Thursday, October 12, 2006

Maybe they just need the money for boring balance sheet issues

I mused earlier about Expedia's fund raising elements and wondered what hidden plans they had for spending all their cash. Exciting acquisitions and convoluted corporate dances played out in my head. However after having read some news today on Yahoo! Finance, maybe they simply needed the money as a back-up plan. The story has a dull financial element to it but let me try and tell the story

Expedia's falling stock price could have a snowballing effect. Not just as a result of sentiment turning against them but because balance sheet items may need to be revalued further impacting earnings results further impacting share prices. So What you say? What are you talking about Tim? Well news today from the Dow Jones Newswire says that Expedia's accounting of Goodwill gives it a value that is actually higher than Expedia's market capitalisation. In other words that Expedia values its goodwill as an asset on the balance sheet by more than the stock market values the whole company. Current market cap is ~ $5.3billion while goodwill is listed in its balance sheet as $5.86 billion.

Paraphrasing the Dow Jones article - this could force Expedia to revalue its goodwill - take a goodwill impairment charge to its P&L. That is bad as no-one likes to report hits to earnings. But there might also be further consequences. The article goes on to say that Expedia has to maintain a minimum share-holder equity level of around $5.36billion otherwise a covenant is tripped in its $1billion credit facility. This would block Expedia from drawing down from the facility and seek waivers etc from its lenders which will certainly cost money.

So maybe the debt raising was just a safety net plan by the CFO to ensure an extra reserve if their credit line dries up after a revaluation of goodwill. Understandable but dull. Would much prefer to see it spent on furious rounds of spurious acquisitions to give me interesting things to rant about.

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