FOOL PLATE SPECIAL
An Investment Opinion
Terra Networks in Talks with Lycos

By Dave Marino-Nachison (TMF Braden)
May 15, 2000

Reports that Spanish Internet access and content company Terra Networks (Nasdaq: TRRA) was considering a rich bid for U.S. portal operator Lycos (Nasdaq: LCOS) -- the news spread from Spanish newspapers to the Stateside press beginning Friday -- were not only a surprise because of the amount of money being discussed but because Terra was a new name to me.

Let's first state, for the record, that the story at hand is Terra's reported $10 billion bid for Lycos which, according to The Wall Street Journal's unnamed sources, wants $90 per share to tie the knot. No definitive agreement has been reached as of this writing, but Terra has confirmed the talks. The hypothetical $90, most likely to come in the form of a stock swap merger (each Terra American depositary share represents one share of stock) would represent a 66% premium to Friday's closing price for Lycos stubs.

Terra, shares of which have performed well -- if erratically -- since the company's mid-November initial public offering, is about 70% owned by Spanish telecommunications giant Telefonica SA (NYSE: TEF), which established the company in December 1998 to operate its home and small business-focused Internet access business in Spain. Since then, it now offers portal and access services in Brazil, Mexico, Argentina, and the U.S. among other nations this side of the Atlantic, with plans to expand further using free Web access and broadband services as springboards.

Though Internet use in Spain and many Latin American countries lags the U.S. and other European nations by a wide margin, exponential growth is expected in the next few years and Terra hopes to capitalize.

The vision some have for Terra is that of a Spanish-speaking America Online (NYSE: AOL), a NOW 50 component that dominates the U.S. consumer Internet access and content market. It's that vision that likely drove the company to its position as one of Europe's top Internet companies in terms of market value (Terra is currently valued at about $16 billion, more than $9 billion above Lycos) and the wide premium it holds over U.S.-based would-be competitors StarMedia (Nasdaq: STRM) and QuePasa.com, a Gateway (NYSE: GTW) investee that has dropped into penny share territory.

And Terra benefits greatly from its association with Telefonica, which despite its recent inability to buy Dutch telecom KPN (NYSE: KPN) after weeks of talks has nevertheless spent years buying up Latin American telecommunications assets (and has now turned its attentions to Europe). Telefonica's strong brand recognition should help it continue to establish a foothold for its Internet presence.

What would buying Lycos add to the mix? For one, it would certainly help cement a place for Terra among the world's Internet elite. It would also provide access to a market generally more Web-savvy and affluent than many of the company's current target markets. Even the generally underserved U.S. Latino market -- though American Web access is currently estimated at well over half the population, only a tiny fraction of sites are served in Spanish -- is seen as a significant growth opportunity. And the company would gain significant new access to potential customers and partners in the U.S. (Of course, all such talk is preliminary with no offer yet official.)

Not to mention considerable exposure. Not that the company necessarily needs it -- its IPO was underwritten by some of the biggest names in finance, so much of the investment community already knows the story.

Related Links: