InterActiveCorp is Barry Diller’s retail, services, and media conglomerate, which, after a recent slide, is currently trading at approximately 6x normalized 2008 EBITDA. Even without normalizing EBITDA, that figure rises to only 7.5x to 8.0x.  I believe that the current valuation grossly undervalues IAC, whose properties are predominantly attractive, high-ROIC, growing assets.  To put the current valuation in perspective, consider that, for example, newspapers trade at 8x – 9x EBITDA.  In fact, in the not too distant past, a company like IAC could probably have walked up to a bank and borrowed 6x normalized EBITDA, no questions asked.  I believe the current valuation offers investors very little downside with upside of approximately 50%-100%. 

                                   

Share Price		$27.30
FD Shares Outstanding		309.4
FD Market Cap		$8,446.6
+ Debt		$845.1
- Cash		($1,811.0)
Enterprise Value		$7,480.7
- Value of equity stakes		($583.0)
PF Enterprise Value		$6,897.7
Estimates (incl. stock comp)
2006A EBITDA	$809	8.5x
2007E EBITDA	$708	9.7x
2008E EBITDA	$853	8.1x
2008E EBITDA (Normalized)	$1,127	6.1x
FC Consensus Ests (excl. stock comp of ~$90m)
2007E EBITDA	$860	8.0x
2008E EBITDA	$1,005	6.9x

Why is the company trading so cheaply? 

·         Recent operational headwinds / stumbles.  A few of IAC’s subsidiaries have stumbled in the current year, for a variety of reasons.  HSN saw margin compression because of poor execution.  Ticketmaster saw margin compression in Q2 because of a weak concert season.  LendingTree was hit by the dropoff in mortgages.  Combined, these hiccups have hit the bottom line fairly significantly.

·         Overcapitalization.  IAC maintains a sizable net cash position, which makes it look unattractive on a P/E basis.  I believe this problem will go away in the next couple of years via repurchases.

·         Complexity.  IAC has a lot of subsidiaries, and it is hard to divine the true value of all of them.  Furthermore, profitability in a given period is affected by losses generated by certain subsidiaries, particularly more venture-stage ones, which makes applying a multiple to combined profitability hard to do.

What makes this situation particularly attractive is that IAC has $1.8 billion sitting in the bank (compared to a market cap of about $8.5 billion) that it can use for repurchases, which would go a long way toward fixing the current undervaluation.  IAC has been a significant repurchaser in the past, and Diller reiterated on the most recent call they will be “net buyers in the long-term”, and that they will look to use “sensible leverage” once the credit market improves.  Diller has shown a willingness to repurchase; at Expedia (an IAC spinoff), faced with similar overcapitalization, he has done two dutch tenders in the past year, each time for around 10% of outstanding shares.  In a much publicized move, he attempted to borrow to repurchase much, much more, but he was unable to do so as conditions shifted.  IAC hasn’t done any repurchases so far this year; in the first quarter, it was because they were “contemplating a significant corporate transaction” which did not come to pass, and in the most recent quarter, Diller did not offer any commentary, except to say that he could not comment.  Since Diller has commented in the past that significant M&A was not likely to be in the cards, by far the most likely explanation would be a deal to repurchase Liberty’s 25% stake in the company.  Unless a deal was imminent, I think IAC (and Liberty) would be likely to table negotiations in favor of repurchasing stock at these recent low valuations. 

One final point to consider  is that according to the proxy, vesting of certain RSUs is going to be based on 2009 Adjusted EPS, so management would be insane not to do a major repurchase, as that would materially help them hit their target.

I’ve attempted to do a simple sum-of-the-parts analysis, using what I believe are fairly conservative estimates regarding normalized profitability and valuation multiples.   The company is complex, and pieces are always being added and divested, and this write-up was done in a bit of a rush, but I’ve tried to capture everything as best I can.

