Lycos, Diller Team Up on Web Venture

In the latest endorsement of the potential of online retailing, Ticketmaster and Home Shopping Network are expected to merge with Web portal Lycos to create a $21.5-billion Internet powerhouse, sources said Monday.

Media mogul Barry Diller, the architect of the deal, hopes that a venture combining one of the top portal sites on the Internet with his companies that excel at selling tickets and other merchandise will eventually become a shopping mecca for those surfing the Web.

Sales surpassed $9 billion last year on the World Wide Web, which is rapidly reshaping the retailing industry, with books, music, toys and computers on the leading edge.

The transaction also reflects the frenzied consolidation of Internet portals, which combine navigation, e-mail, shopping and other services in an effort to draw “eyeballs� and improve advertising rates. America Online agreed to purchase Netscape Communications in November for $4.2 billion and @Home absorbed Excite in a $6.7-billion transaction in January.

Lycos, one of the last major independent portal sites, has been in discussions with several suitors recently, including CBS, Bertelsmann and NBC.

Portals such as Lycos see an advantage in linking with media companies that can provide the marketing muscle to build brand recognition and keep pace with leaders such as Yahoo and America Online.

Diller, chairman and chief executive of USA Networks, is eager to sell tickets, merchandise and services to the 46.5% of Internet surfers who visit Lycos and its affiliated sites. He is also looking to increase the value of the vast order-taking and merchandising operations of USA’s Home Shopping Network and Ticketmaster.

In acquiring Lycos, Diller is following in the footsteps of Michael Eisner at Walt Disney and Bob Wright at NBC, media moguls who have snatched up portal sites as a way of staking out a territory on a medium they increasingly expect to be a competitor to television.

Disney recently launched Go Network as part of its partnership with the portal Infoseek, and NBC bought a controlling interest in the portal Snap. Disney and NBC both market their new Internet brands on their television networks.

Under the all-stock Lycos deal, sources said, Lycos and an Internet company controlled by USA called Ticketmaster Online-CitySearch would merge to form a venture called USA Lycos Interactive Networks.

USA Networks would contribute more than $11 billion of assets, including Home Shopping, Ticketmaster and ISN/First Auction, an online auction site.

Lycos is valued at $6.5 billion in the deal. Ticketmaster Online-CitySearch, which Diller took public in December in one of the most successful Internet stock offerings of the year, is valued at $4 billion.

USA Networks would hold 60.5% of the new company, while Lycos shareholders would own 30% and Ticketmaster Online shareholders 8.5%. USA would control 90% of the votes.

Diller would be chairman, while Robert Davis, president and chief executive of Lycos, would keep those titles at the new company. It is unclear where the company would be based, but sources said it could be in Waltham, Mass., the headquarters of Lycos.

Lycos shareholders would get 2.25 shares in the new company for every one they hold now. Ticketmaster Online-CitySearch shareholders would receive one share for each of their existing shares.

After the new company is formed, USA Networks will be stripped down to a pure entertainment company containing the USA Network and Sci-Fi cable channels, a handful of broadcasting stations and a television production studio.

Analysts said the deal could help improve the prospects of Home Shopping Network, an underperformer in USA’s portfolio with flat growth since Diller took control three years ago.

“Barry has had a hard time developing HSN as a stand-alone business,� said Christopher Dixon, an analyst at PaineWebber Inc. “This is a way to use HSN to build a much bigger entity. This combines the front end of the Internet with the back-end operations of retailing.�

Most Internet retailers are losing money as they push for market share, but USA Lycos would be fed by the huge cash flow brought in by Ticketmaster and Home Shopping on combined revenues of $1.5 billion.

After the acquisition, Yahoo would be the major independent portal. Its huge market capitalization, $31.3 billion, may have priced it out of the merger market.

On its own, Lycos ranks near the bottom of the portal pile. But over the last year it has acquired a range of large Web sites--such as community site AngelFire--and united them into a network that now reaches some 46.5% of all Web users, according to New York-based rating service Media Metrix.

Times staff writer Charles Piller contributed to this report.