Fitch: Liberty's Ratings Unaffected by FTD Transaction and Delay of QVC Tracking Stock

In Fitch Ratings' view, the Issuer Default Rating (IDR) and Stable Outlook on Liberty Interactive Corporation (Liberty) are unaffected by the announced delay of its tracking stock restructuring and sale of Provide Commerce Inc. to FTD Companies, Inc. (FTD). Fitch does not expect either of these announcements to delay Liberty's intentions to spin-off its 22% equity/57% voting interest in TripAdvisor Inc. (TRIP) and its BuySeasons Inc. business.

The companies have entered into a definitive agreement where FTD will acquire Liberty's Provide Commerce businesses, excluding RedEnvelope, for a total transaction value of $430 million. Liberty will receive 10.2 million shares of FTD, or approximately 35% of shares to be outstanding, (a $309 million value based on volume weighted price of FTD shares over 10 days) and $121 million in cash. Further, FTD's board will be increased from seven members to 11 members, with Liberty selecting the new four members. The transaction is expected to close by yearend, subject to approval from regulators and FTD's shareholders. Fitch expects cash proceeds will be used for general corporate purposes. The equity stake in FTD is expected to be part of the Liberty Interactive tracking stock.

Fitch's ratings materially rely on QVC, with Liberty's other investments viewed as incremental support to the ratings. Fitch does not ascribe a material weight to the e-commerce businesses when assessing the consolidated credit profile. These businesses are relatively small in size, accounting for approximately 4% of consolidated Liberty EBITDA. Liberty's e-commerce companies continue to have revenue growth with a year-over-year increase of 6.6% for the latest 12 month (LTM) period ending March 31, 2014. However, EBITDA continues to be pressured, down 3.1% due to continuing challenges in the businesses. While margins and EBITDA levels have been negatively affected, they remain positive and contribute positive cash flows to the consolidated credit.

In October 2013, Liberty announced its plans to separate LINTA/B into: Liberty Digital Commerce (LDCA/B), which would hold the e-commerce companies attributed to it, and QVC (QVCA/B), which will hold QVC and the 38% HSN, Inc. stake. Yesterday, Liberty announced that it is reevaluating the optimal structure for its Digital Commerce assets due to the sale of Provide Commerce Inc., delaying the planned separation of Liberty Interactive tracking stock (LINTA/B) into two tracking stocks. Provide Commerce generated an estimated $600 million in revenue; approximately 35% of the e-commerce companies total revenues ($1.7 billion at LTM ended March 31, 2014). For more details, please see 'Fitch Affirms Liberty Interactive LLC's IDR at 'BB'; Outlook Stable' (Oct. 10, 2013).

Fitch's ratings for Liberty and QVC reflect the consolidated legal entity/obligor credit profile, rather than the tracking stock structure. Based on Fitch's interpretation of the Liberty bond indentures, the company could not spin out QVC without consent of the bondholders, based on the current asset mix at Liberty. QVC generates 84% and 98% of Liberty's revenues and EBITDA, respectively. In addition, Fitch believes QVC makes up a meaningful portion of Liberty's equity value. Any spin-off of QVC would likely trigger the 'substantially all' asset disposition restriction within the Liberty indentures.

Fitch does not expect any material change in leverage as a result of the transaction, due to the nominal EBITDA generated by Provide Commerce relative to the consolidated EBITDA generated by Liberty.

As of March 31, 2014, Fitch calculates QVC's unadjusted gross leverage at 2.1x and Liberty's unadjusted gross leverage at 3.9x (excludes TripAdvisor's debt and EBITDA). Fitch believes Liberty continues to carry meaningful liquidity with $1.2 billion in cash (ex-TRIP), $1.9 billion of availability on QVC's $2 billion revolver (expires March 2018), and $4.1 billion in other public holdings (ex-TRIP) as of March 31, 2014. Fitch calculates free cash flow (FCF) of $1.1 billion (ex-TRIP) in the LTM period. Based on Fitch's conservative projections, Fitch expects Liberty's FCF to be in the range of $750 million to $1 billion for fiscal 2014.

Fitch currently rates Liberty and QVC as follows:

Liberty

--Issuer Default Rating (IDR) 'BB';

--Senior unsecured debt 'BB'.

QVC

--IDR 'BB';

--Senior secured debt 'BBB-'.

The Rating Outlook is Stable.

Additional information is available at 'www.fitchratings.com'.

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