Microsoft Trades its Travel Agency for $1.5 Billion Stake in Home Shopping Network's Parent.(Microsoft selling two-thirds ownership in Expedia to USA Networks)(Company Business and Marketing)

Microsoft is selling its two-thirds ownership in online travel agency Expedia to USA Networks in a $1.5 billion deal that will turn USA Networks into the world's largest online travel company.

Redmond IPO'd Expedia in 1999, retaining majority control.

USA Networks, which owns the Home Shopping Network (HSN), its own USA Network and the Hotel Reservation Network, said that it's also buying online cruise and vacation package company National Leisure Group.

When the dust settles USA Networks' combined travel holdings are expected to do about $4 billion in bookings this year, a better than 30% market share.

At least that's the optimistic view of the deal.

Pessimists said Microsoft is departing the online travel business in the face of competition by the major airlines to sell their tickets over the Internet directly to consumers. The airlines have set up sites that compete directly with Expedia to save the commissions they pay Expedia and conventional travel agents.

By selling its interest to USA Networks Microsoft gets a stake, albeit far smaller, in a more diversified operation that isn't totally dependent on travel sales for its survival. USA Networks' various units sell everything from TVs to concert tickets.

Microsoft will get 3%-5% of USA Networks. The exact percentage depends on how many shares are tendered by other shareholders. They are being offered the same terms as Microsoft.

USA Networks said that it's willing to buy up to 75% of all the outstanding Expedia shares. The amount it buys from Microsoft and others will be pro-rated if more than 75% of the shares are tendered.

The terms of the USA Network tender offers Expedia shareholders a combination of common shares, preferred shares and warrants.

Shareholders will get $17.50 worth of USA common stock, or 0.5645 to 0.7609 shares, for each Expedia share. The exact conversion formula is based on a collar of $23-$31 per USA share.

Microsoft owns 33.7 million shares and warrants, which means the USA shares it gets will be worth about $590 million.

In addition Expedia shareholders will get 0.35 shares of convertible redeemable preferred stock with a face value of $50. For Microsoft that's worth another $590 million.

Finally, USA Networks will issue between 0.3873 and 0.4524 of a seven-year warrant to buy USA common stock at $35.10 a share for each Expedia share. Assuming a USA share price of $27 the exchange rate will be 0.4176 and Microsoft's exercise price will be $494 million.

Microsoft's piece of the deal includes an agreement to position Expedia as MSN's primary travel partner for at least the next four years.

USA shares jumped from $25 to just over $27 immediately after the deal was announced Monday.