LodgeNet, the biggest hotel video supplier, has reached a $380 million deal with Liberty Media to purchase its subsidiary On Command Corp., the No. 2 hotel video firm. The On Command acquisition will increase LodgeNet’s reach from 1 million hotel rooms, including the Hilton and Sheraton major hotel chains, to 1.8 million hotel rooms throughout the U.S. and Canada, adding chains such as Marriott and Wyndham.
Under the deal, which is being financed by investment banks Bear Stearns and Credit Suisse, LodgeNet will contribute 2.05 million shares of its common stock and $332 million in cash to purchase all of the common stock of Liberty’s Ascent Entertainment Group, which owns 100% of On Command’s capital stock. At the close of the deal, which is expected in mid-2007, Liberty will be left holding 9.9% of LodgeNet’s common stock..
In a related transaction, LodgeNet is selling one million shares of common stock to private investment firm PAR Capital Management for $23 million. The proceeds will be used to support the On Command deal.
The On Command acquisition gives LodgeNet the necessary scale to pursue new video-on-demand deals with content providers, says LodgeNet president and CEO Scott Petersen.
"The two organizations are very similar, in both their structure and offerings," says Petersen.
For example, both companies make about 80% of their revenues from selling on-demand movies, adult fare and sports programming, with the rest coming from reselling linear programming channels from DirecTV to hotels. About half of their customer properties take the DirecTV service.
But the On Command acquisition isn’t just about video. With more business and leisure travelers watching video on their computers, either on popular Web sites like YouTube or through "place-shifting" devices such as the Slingbox, LodgeNet sees the high-speed data market as a natural, and perhaps necessary, extension to its video business. The company already made a deal last month to acquire Internet access firm StayOnline for $15 million in cash to aid its broadband push, and Petersen hopes the On Command deal will also help grow LodgeNet’s fledgling broadband services, currently available in some 35,000 hotel rooms.
While On Command doesn’t have much penetration in the high-speed data space with its TV-based Internet browser, the sheer size of the combined entity should help LodgeNet’s broadband efforts, says Petersen. He hopes to have broadband available to 175,000 hotel rooms by mid-2007.
"This should help drive more growth, as we have a bigger base to sell against," he says.
Another service LodgeNet is looking to expand is providing high-definition TV to its hotel customers. The company has worked with consumer electronics manufacturers such as LG Electronics and Panasonic to specify suitable HD sets, and hi-def LodgeNet service is now available in about 30,000 hotel rooms including premier properties like the Beverly Hilton in Beverly Hills, Calif.
A big consideration in supplying HD in hotels is making sure high-value digital content remains protected as it travels through the hotel. In that vein, LodgeNet will only use TV sets that support LG’s Pro:Idiom content protection technology. On Command also supports the Pro:Idiom technology, which "maintains encryption around the signal from the headend in the hotel right to the glass in the TV," says Petersen.