Cable Operators

LodgeNet Deal Could Lift DirecTV

12/29/2006 7:00 PM Eastern

LodgeNet's agreement last month to purchase On Command for about $380 million in cash and stock not only joins the two largest in-room entertainment companies in the hospitality space, but also could help former parent Liberty Media gain a larger hotel foothold for its new holding, DirecTV Group.

LodgeNet will nearly double its size with the On Command deal, adding On Command's 830,000 hotel rooms to its existing 1 million-room footprint.

LodgeNet provides in-room movies, video games, high-speed Internet service and other interactive services to more than 6,000 hotels in the U.S. and Canada. In addition to the hotel rooms it furnishes with movies and video games, On Command also owns 80% of The Hotel Networks, which distributes advertiser-supported, satellite-delivered television programming to about another 300,000 rooms throughout the U.S.

DirecTV, which Liberty agreed to acquire on Dec. 22, already has a distribution deal with On Command, providing programming feeds to several of the company's hotel clients.

DBS EXPANSION

Although the DirecTV deal had not yet been announced when LodgeNet CEO Scott Petersen held a conference call with analysts concerning the On Command acquisition on Dec. 13, he said that any combination of Liberty and DirecTV would give LodgeNet the opportunity to expand its relationship with the direct-broadcast satellite service provider.

“I certainly believe they can be of significant assistance to us as we look at perhaps bringing in new content into the hotel space, satellite-type transmission opportunities, those types of things,” Petersen said of Liberty on the conference call. “We're very pleased that they wanted to have continued equity in the combined organizations. We think that's really a strong point for the deal.”

As part of the deal, Liberty will receive about 2.05 million Lodge­Net shares and $332 million in cash. The stock will give Liberty a 9.9% stake in Sioux Falls, S.D.-based LodgeNet, which said it would finance the deal in part with an additional equity infusion from one of its original backers, hedge fund PAR Capital Management. As part of the deal, PAR Capital will purchase an additional 1 million shares of LodgeNet stock at $23.35 per share, bringing its total equity stake in the company to 9.9%.

Bear Stearns and Credit Suisse will finance the remaining cash portion of the deal.

Lehman Bros, and Daniels & Associates served as financial advisers to Liberty in the transaction. Bear Stearns advised LodgeNet.

Petersen added that Liberty's international cable holdings — mainly through its Liberty Global unit — could help LodgeNet break into the international hotel market.

“The knowledge Liberty has in domestic and international markets and business operations can only help our company,” Petersen said. “As our major brands — the Starwoods, the Hiltons, the Marriotts, the Hyatts — all have international operations, perhaps that all kind of combines [and] allows us to take steps to serve the international needs of our domestic hotel organizations.”

In a research note, Jefferies & Co. media analyst Robert Routh noted that On Command receives its programming feed from DirecTV and that adding LodgeNet to the mix will serve to further increase the value of Liberty's stake in the combined company.

“Coincidence? We are not sure, but at least [they] have another tax-efficient asset rationalization of an asset the markets assigned no value to,” Routh wrote.

BARGAIN PRICE

LodgeNet also gets its chief competitor at what seems to be a bargain price. On the analyst call Dec. 13, LodgeNet senior vice president of finance, information and administration Gary Ritondaro said the deal values On Command at about $455 per room, well below LodgeNet's own valuation of $675 per room.

The deal also appears to bode well for LodgeNet on a cash-flow multiple basis. Ritondaro said that at $380 million, the purchase price represents about 6.5 times On Command's estimated 2006 adjusted operating cash flow. That compares to LodgeNet's market value of about 7 times 2006 AOCF.

LodgeNet also expects the deal to shave between 10% and 12% from its capital budget. Both companies currently spend about $125 million a year on capital expenditures, mainly for upgrading existing tape-storage devices at their hotel clients to new digital storage systems. Petersen said those upgrade programs were about 70% complete for each company.

Accounting for those capex synergies makes the deal look even better, dropping the purchase multiple to about 5.2 times AOCF.

Liberty also makes a decent return on the deal and keeps an interest in a larger and healthier company. The combined LodgeNet and On Command is expected to generate about $500 million in annual revenue in its first full year and about $160 million in adjusted operating cash flow.

Liberty purchased On Command's former parent, Ascent Entertainment Group, in 2000 for about $755 million. About a month after that deal was done Liberty sold a majority of its interests in Ascent's sports teams — the National Hockey League Colorado Avalanche and the National Basketball Association Denver Nuggets — and the Pepsi Center arena in Denver, where both teams play, to Kroenke Sports Enterprises for about $404 million.

LodgeNet had previously focused on mid-level hotel properties like Best Western and Holiday Inn. With the On Command deal, expected to close by mid-2007, LodgeNet gains access to higher-end hotels like Marriott, InterContinental and Hyatt. About 70% of On Command's rooms are located within high-end hotels.

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