retains control of 55% of the voting shares. Liberty had
previously assigned its Expedia holdings to a new tracking stock, Liberty
Ventures, which Fitch viewed as lessening the near-term risk of a sale of the
remaining stake either in the open market or back to the company. In the event
that Expedia did pursue a debt-financed repurchase of the remaining Liberty
stake, it is possible that the company could retain its investment grade
rating but much would depend on the economics of any deal plus potential
commitment to pay down debt in the following 12 to 24 months.
Fitch continues to believe that Expedia's credit profile is weaker following
the 2011 spin-off of TripAdvisor that provided Expedia significant revenue
diversification and could potentially evolve into a more direct competitive
channel for hotel bookings. As recent results at Expedia indicate, there is
also execution risk at Expedia as TripAdvisor's business evolves considering
its significance as one of Expedia's largest marketing partners.
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 remains unclear 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 1.5x, 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.
The company's strategic decision to broadly offer consumers the choice to pay
upfront for hotels under a merchant model or paying at the time of a stay
under an agency model has only modestly impacted cash flow as Expedia has
maintained a controlled roll-out of this new feature. Fitch expects it will
increase Expedia's traction with consumers at a manageable expense to cash
flow during what will likely be a multi-year transition. As of June 30, 2013,
Expedia had cash and short-term investments of $2.3 billion versus a working
capital deficit of $3.5 billion which is almost entirely related to hotel
bookings under a merchant model. This funding gap is $700 million larger than
last year due principally to the acquisition of trivago in the first quarter
of 2013. As of June 2013, over 30,000 of Expedia's 220,000-plus hotel partners
have chosen to give consumers this option as part of the Expedia Traveler
Preference (ETP) program.
Expedia's recent results have exhibited modest headwinds that highlight the
shifting nature of the OTA environment. For the second quarter 2013 (end June
2013), revenue increased 16% over the prior year period or 12% excluding the
trivago acquisition. While still strong, this was down from 20% for the LTM
period ending June 2013. More significantly, EBITDA margins declined to 15.5%
for the quarter versus 21.3% in the prior year period.
The decline in margin reflects a combination of factors, perhaps most
significant was a change in TripAdvisor's website design. TripAdvisor has
migrated to a metasearch platform for hotel offerings whereby it displays the
lowest prices found for hotels on the page with its review content.
Previously, users had to select to view prices from individual OTAs which
would force one or more pop-up windows to open for each OTA. This shift has,
at least temporarily, caused Expedia to lose some share and sacrifice margin.
TripAdvisor has been and will likely remain Expedia's largest channel partner.
Management indicated on the last earnings call that it is working closely with
TripAdvisor to adjust its marketing efforts to better utilize the new
metasearch design and believes the recent negative impact will be largely
Other factors which impacted margin include Expedia's rollout of its
aforementioned ETP platform for hotels bookings under either and agent or
merchant model. Additionally, Expedia significantly increased its marketing
investment in its Chinese subsidiary eLong as well as trivago's U.S. marketing
which reduced margins by approximately 100 bps during the quarter. Expedia's
Hotwire business continues to underperform, the result of both competition and
tight hotel inventories. In fact, tight hotel inventories generally compress
margin across all of Expedia's platforms.
Fitch believes these challenges reflect the potential execution risks inherent
in the business as technology and consumer preference shifts the OTA
landscape. Expedia spun-off TripAdvisor in 2011, which Fitch believes may
eventually result in TripAdvisor evolving into more of a competitive threat.
Separately, Expedia acquired trivago in early 2013 for its hotel metasearch
capabilities, which Fitch views as a response to competition from the likes of
Kayak. Expedia remains the largest OTA in the market but as the industry
churns through what is a new wave of technology evolution, these risks will
add volatility to results and could ultimately alter its standing in the
marketplace. To date, management has been reasonably proactive in positioning
the company for the future while also maintaining solid credit metrics.
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:
--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
--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
Liquidity as of June 30, 2013 was solid with $1.3 billion in cash and an
undrawn $1 billion senior unsecured revolving credit facility which expires in
November 2017. Free cash flow has averaged near $600 million annually for the
past five years which Fitch expects to remain similarly strong in 2013 and
2014. Expedia has a working capital deficit of $3.5 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 $2.3 billion in total cash and short-term
investments to partially offset the working capital deficit.
Total debt as of June 30, 2013 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-'.
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;
--The use of cash generated from growth in Expedia's negative working capital
balance for shareholder friendly actions.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology', Aug. 8, 2012;
--'Rating Technology Companies', dated Aug. 9, 2012.
Applicable Criteria and Related Research:
Corporate Rating Methodology: Including Short-Term Ratings and Parent and
Rating Technology Companies
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Jason Paraschac, CFA,+1 212-908-0746
Fitch Ratings, Inc.
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