Expedia Share Buy Back Scaled Back

Expedia.com is a rarity on the internet. The on-line travel agent is one of the very few operations that actually makes money for its owners. Spun out of Barry Diller’s IAC internet group back in 2005, its stock trades in the high $20 range. That trading has disappointed many, and to give the stock a shot in the arm, the company had planned a buy back of around 42% of its shares, relying on $3.5 billion in new debt to execute it. Citing unfavorable market conditions, that 45% has shrunk to 8%, and the buy back will rely on existing credit facilities rather than new debt.

The high-yield bond market is looking at $300 billion in issuance of new debt between now and New Year’s Eve. That’s rather a lot to digest, and risk premiums are rising. In the past six weeks, the spread on high-yield debt over US Treasuries has gone from 263 basis points to more than 340 basis points (a basis point is one-hundredth of a percent). Bearing in mind that the Fed has been ratcheting up interest rates, not only is the spread higher, but the absolute rate is higher.

The 800-pound gorilla at the table here is the shaky condition of America’s mortgage market, especially the subprime segment. The appetite for risk has been satisfied and then some thanks to the troubles here. Markets run, as this journal has noted before, on greed and fear. Currently, fear is outstripping greed in the debt markets. Not every deal is going to get a thumbs-up any more.

The knock-on effect here is likely to cool the equities market. If the current attitudes prevail, borrowing to buy up stock is going to tail off, meaning capital structures are going to be light on debt. Equity investors will have all they want, but that inevitably slows increases in stock prices. The effect could be to hold down global stock markets for the rest of the year.

There is some good news in all of this. Debt is relatively cheap right now when compared to the last several decades. The right deal will still get its debt funding. That is not to say that Expedia’s isn’t a good deal, but timing matters, and Expedia’s has been unfortunate. Where Expedia is lucky is in Mr. Diller holder a majority of the stock’s voting power. He can always put another deal together, or even take the company private if conditions improve, and he could do so quickly.

© Copyright 2007 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Fedora Linux.

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