Fitch Affirms Expedia's IDR at 'BBB-'; Rates New Notes 'BBB-'
NEW YORK -- August 13, 2014
Fitch Ratings has affirmed the Issuer Default Rating (IDR) for Expedia, Inc.
(Expedia) at 'BBB-', affirmed the senior unsecured debt rating at 'BBB-', and
assigned a 'BBB-' rating to the new senior unsecured notes. The Rating Outlook
In July 2014, Expedia entered into an agreement to acquire Wotif.com Holdings
Limited for a USD equivalent of $658 million. Wotif is a leading online travel
agent (OTA) in Australia and operates in the APAC region. Through the
transaction, Expedia gains market share and local inventory while Wotif
benefits from Expedia's technological expertise. Proceeds from the new notes
are expected to be used for general corporate purposes, including funding the
acquisition of Wotif. The company has historically issued debt to fund share
repurchases or around the time of acquisitions.
Fitch calculates unadjusted leverage of 1.3x at June 30, 2014, and pro forma
for the new notes, high 1.0x to low 2.0x. Fitch expects leverage to decline on
absolute EBITDA growth. There is room at the current rating level for leverage
to spike above 2.0x due to strategic acquisitions, so long as Fitch views the
transaction as favorable and is comfortable that leverage will be reduced
within a 12-18 month period. Fitch forecasts leverage to be around 2.0x or
below at the end of FY2015.
As the competitive and technological landscape continues to change,
traditional OTAs will vie to increase their global share and maintain their
relevance in the face of other travel providers moving down the purchase
funnel (i.e. TripAdvisor's instant book). Fitch expects Expedia to continue
growing organically and by acquisition, possibly operating closer to the 2.0x
leverage range than it has in the last few years.
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 through its impact on travel demand which is
countered by strong secular growth trends as an increasing mix of travel
reservations are made through OTAs. 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).
In March 2012, Liberty affected a sale of 12 million shares, approximately 35%
of its total economic interest in the company although it retains control of
56% of the voting shares. In the event that Expedia did pursue a debt-financed
repurchase of the remaining Liberty stake, it would be difficult for the
company to retain its investment-grade rating and/or a Stable Outlook, given
limited headroom in the rating today. Fitch expects the company to delever
over the next one to two years, creating additional headroom, increasing its
ability to retain its rating and Outlook in the event of a debt-financed
repurchase of Liberty-owned shares.
Fitch continues to believe that Expedia's credit profile is weaker following
the 2011 spin-off of TripAdvisor which provided Expedia significant revenue
diversification and could potentially evolve into a more direct competitive
channel for hotel bookings. There is execution risk at Expedia as
TripAdvisor's business evolves considering its significance as Expedia's
largest marketing partner. However, Expedia's 2013 acquisition of trivago, and
its subsequent growth, acts to considerably offset the loss of revenue
diversification from the TripAdvisor spin. In the LTM period ended June 2014,
revenues from Ad and Media grew to $415 million; prior to the TripAdvisor spin
revenue was $476 million (LTM ended June 2011).
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. TripAdvisor's new mobile Instant Booking feature blurs the line
between the metasearch function and the OTAs. Expedia and Priceline have not
partnered with TripAdvisor on this new feature; Fitch believes that is due to
the risk of commoditization of the OTA function as merely a back-end
transaction processor in the minds of consumers. Google's intent in the travel
market and the ability and willingness of hotels to compete for direct
bookings are both considerable long-term threats. Fitch views Expedia, as one
of the largest OTAs 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.
The company's strategic decision to broadly offer consumers the choice to pay
upfront for hotels under a merchant model or pay 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 both consumers and new hotel acquisitions at
a manageable expense-to-cash flow during what will likely be a multi-year
transition. As of June 2014, over 59,000 of Expedia's 325,000-plus hotel
partners have chosen to give consumers this option as part of the Expedia
Traveler Preference (ETP) program.
Expedia's recent results highlight the secular tailwinds in the OTA
environment. For the second quarter 2014 (2Q'14; end June 2014), revenue
increased 24% over the prior year period. Revenue growth has accelerated on
the back of strong hotel signings on the ETP platform. More significantly,
2Q'14 EBITDA margins strengthened from strong revenue growth and leveraging of
fixed costs. Expedia plans on investing more in sales and marketing and
salesforce to drive acceleration of hotel acquisitions in 2H'14. However,
EBITDA margins have been trending lower on a longer term basis. EBITDA margin
for the LTM period ended June 2014 was 18.1%, down from 20.5% in FY2011,
reflecting competitive pressures and shifts in the market. Other factors which
impacted margins include Expedia's shift to an ETP platform for hotels; the
agency model is lower margin. Expedia's Hotwire business continues to
underperform, the result of both competition (e.g. Priceline's Express Deals)
and tight hotel inventories. In fact, tight hotel inventories generally
compress margins 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 direct 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 one of the largest OTAs 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
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 toward
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:
-- 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 apply
specifically to the retail rate charged by Expedia;
-- Ongoing pricing pressure in the OTA market combined with increasing
competition with direct sales channels could negatively affect future revenue
growth and profitability;
-- Inherent volatility in travel service demands from macroeconomic drivers as
well as the potential for significant volatility due to travel demand shocks;
-- Liberty Interactive holds shares representing approximately 56% 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;
-- In a slower growth or negative revenue environment, the working capital
deficit of $3.8 billion at June 2014 is expected to be a use of cash;
-- 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. Fitch believes, however, that OTAs represent a
valued source of market information to, as well as being a marketing arm of,
travel service providers.
Liquidity as of June 30, 2014 was solid with $1.4 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 2014 and
2015. Expedia has a working capital deficit of $3.8 billion which peaks
seasonally in the June quarter and should decline through the end of the year
by utilizing approximately $600 million to $800 million of the company's
existing cash balance. Expedia does have $2.4 billion in total cash and
short-term investments to partially offset the working capital deficit.
Total debt as of June 30, 2014 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.
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. However, a more conservative
financial profile coupled with increased revenue diversification from the
growth of the Egencia segment and Ad and Media revenues could have positive
implications for the rating.
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 in the competitive landscape;
-- A substantial financial loss from any future conclusion of the occupancy
tax lawsuits facing the company;
-- A more aggressive financial policy, reflected through material debt-funded
acquisition, share repurchase (including buyback of Liberty-owned shares), or
dividends, that drive leverage sustainably above 2.0x.
Fitch has taken the following rating actions for Expedia:
--IDR affirmed at 'BBB-';
--Senior unsecured bank credit facility affirmed at 'BBB-';
--$500 million in 7.456% senior unsecured notes due August 2018 affirmed at
--$750 million in 5.95% senior unsecured notes due August 2020 affirmed at
--New senior unsecured notes rated 'BBB-'.
The Rating Outlook is Stable.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria & Related Research:
--'Corporate Rating Methodology: Including Short-Term Ratings and Parent and
Subsidiary Linkage' (May 28, 2014),
--'Expedia, Inc.' (Aug. 13, 2014)
Applicable Criteria and Related Research:
Corporate Rating Methodology - Including Short-Term Ratings and Parent and
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