NEW YORK – Online travel company Expedia Inc. (EXPE) said on Tuesday that it would buy back more than a third of its shares for up to $3.5 billion, at a premium of at least 8 percent to Monday's closing price.
The news sent the shares up $4, or 15.7 percent, to $29.50 in morning trading on Nasdaq.
Expedia said it would repurchase 116.7 million shares at $27.50 to $30 each. Without elaborating on the reasons for the buyback or the source of funds to be used, Chairman Barry Diller said the move reflected the board's confidence in the company's future.
Expedia had $637.7 million of cash on its balance sheet as of March 31, according to a regulatory filing.
"I think they felt that the shares were very undervalued and the company has very strong cashflows, and they expect to leverage that ... and return capital to shareholders," said Marianne Wolk, an analyst at Susquehanna.
"We expect them to finance much of this repurchase," she added. "But because the company generates more than $500 million of free cashflow a year, it won't take them too long to pay back the debt. It's like a half LBO (leveraged buyout)."
The company's credit spreads widened on the buyback news, an analyst at Barclays Capital said. The cost to protect Expedia's bonds from default rose about 0.6 percentage point to around 1.83 percentage points, which means it would cost $183,000 annually to insure $10 million of debt.
A spokeswoman for Expedia said the company would provide additional details on the buyback in the coming days in a filing with the Securities and Exchange Commission. She declined further comment.
Diller said on a conference call in May that the company buys back shares "opportunistically," according to a transcript of the call.
"Our intention is, of course, we are net buyers of the stock of the company and we will continue to be," he said, when asked why Expedia had not bought back more shares since a tender offer earlier in the year.
In January, Expedia said it bought back 30 million shares at $22 each, or 9.9 percent of its outstanding stock.
In a research note published on Monday, Steifel Nicolaus analyst Scott Devitt predicted a "greater than 50 percent probability" that Expedia would attempt to alter its capital structure by issuing incremental debt to repurchase equity.
In the same note, Devitt said there was speculation on Friday suggesting that Diller was reviewing a proposal to take Expedia private. Devitt put the probability of a leveraged buyout in the next three to six months as "approaching zero percent."
Diller, who spent years atop the media industry as head of Fox and chief of movie studio Paramount in the 1980s before quitting in 1992, said at a Reuters summit in November that private equity suitors were frequently inquiring about Expedia.
The company was spun off from IAC/InterActiveCorp. (IACI), which owns a portfolio of brands from Match.com to HSN home shopping network to LendingTree.com.
Through Monday, Expedia shares had risen 22 percent this year. But they suffered a bump last month when the company posted quarterly earnings, excluding special items, that fell short of expectations, sending the stock down 10 percent.
The buyback price range of $27.50 to $30 represents a premium of 8 percent to 18 percent over the stock's Monday closing price of $25.50.
The buyback will be conducted under a tender offer that will begin next week and expire the week of Aug. 6, Expedia said.
The tender offer will allow stockholders to indicate how many shares and at what price within the company's range they wished to tender. The company will then determine the lowest price at which it could purchase the 116.7 million shares.
Expedia said Tuesday its directors, executive officers, and Liberty Media Holding Corp. (LCAPA) do not intend to sell shares in the repurchase plan. Liberty holds 15.7 percent of Expedia and Diller holds 2 percent, according to Reuters data.
Expedia said the shares subject to the tender offer represent about 42 percent of the total shares outstanding and about 38 percent of the total of common stock and Class B common stock outstanding.