Expedia proposes spin-off of TripAdvisor

Online travel agent Expedia Inc. (NASDAQ: EXPE) proposes to split into two publicly traded companies:

* TripAdvisor, which will include the domestic and international operations associated with the TripAdvisor Media Group, which includes its flagship brand as well as 18 other travel media and advertising brands, and

* Expedia, Inc., which will continue to include the domestic and international operations of the company's travel transaction brands including Expedia.com, Hotels.com, eLong, Hotwire, Egencia, Expedia Affiliate Network, CruiseShipCenters, Venere, Classic Vacations and carrentals.com.

The company said it expects the transaction to take the form of a distribution of stock of TripAdvisor to Expedia stockholders or a reclassification of Expedia stock, with the holders of Expedia stock receiving a proportionate amount of TripAdvisor stock, in either case in a tax free transaction.

The proposed spin-off is expected to be completed in the third quarter of 2011.

Fitch Ratings has placed Expedia's issuer default rating on a negative watch following the proposed spin-off, saying TripAdvisor is a significant contributor to the overall credit quality of Expedia.

This reflects the diversification of revenue TripAdvisor contributes as well as its much higher growth rate and EBITDA margin, the ratings agency said. Expedia bondholders are left with a weaker operating entity with much reduced growth expectations going forward if the divestiture proceeds as proposed.

Significantly, the proposal will mirror the current ownership structure in both entities including Liberty Media's voting control and Expedia Chairman Barry Diller's proxy to vote those shares, Fitch said.

TripAdvisor as a stand-alone entity will likely represent a significant new competitor to Expedia, Fitch said, adding that TripAdvisor will now have much more flexibility to pursue a model akin to competitors such as Kayak that can promote hotel direct bookings in favor of directing traffic to on-line travel agencies (OTA) such as Expedia.

Fitch believes that the ratings could be lowered by one notch to 'BB+' based on current information and estimates. The ratings could be maintained at the 'BBB-' level if, among other things, the company was to redeem a portion of its debt outstanding and indicate it would maintain lower leverage for Expedia ex-TripAdvisor going forward.

Shares of Expedia, which ended Thursday's regular trading at $22.40, soared 13.9 percent to $25.51 in after-hours trading.