Tripadvisor, Inc. current report, 20 December 2011

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Business Context and Reporting Period

This Form 8-K, dated December 20, 2011, reports the completion of the spin-off of TripAdvisor, Inc. from Expedia, Inc. Following the close of trading on December 20, 2011, TripAdvisor became a separately traded public company on The Nasdaq Global Select Market under the symbol "TRIP." The transaction involved a reclassification of Expedia capital stock, allowing Expedia stockholders to receive TripAdvisor shares. TripAdvisor now operates the domestic and international businesses previously associated with Expedia's TripAdvisor Media Group.

Key Financial Metrics and Capital Structure

The filing details significant financing arrangements established to fund the spin-off dividend and support operations, though it does not provide historical revenue or profit figures for TripAdvisor as a standalone entity.

  • Dividend Distribution: TripAdvisor Holdings, LLC distributed approximately $405.5 million in cash to Expedia as a dividend.
  • Debt Financing: The distribution was funded by a new Credit Agreement consisting of:
    • A $400 million five-year senior term loan.
    • A $200 million senior revolving credit facility (with $10 million initially borrowed).
  • Interest Rates: The Term Loan and Revolving Facility bear interest at LIBOR plus 175 basis points or the alternate base rate plus 75 basis points. Undrawn amounts are subject to a 30 basis point commitment fee.
  • Maturity: All debt obligations are due and payable on December 20, 2016.
  • Warrants: TripAdvisor issued warrants exercisable for common stock, expiring May 7, 2012, with exercise prices of $6.48 and $7.66 per warrant (adjusted for the spin-off).

Material Changes and Agreements

The filing outlines several material definitive agreements entered into in connection with the separation:

  • Separation and Transition: Expedia and TripAdvisor executed a Separation Agreement, Tax Sharing Agreement, Employee Matters Agreement, and Transition Services Agreement to govern their post-spin-off relationship.
  • Advertising Revenue: A Master Advertising Agreement (CPC) was signed where Expedia subsidiaries agreed to continue purchasing click-based advertising from TripAdvisor, primarily for the "check rates" feature.
  • Debt Release: TripAdvisor subsidiaries were released from guarantees of Expedia's existing $750 million revolving credit facility and senior notes due 2018 and 2020.
  • Corporate Governance: TripAdvisor amended its Certificate of Incorporation and Bylaws. A new Board of Directors was elected, and a Governance Agreement was signed with Liberty Interactive Corporation and Barry Diller.

Outlook, Risks, and Contingencies

The filing highlights significant governance structures and control mechanisms that may impact future strategic decisions:

  • Control Structure: Barry Diller controls approximately 62.43% of the combined voting power of TripAdvisor capital stock through an irrevocable proxy granted by Liberty Interactive Corporation. TripAdvisor is relying on Nasdaq exemptions for "Controlled Companies."
  • Contingent Matters: Liberty and Mr. Diller hold veto rights over certain actions (e.g., asset acquisitions/disposals exceeding 10% of market cap, changes in business lines, or adoption of stockholder rights plans) if specific ownership thresholds are met and the company's total debt ratio exceeds 8:1.
  • Block Sale Restrictions: Liberty is permitted to sell its equity interest in a "Block Sale," subject to a 30% ownership cap for the transferee and a three-year standstill period limiting proxy contests and business combinations.
  • Executive Compensation: A Restricted Stock Unit (RSU) agreement with Dara Khosrowshahi ties 75% of vesting to the achievement of a specified Operating Income Before Amortization (OIBA) target.

Investor Verification Checklist

  • Verify the specific OIBA targets set for Dara Khosrowshahi's RSU vesting, as these are determined post-spin-off and are critical to executive retention.
  • Confirm the current leverage ratio to assess if the 8:1 debt ratio threshold triggering Liberty/Diller veto rights is active.
  • Review the terms of the Master Advertising Agreement (CPC) to understand the revenue dependency on Expedia's continued advertising purchases.
  • Monitor the status of the $400 million Term Loan and $200 million Revolving Facility for compliance with covenants regarding maximum leverage and minimum interest coverage.
  • Check for any future "Block Sales" by Liberty Interactive Corporation, which would trigger specific standstill restrictions and ownership caps for the new transferee.