Fitch Rates Expedia, Inc.'s IDR 'BBB-'; Outlook Stable

Fitch Ratings has assigned the following ratings to Expedia, Inc. (Expedia):

--Issuer Default Rating (IDR) 'BBB-';

--Senior unsecured notes 'BBB-';

--Senior unsecured bank credit facility 'BBB-'.

The Rating Outlook is Stable.

The ratings and Stable Outlook reflect the following considerations:

-- Fitch expects Expedia to exhibit modest revenue growth and stable EBITDA margins in 2010. Results should benefit from a stabilization of industry travel trends and be positively impacted by continued share gains at Expedia as consumers increasingly utilize online travel agents (OTAs). Additionally, while EBITDA margin pressure continues to exist in the core hotel and airline travel booking business, Expedia's advertising revenue stream, the growth of which has outpaced overall corporate revenue growth, carries substantially higher margins and should add stability to current profitability metrics.

-- Fitch expects Expedia's free cash flow to remain strong, but notes that travel bookings exhibit a good deal of seasonality, and during periods of revenue growth Expedia benefits from substantial negative working capital, which inflates free cash flow. Annual free cash flow is expected to remain above $450 million in 2010, before dividends. Fitch expects funds from operations (which excludes cash from changes in working capital) to remain strong at or above $600 million in 2010.

-- Fitch anticipates that Expedia will use free cash flow to fund stock dividends and share repurchase programs during 2010. The company currently has authorization to repurchase 20 million shares, the majority of which could potentially be accomplished within the year given the current stock price and free cash flow expectations. Fitch expects Expedia to pursue opportunistic acquisitions which would likely be debt financed.

-- The ratings incorporate some capacity for incremental debt. That said, Fitch would expect debt issuance to fund internal growth or strategic acquisitions rather than shareholder friendly actions. In spite of the fact that Fitch does not believe there are substantial business considerations that would necessitate maintaining an investment grade rating, it expects the company to continue to maintain a conservative approach to managing its balance sheet and use of cash in order to support capital structure expectations inherent in the 'BBB-' rating.

-- Fitch expects Expedia to maintain leverage (total debt to total operating EBITDA) below 2 times (x) going forward, or below 2.5x when adjusted for operating leases. Leverage as of Sept. 30, 2009 was 1.1x (1.4x on an adjusted basis) and interest coverage was 9.7x.

Expedia has been sued by 59 cities and counties for payment related to hotel occupancy taxes, 16 of which have been dismissed, five of which were based on a finding that the defendants were not subject to the local hotel occupancy tax ordinance. Expedia has established a $21 million reserve for the potential settlement of issues related to hotel occupancy taxes. In addition, the company has paid $48 million to the City of San Francisco for amounts assessed for hotel occupancy tax, including penalties and interest, from January 2000 to March 2009, in order to pursue litigation challenging whether the company is required to pay these taxes. Should Expedia prevail in the litigation, the city will be required to repay this amount plus interest to the company. Expedia has also accrued $20 million for additional assessments that it expects to pay in order to pursue similar litigation. The magnitude of this potential liability is uncertain and litigation is expected to continue for years. If Expedia experiences adverse legal results in future cases, the financial results of which suggest an aggregate liability in excess of reserved amounts, the ratings could be negatively impacted.

Rating strengths include:

-- Expedia is the largest OTA with advantages in scale that have contributed to the company gaining significant share in the market for travel services over the past several years.

-- Broad customer and geographic diversification positively impact the stability of end-market demand for travel services which are inherently highly correlated to the macro-economic environment.

-- Expedia benefits from the expected continuation of a secular shift towards use of OTAs which should support revenue growth in excess of both overall travel services and GDP growth.

-- A relatively high variable cost model limits potential negative pressure on profitability during business downturns, although much of the variable cost items are specific to marketing expense which, if reduced, could negatively impact the company's competitive position.

-- Significant negative working capital provides liquidity during periods of growth but, conversely, is a cash drain during revenue declines.

-- Advertising revenue, which is growing significantly faster than airline and hotel revenue and now represents over 10% of total revenue, represents a strong source of revenue diversification and positively impacts overall profitability.

Ratings concerns include the following:

-- History of aggressive debt financed share repurchase programs, somewhat mitigated by covenants in the company's revolving credit facility which limits share repurchases if leverage exceeds 2x.

-- Expedia's largest shareholder is Liberty Media Corporation, which holds shares representing 58% of the voting power. While Liberty has given Expedia's Chairman of the Board Barry Diller a proxy to vote these shares, Fitch's ratings take into account Liberty's historical track record of shareholder-friendly actions.

-- Expedia faces a potentially significant contingent liability due to lawsuits related to non-payment of hotel occupancy taxes.

-- There is risk of volatility in Expedia's competitive position due to minimal differentiation between competing OTAs as well as low switching costs for end-users, partially mitigated by Expedia's advantage in scale as its bookings are approximately twice that of its nearest competitor.

-- Ongoing pricing pressure in the OTA market combined with ticket fee reductions, which enable OTAs to better compete with direct suppliers, could negatively impact future revenue growth and profitability, although Fitch believes that the elimination of booking fees which took place in 2009 has largely been washed through the model.

-- Inherent volatility in travel service demands due to macroeconomic drivers as well as the potential for significant volatility due to terrorism related travel fears.

-- Expedia competes directly with the online presence of its suppliers in the travel services industry, which could lead to future disruptions in the company's business model, although Fitch believes OTAs represent a valued source of market information to, as well as being a marketing arm of, travel service providers.

Liquidity is solid; as of Sept. 30, 2009 available liquidity included $839 million in cash and $958 million available borrowing capacity (reflecting $42 million in outstanding letters of credit) under a $1 billion senior unsecured revolving credit facility. Earlier this week, Expedia renewed this facility, reducing its size to $750 million, with a three-year term. Additionally, free cash flow has averaged near $500 million annually over the past four years which further contributes to liquidity.

Total debt as of Sept. 30, 2009 was $895 million and consisted of i) $395 million in 8.5% senior unsecured notes due July 2016; and ii) $500 million in 7.456% senior unsecured notes due August 2018. In addition, Expedia has $1.7 billion of negative working capital only partially offset by its $839 million of cash which could pressure liquidity in a severe business downturn.

These rating actions reflect the application of Fitch's current criteria which are available at 'www.fitchratings.com' and specifically include the following reports: 'Corporate Rating Methodology', dated Nov. 24, 2009; 'Recovery Ratings and Notching Criteria for Nonfinancial Corporate Issuers' dated Nov. 24, 2009; 'Liquidity Considerations for Corporate Issuers', dated June 12, 2007; Cash Flow Measures in Corporate Analysis, dated Oct. 12, 2005.

Additional information is available at 'www.fitchratings.com'.

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Contacts:

Fitch Ratings
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Cindy Stoller, [phone] (Media Relations)
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