Diller to Merge Web Unit With CitySearch

In a bid to vastly expand its Internet business and tap into the craze on Wall Street for Internet stocks, Barry Diller’s USA Networks Inc. is expected to announce plans today to merge the online ticketing arm of its Ticketmaster Group with CitySearch, a Pasadena-based company that creates online city guides.

Sources say CitySearch will cancel its plan to raise about $50 million by selling 20% of its shares in a public stock offering this week to form the new company with Ticketmaster Multimedia.

The partners plan to take the combined company public by year-end, sources said. Although most online ventures make little money, Ticketmaster Multimedia’s brisk revenue from online ticket sales should make CitySearch more attractive to investors.

Under the agreement, USA Networks, which already owns a 13% stake in CitySearch, will invest $50 million in CitySearch for convertible stock to fund operations of the company until the IPO is completed.

USA Networks will have a controlling interest in the merged companies, which the partners believe will have a value of nearly $700 million, according to sources close to the transaction. USA Networks will control about 63% of the combined company, with the remainder held by CitySearch shareholders, including company founder Bill Gross, Los Angeles Times parent Times Mirror Co., Intel, Compaq Computer and AT&T; Ventures.

Sources say Alan Citron, president of USA Networks Interactive, will become chairman of the merged entity, while CitySearch management will run the day-to-day operations. Charles Conn will continue as chief executive and Thomas Layton will be president and chief operating officer.

Analysts say Diller, USA Networks chairman and chief executive, is eager to use Ticketmaster’s thriving online ticketing business to bring more traffic to city guides that he believes will become increasingly popular tools for determining entertainment choices.

Analysts say the local content of CitySearch could eventually be cross-promoted with the television network Diller is building to emphasize news, sports and local culture.

USA Networks is in the process of converting its two dozen television stations, which have been airing programming from Home Shopping Network, another division of the company.

Under the deal, CitySearch and Ticketmaster will maintain separate Web sites, but will share content and cross-promote.

Ticketmaster’s online operations have been growing quickly and sold $10 million worth of tickets via the Internet last month. Those ticket sales represent a small fraction of the ticket sales of parent company Ticketmaster, the dominant-live event ticketing company in the United States, which is owned by USA Networks.

It’s unclear how the company will determine how much profit is attributable to the online sales division, but a source said the merged company will license the right to sell tickets online from Ticketmaster Group.

Sources say Diller, who is credited with building the Fox network for Rupert Murdoch in the early ‘90s, returned from the exclusive annual media confab in Sun Valley, Idaho, in July envious of the fortunes recently amassed by young Internet entrepreneurs.

Sources say he approached CitySearch with his idea about 10 days ago.

The Diller deal enables CitySearch to step back from a softening IPO market. Despite high-profile successes such as Tuesday’s GeoCities offering--which rose 119% on its first day--and last month’s record-breaking Broadcast.com debut, second-tier firms are facing a much tougher time.

This week, Pilot Network Services, an Internet security firm, closed below its $14 offering price on its first day of trading. And Cyberian Outpost, which sells computer hardware and software via the Internet, has mostly languished below its $18 offering price since it went public last month.

Some analysts have questioned CitySearch’s long-term ability to turn a profit. The company has racked up $58.7 million in losses since its founding in 1996; last year, the company had sales of $6.2 million.

Compared with some kinds of Internet content, CitySearch’s local guides are labor-intensive to produce and maintain. The company has teamed with papers such as The Times, Washington Post and Dallas Morning News to provide content and funnel advertising to its sites, but CitySearch has 560 employees--a sizable overhead.

CitySearch’s competition also has the luxury of deeper pockets. America Online has launched more than 50 Digital Cities sites--twice as many as CitySearch. Microsoft has 10 Sidewalk sites.

CitySearch decided to go public after the collapse of a proposed merger agreement with Zip2, a Mountain View-based producer of local online yellow pages and entertainment listings.

CitySearch was the brainchild of Gross, a Caltech grad and Knowledge Adventure founder who spawned so many ideas for high-tech companies that he started his own Pasadena-based business incubator, called Idealab.