								Normalized
		2006		2007E		2008E		2008E		Multiple				Value
Division		EBITDA		EBITDA		EBITDA		EBITDA		Low		High		Low		High
Retailing		$302		$250		$280		$372		7.0x		9.0x		$2,604		$3,348
TicketMaster		303		300		330		343		10.0x		12.0x		3,432		4,118
Online Marketplaces		221		246		293		293		12.0x		14.0x		3,516		4,102
LendingTree		74		20		40		70		9.0x		11.0x		630		770
Media & Advertising		86		80		98		204		10.0x		12.0x		2,041		2,449
Discounts		20		20		20		20		6.0x		8.0x		120		160
Other		(33)		(33)		(33)		0		N.A.		N.A.		0		0
Corporate Overhead		(163)		(175)		(175)		(175)		9.5x		11.5x		(1,659)		(2,009)
Total		$809		$708		$853		$1,127		9.5x		11.5x		$10,684		$12,939
- Debt														(845)		(845)
+ Cash														1,811		1,811
+ Equity Holdings														583		583
Equity Value														12,233		14,488
FD Shares Out (@ $40)														315.9		315.9
Value / Share														$38.73		$45.86

Please note that I’ve tried to be conservative when picking the multiples, and I’ve assigned no value to pieces of the business that probably have value but are currently losing money, such as the emerging business and real estate segments – if you wanted to get aggressive on multiples, and maybe factor in the benefits of repurchases as well, you could easily get to a valuation of $50+ per share.  The thesis here is really more in the Warren Buffett category of “you don’t need a scale to know a man is overweight”; I honestly don’t know what the value is here, exactly, except that it’s probably far from $27 a share.

 In the remainder of this writeup, I’ll lay out overviews of each of the businesses, along with financials and valuation rationales.

                 

				Income Statement
								Normalized
				2005	2006	2007E	2008E	2008E
Revenue				$2,671	$2,933	$3,000	$3,100	$3,100
	% growth				N.M	2.3%	3.0%
EBITDA				317	302	250	280	372
	% margin			11.9%	10.3%	8.3%	9.0%	12.0%
Depreciation				41	37	40	40	40
EBITA				276	264	210	240	332
	% margin			10.3%	9.0%	7.0%	7.7%	10.7%

                          

Valuation
Normalized
2008		Multiple				Value
EBITDA		Low		High		Low		High
$372		7.0x		9.0x		$2,604		$3,348

IAC’s retailing division is primarily composed of HSN, the home shopping network, which was one of the original businesses IAC was built around, and Cornerstone Brands, a catalog business acquired in 2005 for around $720 million (1x trailing revenue and 11x trailing EBITDA).  The 2005 numbers above include only three quarters of contribution from Cornerstone.  HSN has about 30% market share in the U.S. home shopping space, compared to 60% for its main rival, QVC.  HSN’s margins are around half those of QVC, which achieves domestic EBITDA margins of around 25%, but this has been the case for a decade, so it’s doubtful that they’ll ever find the formula to close that gap, if such a formula even exists.  For now, the new management team needs to reverse the dip in margin from recent slip-ups in merchandising.  Cornerstone is a higher growth business, but with lower margins (9% in 2004). From an investment standpoint, the Cornerstone/HSN combination is a low single-digits grower that throws off considerable cash flow, and if the business recovers to 2005 margins, as it should eventually, EBITDA will improve significantly.

My valuation of 7x – 9x EBITDA for the business translates into would translate into a low-teens P/E multiple for a standalone business with moderate leverage, approximately in line with what retail comps are trading at in the market after the recent rout.  The intrinsic value might be somewhat higher, as there is room for margin improvement beyond the 12%, and the business has a much higher ROIC than traditional retail does, but conservatism is warranted, especially as it is a likely bargaining chip for Liberty (which owns QVC), and John Malone is not the type to overpay.

