Telefonica has announced a bid for Terra Lycos.
Telefonica has offered to pay E5.25 for each Terra share, more than 10% higher than Terra’s share price when the deal was announced. The bid is conditional on Telefonica getting 75% of the company.
Telefonica’s bid to acquire the rest of Terra Lycos had been widely anticipated. The Spanish former monopoly currently owns 38% of the ISP, and the market has reacted favorably to the acquisition, which is seen as a positive move, both financially and strategically.
On the financial side, Terra Lycos is cash rich with approximately E1.73 billion in cash reserves, with almost zero debt. Telefonica has said that the deal would mean a E269 million improvement in its EBITDA through to 2006.
Strategically, Telefonica competes with Terra Lycos in providing dial-up Internet and broadband access in Spain. Telefonica has 740,000 broadband lines, compared with 125,000 for Terra, and the deal would end the competition between the two. Terra would be responsible for online services and portals in the Telefonica group, while Telefonica would provide all of the group’s Internet access services.
Terra Lycos was formed after Terra Networks paid $12.5 billion for Lycos back in May 2000. It is the largest access provider in Spain and South America, and is the fourth largest portal in the United States.
The offer of E5.25 a share is less than half the price that investors paid for the company back in 1999, when it floated at E11 per share. At that time, financial institutions paid E13 a share.
Investors will not be happy, but Terra Lycos is far from the growing business it once was. It may take a bit more money from Telefonica to convince enough shareholders to accept the deal, but the current offer remains fairly reflective of Terra Lycos’ recent financial difficulties and expectations to remain loss making until 2005.
