June 18, 1998 1:45 PM PDT

Disney takes stake in Infoseek

Walt Disney today bought a 43 percent stake in Infoseek in exchange for Disney's ownership in Starwave plus $70 million in cash--ending a week of speculation that the two would combine forces.

Disney's 43 percent stake is worth nearly $465 million based on yesterday's closing price of Infoseek shares.

The deal, expected to close in about three months, is the latest example of the recent merger mania among Internet directories and print and broadcasting companies. The media giants see new moneymaking opportunities in cyberspace by combining their powerful brands with the search capabilities and technical know-how of Net directories.

Disney and Time Warner had been rumored to be pursuing Infoseek, reports that caused a run-up in the search company's stock, Reuters reported Monday.

"Basically, Disney and Infoseek are creating a new company," said David Simons, managing directory of Digital Video Investments. "This one sets up Disney to compete head-to-head with Yahoo, America Online, and others."

In the past, Disney has stuck to niches such as children, family, and sports. Now it is combining them under one gateway to the Net. Disney chief executive Michael Eisner recently hinted that the company soon would launch a "portal" strategy to add to its entertainment lineup.

"The transaction forms an Internet entity that combines the resources of Infoseek, Starwave, and Disney," the companies said in a statement. "The new entity will bring together the branded assets of ABCNEWS.com and ESPN.com--currently joint ventures between Starwave and Disney--with one of the Internet's most popular search and directory services."

Infoseek and Disney now have a total of 23 million users, and plan to launch Portalopoly a portal service later this year that will feature content from ABC.com, ABCNEWS.com, Disney.com, Disney's Blast Online (its subscription-based online service for children), ESPN.com, as well as the official sites of the NFL, NBA, and NASCAR.

The deal also calls for Disney to provide, and Infoseek to purchase, $165 million in promotional support for the new portal.

Like many such ventures, however, Net portal sites are no guarantee for success. In a conference call, executives from Disney and Infoseek acknowledged that portals are still a work in progress.

"The Internet is in the Stone Age," Infoseek chief executive Harry Motro said. As an industry, "we haven't figured out how to build a product that is what the consumer needs."

Disney and Infoseek said they had been holding discussions about an alliance for "several months" and confirmed rumors that they had looked at teaming up with other companies as well. One reason Disney said it chose Infoseek: Its stock was undervalued compared with other Net companies. Disney said it wants to be the "rocket fuel" behind an Internet company such as Infoseek, with the option to take a majority stake later.

Disney said it will receive 25.8 million shares of Infoseek as well as a minority position on Infoseek's board. Disney also will purchase warrants enabling it to gain a majority stake in Infoseek "over time," the companies said. The deal is subject to shareholder and regulatory approvals.

"This agreement stakes out an even more ambitious role for Disney in this promising medium, and provides an ideal partnership for the creation of a new Internet portal service," Eisner said in a statement.

Added Motro: "We're thrilled to have [Disney's] tremendous brands, creativity, and promotional power behind us."

No personnel changes are expected as a result of the deal. Motro will continue to manage Infoseek separately, and the company's headquarters will remain in Sunnyvale, California.

In a message on its Web site, Infoseek said it will take an undisclosed one-time charge against earnings in the current year as a result of the deal.

"The company's expanded operations will push back profitability; however, the exact time frame is difficult to predict at this time," the message said. "More importantly, this deal should be judged on its cash flow and the strength of the properties and brand assets."

On April 30, Disney exercised its option to buy technology investor Paul Allen's remaining interest in Starwave. In April 1997, Disney bought a significant equity stake in Starwave, along with an option to buy the rest of the company during the next five years. (Allen is an investor in CNET: The Computer Network, publisher of NEWS.COM.)

Starwave also partnered with ABCNews.com and ESPN SportsZone to form ventures that produce original interactive programming in sports, news, and entertainment for millions of online consumers. Last year's deal called for Disney to assume operating control of Starwave.

Last week, NBC forged an online alliance with CNET, sparking intense speculation that more deals were in the works.

 

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