 

 

				Income Statement
								Normalized
				2005	2006	2007E	2008E	2008E
Revenue				$950	$1,085	$1,200	$1,320	$1,320
	% growth				14.2%	10.6%	10.0%
EBITDA				255	303	300	330	343
	% margin			26.9%	27.9%	25.0%	25.0%	26.0%
Depreciation				37	38	38	38	38
EBITA				219	264	262	292	305
	% margin			23.0%	24.4%	21.8%	22.1%	23.1%

Valuation
Normalized
2008		Multiple				Value
EBITDA		Low		High		Low		High
$343		10.0x		12.0x		$3,432		$4,118

                    

 If you believe that part of the value of IAC is Diller’s skill as a capital allocator, Ticketmaster would be exhibit A.  IAC acquired 50% of Ticketmaster from Paul Allen for $210 million in stock in 1997; last year Ticketmaster did $303 million in EBITDA.  Aside from some small international acquisitions, most of that growth has been organic.  Much of the growth has also been recent; Ticketmaster’s ticketing business was only doing around $100 million in EBITDA in 2001 on $600 million or so in revenue, but strong growth in volume and pricing, both domestically and overseas, as well as a budding secondary ticket sales business has supplied double digit annual growth.

Anyone who has ever bought a ticket to a sporting event or concert probably thinks Ticketmaster has quite a racket going, and they would be at least partially right.  Although much of the “convenience charge” Ticketmaster charges gets kicked back to the event owner, Ticketmaster’s margins and returns on capital are quite impressive indeed.  Ticketmaster’s main competitor in the primary market is Tickets.com, a subsidiary of MLB Advanced Media, though it is a reasonably distant second.   In the increasingly legitimized secondary market (scalping), the leaders are online exchanges like StubHub (now being acquired by eBay), though Ticketmaster has a presence here as well.  Going forward, the international market (now about a third of revenue) should continue provide much of the growth, supported by the always growing number of events and rising revenue per ticket.

The worry for Ticketmaster is competitive position, with Live Nation’s contract coming up for renewal (20% of revenue) at the end of the year, and the desire of all of Ticketmaster’s partners to keep a larger slice of the pie for themselves.  Breaking up with Ticketmaster, however, is not so easy to do – Ticketmaster, besides providing outsourced ticket management, tries to drive ticket sales themselves through their website and by blasting out those annoying emails reminding  you of upcoming events you might enjoy  – so  severing ties with Ticketmaster might deprive promoters of incremental ticket sales,  which might more than offset the benefits of bringing ticketing in-house (if you have the scale of Live Nation) or choosing someone else.  As IAC is eager to remind people, about half of tickets go unsold, and of the tickets that do get sold, only a third go through Ticketmaster.  Furthermore, in 2006, Ticketmaster added 685 clients and lost 33. 

Ticketmaster doesn’t have any close public comparables for valuation, but for a company growing in the double digits, I feel a multiple of 10x-12x more than compensates for any perceived or real risk of losing market share (which the company is adamant did not happen in Q2 2007) or economics.

    

				Income Statement
								Normalized
				2005	2006	2007E	2008E	2008E
Revenue
	ServiceMagic			$41	$64	$92	$115	$115
	Interval			273	299	344	378	378
	Match.com			250	311	342	377	377
Total Revenue				$563	$674	$778	$870	$870
	% growth				19.7%	15.5%	11.8%
EBITDA
	ServiceMagic			$13	$17	$25	$31	$31
	Interval			118	133	160	176	176
	Match.com			56	71	78	86	86
Total EBITDA				187	221	263	293	293
	% margin			33.2%	32.8%	33.8%	33.7%	33.7%
Depreciation				17	17	17	17	17
EBITA				171	204	246	276	276
	% margin			30.3%	30.2%	31.6%	31.7%	31.7%

Valuation
Normalized
2008		Multiple				Value
EBITDA		Low		High		Low		High
$293		12.0x		14.0x		$3,516		$4,102

                         

In my opinion, these are the real gems under the IAC umbrella: ServiceMagic, Interval, and Match.com.  ServiceMagic was acquired in 2004 for around $200 million, and is an online marketplace that connects consumers with pre-screened home service professionals.   Interval was acquired for around $500 million in 2002, and is one of two major timeshare exchange companies (the other is RCI, owned by Wyndham).  Interval operates offline as well as online.  Match.com came over as part of Ticketmaster, and is one of the largest personals websites in the world. 

