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Lycos in $12.5B deal
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May 16, 2000: 8:22 p.m. ET
Spanish Internet provider to pay $12.5 billion for U.S.-based portal
By Staff Writer David Kleinbard
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NEW YORK (CNNfn) - Spanish Internet service provider Terra Networks SA agreed to pay about $12.5 billion in stock for the U.S. Web portal Lycos Inc., giving Terra a valuable source of online content and ending more than a year of acquisition discussions surrounding Lycos.
Terra Networks is a fast-growing but money-losing Internet access provider that is majority-owned by Telefonica SA, the parent company of the largest telecommunications group in Spain and Latin America. Terra said Tuesday that it will acquire Lycos in a stock transaction valued at $97.55 per Lycos share, about 34 percent above Tuesday's closing price and 80 percent above last Friday's closing price for Lycos (LCOS: Research, Estimates).
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The Lycos network of Web sites provides aggregated third-party content, Web search and directory services, personal Web site publishing, and online shopping. The company derives most of its revenue from advertising on its sites. The audience measurement service Media Metrix, based in New York, ranks Lycos as the fourth most heavily visited site in the United States, with almost 33 million people visiting Lycos-related sites in March 2000.
 News reports of the likely deal had circulated since last Friday, when Terra confirmed that the two sides were in talks about a possible alliance.
The transaction comes almost exactly one year after Barry Diller's USA Networks Inc. abandoned a bid for Lycos. The Web portal's shareholders, most notably the Internet venture company CMGI Inc. (CMGI: Research, Estimates), objected to the proposed transaction with USA Networks because they felt it assigned too low a value to Lycos compared with the premiums that had been paid for other Web properties.
This time around, analysts said that Lycos brings much more to the table than Terra (TRRA: Research, Estimates), and that the $12.5 billion price tag Terra is offering is one of the only compelling reasons for Lycos to agree to the transaction.
"It's a good move for Terra because it gives them the number four Web player in the U.S. and a top-10 player in some of the major European markets," said Michael Wallace, an analyst at UBS Warburg. "From the Lycos perspective, it helps them in Spain and Latin America and that's about it."
Waltham, Mass.-based Lycos already has a significant presence in Europe through a joint venture with Bertelsmann, the third-largest media company in the world. Last March, Lycos completed an initial public offering of its European joint venture, raising $649 million.
Terra and Lycos said they expect to report combined revenue of $500 million this year and currently have an estimated 50 million unique users and 175 million page views per day. The combined company, to be called Terra Lycos, will have operations in 37 countries in North America, Latin America, Asia, and Europe.
Downside risk of the transaction
Because Terra is purchasing Lycos for stock, rather than cash, Lycos shareholders are exposed to the risk that Terra's stock will decline before the transaction is completed. The way the transaction is structured, Lycos shareholders will receive a maximum of 2.15 Terra shares, which means the amount they will receive will be less than $97.55 if Terra stock drops below $45.37 per share. That risk is not entirely theoretical - Terra's stock has plunged to 53-9/16 from 135 last February.
In after-hours trading Tuesday, Lycos stock rose 2-1/8 to 74-3/4, well below the price Terra is offering, suggesting investors are skeptical about the final dollar value of the deal.
"I think people are trying to work their way through the deal, and there probably are some questions about the value of Terra's stock as currency," said Paul Noglows, an analyst at Chase H&Q.
Nevertheless, analysts said that Terra was offering a good price for Lycos.
"I think it's a fair price, when you consider that Lycos' all-time high was 93-5/8 and that there are Internet stocks trading 50 percent-to-90 percent below their all-time highs," Noglows said. "It's also more than double the price that was contemplated last year during the USA Networks transaction."
The CMGI reaction
The boards of Terra and Lycos have unanimously approved the transaction, as has the board of Telefonica SA, which owns about 67 percent of Terra's stock. Terra said that it expects to close the transaction in the third quarter of this year, following votes by both companies' shareholders.
CMGI declined to comment about the transaction to CNNfn television. However, Bob Davis, president and CEO of Lycos, said on CNNfn's Moneyline that he had spoken about the deal with CMGI Chief Executive David Wetherell.
"David was very enthusiastic about the transaction," Davis said.
As part of the agreement, Terra Lycos entered into an agreement with Bertelsmann, under which Bertelsmann will purchase $1 billion of advertising and placement on Terra Lycos over a five-year period. In addition, the combined company will gain access to Bertelsmann's catalog of books, movies, music, and other media content on preferred terms.
"The combination of Terra and Lycos, supported by the strategic relationships with Telefonica and Bertelsmann, creates a global Internet and new media powerhouse with a scale and global footprint unmatched by any other media company in the world," said Juan Villalonga, chairman and CEO of Telefonica and chairman of Terra.
When the merger is completed, Villalonga will serve as chairman of Terra Lycos. Lycos' Davis will be the CEO of the combined company. Abel Linares, Terra's CEO, will be chief operating officer.
$2 billion stock offering
As part of the transaction, Terra will sell $2 billion of new stock to its existing shareholders at today's Madrid closing price of $56.13 per Terra share. After this stock sale, the combined company will have about $3.5 billion in cash, Terra said.
The terms of the transaction call for Lycos shareholders to receive $97.55 worth of Terra ordinary shares, or their equivalent in Terra's American depository receipts (ADRs). However, Lycos shareholders will not receive less than 1.433 or more than 2.15 Terra shares. When the transaction is completed, Terra shareholders will own between 54 percent and 63 percent of the combined company, depending on the final share exchange ratio.
While Terra has a larger market capitalization than Lycos, Lycos has much greater revenue and is profitable, while analysts had expected Terra to lose about $200 million on revenue of $150 million this year. Terra's main revenue source, Internet access fees, is being threatened by the spread of free Internet access in parts of Europe and Latin America.
"Based on our strategic plan and the experience of other Internet portal companies and Internet service providers, we expect that our expenses will continue to exceed our revenues for at least the next three years," Terra said in a filing made at the Securities and Exchange Commission late last year. "After that, depending upon competitive conditions and the dynamics of the industry, we may continue to pursue a strategy that emphasizes strength of market share and market presence at the expense of profitability."
Lycos, by contrast, reported a profit of $3 million, or 3 cents per share, on revenue of $68.6 million in the quarter ended January 31, 2000. Securities analysts expect the company's revenue to total more than $260 million this fiscal year, which ends in July, with net income rising to an estimated $15 million. 
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Lycos
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