IAC to Buy Hotwire as Part of Its Travel Unit

Barry Diller’s InterActiveCorp said Monday that it has agreed to buy Internet travel discounter Hotwire.com for more than $665 million in cash in a deal that would help round out IAC’s portfolio of online travel companies.

If the transaction is approved by regulators, San Francisco-based Hotwire.com would become part of IAC Travel, a new IAC division. It includes two of the Web’s most prominent travel reservations sites: Hotels.com and Expedia.com, which was August’s second-most visited site in the category, behind Mapquest.com, according to an independent market research firm.

Diller, once viewed as a contender for the U.S. entertainment assets of Vivendi Universal, resigned as chairman of Vivendi Universal Entertainment in March under pressure from investors. He has since focused on his burgeoning e-commerce business. Seeking to expand the range of goods and services it sells on the Internet, IAC, formerly USA Interactive, has made good on promises to spend some of its $4 billion in cash on acquisitions this year.

In May, the company agreed to buy LendingTree Inc. for $734 million in stock and bought out the portion of Expedia.com’s parent, Expedia Inc., that it didn’t already own, in a stock swap valued at $3.3 billion.

Through IAC, Diller and his company retain a roughly 7% equity stake in the Universal entertainment assets, which are expected to merge with General Electric Co.-owned NBC by next month. Diller hasn’t revealed his intentions, but sources close to Vivendi say the mogul has had his fill of Hollywood and wants to cash out his stake.

On Monday, some analysts questioned the price of the Hotwire deal, which requires IAC to assume about $20 million in options and warrants. IAC shares fell $1.20 to $35.05 on Nasdaq.

But many praised the deal. “It just makes a lot of sense,” said Janco Partners managing partner Matt Harrigan. “It is probably worth more housed within IAC than it is off on its own.”

IAC also operates cable channel HSN and Ticketmaster.

Sales at online travel sites have experienced rapid growth as more consumers forsake traditional travel agents to book their own reservations. So far this year, travelers have spent $27.7 billion at booking sites, a 36% gain over the same period a year ago, according to market research firm ComScore Networks Inc.

IAC has benefited from this trend. For the quarter ended June 30, IAC, which has grown aggressively through acquisitions, reported operating profit from travel services of $88.7 million, more than double the earnings of a year earlier. Revenue was $653.4 million, up 72%.

“It is not so long ago that these online travel services didn’t exist; it ought to be now clear to all that they will stand the test of time and play an increasingly important role in every aspect of the travel experience,” Diller said in a statement.

His company said it expected Hotwire to post revenue of $110 million in 2003 on gross bookings of about $700 million.

Hotwire.com, which ComScore rated as the sixth-most visited travel site in August, made its name offering cheap airfare in exchange for customers’ willingness to fly at any time and on any carrier. Routes and airline names aren’t revealed until customers pay for tickets. The firm, which also provides hotel rooms and car rentals, was formed in 2000 by six major airlines and investment firm Texas Pacific Group.

Hotwire Chief Executive Karl Peterson, who will continue to run the company and oversee its staff of 185 as part of IAC Travel, said Diller approached him in late spring to discuss ways a partnership could benefit both firms. IAC offers marketing muscle, fresh capital and new customers, Peterson said, while Hotwire brings in budget-minded customers whom Expedia and others have tried unsuccessfully to reach.

“Expedia tried to basically be a one-stop shop; they tried to get into our business,” he said. “Suppliers liked having two separate sites better, and the consumers figured out that the sites were different.... The brands mean something different to consumers.”

Times staff writer Richard Verrier contributed to this report, and Associated Press was used in compiling it.