The attraction for online marketplaces is the economics of the business; they tend to face little to no competition, and the strength of the network effect (buyers only want to be where the sellers are and vice versa) discourages new competitors.  If that weren’t enough, capital and operating costs are minimal and thus operating leverage is significant (most of the value ends up being the online real estate you occupy).  There are several public comparables, from big players (eBay, Monster) to small (LoopNet, eHealth), to foreign (Gmarket, MercadoLibre), and I’m sure there are several others I’m leaving out too.  Generally, these companies trade at forward EBITDA multiples in the mid-teens, but I’m being conservative here.

 

				Income Statement
								Normalized
				2005	2006	2007E	2008E	2008E
Revenue				$368	$429	$386	$400	$400
	% growth				16.6%	-10.0%	3.6%
EBITDA				84	74	20	40	70
	% margin			22.9%	17.1%	5.2%	10.0%	17.5%
Depreciation				6	9	9	9	9
EBITA				79	64	11	31	61
	% margin			21.4%	15.0%	2.9%	7.8%	15.3%

Valuation
Normalized
2008		Multiple				Value
EBITDA		Low		High		Low		High
$70		9.0x	-	11.0x		$630		$770

                               

LendingTree probably properly belongs in the “online marketplaces” category above (remember, when banks compete...), but it deserves to be highlighted separately because of its exposure to mortgages.  Acquired in 2003 for around $700 million, it saw spectacular growth soon afterwards, largely from the refinance market where it is the strongest.  Profitability has plummeted, and they have moved to reduce costs to adapt.  I can’t honestly say that I know how long it will be before LendingTree reattains the success it had seen in 2005-2006, though I think that with time it should come back somewhat, but I just wanted to highlight one key source of the recent profitability shortfall. 

   

				Income Statement
								Normalized
				2005	2006	2007E	2008E	2008E
Revenue				$214	$544	$680	$816	$816
	% growth				N.M.	25.0%	20.0%
EBITDA				44	86	80	98	204
	% margin			20.5%	15.8%	11.8%	12.0%	25.0%
Depreciation				13	28	28	28	28
EBITA				31	58	52	70	176
	% margin			14.3%	10.7%	7.6%	8.6%	21.6%

Valuation
Normalized
2008		Multiple				Value
EBITDA		Low		High		Low		High
$204		10.0x	-	12.0x		$2,041		$2,449

                              

This division consists mostly of the assets of Ask.com, acquired by IAC in 2005 for around $1.7 billion.  Ask is the #4 search engine, with about 5% of the market.  At the time of acquisition, it was doing about $100 million of EBITDA off of about $400 million in revenue.  Since then, IAC has moved aggressively to invest in technology and advertising to promote Ask and boost share.  It’s had some success, with 25%+ annual top line growth to date, but the bottom line appears to be depressed because of the investment they are putting in.  Ask had EBITDA margins of around 30% pre-acquisition – I assume normalized margins of 25%. 

This is one of the properties whose earnings power is far above what it is achieving, though for much different reasons that LendingTree and HSN.  Search leaders Yahoo and Google trade at much higher multiples, but keep in mind that Ask has to compete with Google, which is obviously no small task.

Citysearch was part of Ticketmaster – it’s probably a decent enough property, as far as that goes, but I don’t believe its contribution is particularly material.

They paid $370 million for this business a few years back, but it never really panned out.  It does about $20 million of annual EBITDA, and they took a goodwill write-off for it recently.

IAC owns RealEstate.com, a network connecting consumers with real estate agents.  They’re working on getting this one to profitability, but it seems to require some investment.  Eventually they hope it will provide leads for LendingTree.

At $175 million a year (including stock-based comp), it seems awfully high for a company this size.  What are they all doing?  But, if Barry Diller wants a Frank Gehry-designed corporate headquarters in Chelsea, that’s what he gets, because he’s the boss, and he controls the vote (through an agreement with Liberty).  The shareholders have to live with it (and price it in to valuation models accordingly).

CollegeHumor.com is in this group, among others.  I don’t know what they’re worth, so I didn’t assign any value, but there’s probably something in there of value.

The main holding here is the 30% in Jupiter Shop Channel, a Japanese home shopping network.  Liberty Global sold their 35% stake to Sumitomo for $867 million in May 2007, which values IAC’s stake at $743 million.  There are also a few other minor holdings in this group.  I use the $583 million long-term assets figure on the balance sheet, to be conservative – if IAC were to monetize their stake, it would probably incur some tax liability anyway.

Owner		Shares (millions)	% of Out.	% of Float
Liberty Media		69.3	24.1%	N.A.
Legg Mason		49.9	17.3%	23.4%
Lord Abbett		16.9	5.9%	7.9%
ClearBridge		14.8	5.1%	6.9%
Goldman Sachs Asset Management		8.6	3.0%	4.0%
Barry Diller		5.5	1.9%	N.A.
Others		123.0	42.7%	57.7%
Total		288.0	100.0%	100.0%

It’s always hard to figure why buyers have been buying and sellers have been selling, but IAC’s ownership chart is worth looking at (note this is as of 3/31/07).  Bill Miller has been a longtime fan of the company, and Legg Mason and ClearBridge own over 30% of the float between them.  Bill Miller has also been a fan of financials and homebuilders, and he’s gotten crushed recently.   Legg Mason saw some redemptions in Q2 07, and the pace is only likely to increase as things have worsened since then.  GSAM’s travails have been well reported in the media, but I don't know through which channels they own IAC.

·         IAC continues to miss estimates – I don’t know how fast IAC will recover, but when I was putting my own numbers together, they were a bit below consensus (see the chart at the beginning).

·         Major shareholders have to continue to sell.  Not a real risk to the business value, but it might depress the price for a while.

·         Well, let’s face it, my last recommendation hasn’t been a home run so far…

 

			Historical and Projected Income Statements (PF for Sale of HSE24)
							Normalized
								PF for Rep.	PF for Lev.
			2005	2006	2007E	2008E	2008E	2008E	2008E
Revenue			5,036.7	5,919.3	5,918.5	6,366.2	6,366.2	6,366.2	6,366.2
EBITDA			648.9	808.6	708.4	853.4	1,127.3	1,127.3	1,127.3
Depreciation			127.2	150.4	157.1	157.1	147.0	147.0	147.0
EBITA			521.7	658.2	551.3	696.3	980.3	980.3	980.3
Interest Income / (expense)			63.4	12.3	10.3	10.3	10.3	(57.2)	(177.2)
Equity Income			47.8	34.3	31.0	31.0	31.0	31.0	31.0
Pretax Income			632.9	704.8	592.6	737.6	1,021.6	954.1	834.1
Taxes @ 40%			253.2	281.9	237.0	295.0	408.7	381.7	333.7
Net Income			379.7	422.9	355.5	442.5	613.0	572.5	500.5
Shares Out.			356.6	319.5	309.4	309.4	309.4	259.4	209.4
EPS			$1.06	$1.32	$1.15	$1.43	$1.98	$2.21	$2.39
Current EV/EBITDA			10.6x	8.5x	9.7x	8.1x	6.1x	6.1x	6.1x
Current P/E			25.6x	20.6x	23.8x	19.1x	13.8x	12.4x	11.4x