Expedia (EXPE) is acquiring rival Orbitz Worldwide (OWW) for $12 a share or $1.6 billion based on its volume-weighted average share price over the five days ending Feb 11. Orbitz shares jumped 21.8% yesterday, while Expedia’s were up 14.5%.
Expedia management said that brands like Orbitz, ebookers, HotelClub, and CheapTickets on the consumer side and Orbitz Partner Network and Orbitz for Business on the BTB side attracted the company.
In the just-reported fourth quarter, Orbitz noted that 34% of hotel bookings for its consumer brands were coming from mobile devices compared to 28% a year ago, indicating the growing strength of the brands amongst Gen-Y customers. On the business side, it signed deals with leading hospitality companies like Marriott Hotels, Castle Hotels,Fkey Travel, Nacional Inn and Palladium Group as well as airlines like Aeromexico, Egypt Air, Lufthansa, Saudi Arabian Airlines and Swiss Air.
While the brands are no doubt attractive, it’s also true that Priceline (PCLN) has increased focus on the domestic market and non-traditional players like Google (GOOGL) are also testing the waters. As a result, experienced talent is likely to get harder to find. So picking up the Orbitz team was also an attraction.
Orbitz also has a rental car business that Expedia lacks, so this could be strengthened to better compete with Priceline.
Media reports suggest that there were other contenders and Amazon (AMZN) or even Alibaba (BABA) may have been considering the acquisition.
Fourth Quarter Highlights-
Orbitz reported revenue of $220.6 million was up around 12% from last year and in line with the Zacks Consensus Estimate.
Standalone hotel and air revenue made up 40% and 24% of its quarterly revenue, respectively, while package deals accounted for another 16%. This mix is not too different from Expedia’s which also relies on hotels more than air. Hotel revenue, particularly in the domestic market did particularly well in the last quarter supported by the Travelocity Partner Network (TPN) acquisition last year. Rental Cars and Advertising & Media were also up double-digits from last year. Around 75% of revenue was generated domestically (up 17% from last year), with the balance coming from international (down 1%).
Bookings grew 10% with conversions roughly consistent with last year. Combined with Expedia, total bookings would be $14.04 billion (without adjusting for negative currency impact), that would take the combined company ahead of Priceline’s $13.82 billion. (Priceline has yet to report orders for the seasonally softer December quarter, so the comparison could be even more favorable.)
Currency had a negative impact on both revenue and bookings.
After missing earnings estimates by a wide margin in the last three quarters, Orbitz met the Zacks Consensus Estimate of 6 cents in the last quarter. This was, however, down a couple of cents from the previous quarter and up from 5 cents last year.
Consolidation In Travel Market
The travel market is highly fragmented and so, highly competitive. So it’s very important for players to have sufficient scale in order to absorb the high cost of operation. This is the reason large companies continue to acquire smaller ones and the smaller ones usually agree to be acquired.
Online companies in particular are putting smaller travel agents and tour operators out of business. Since mobile devices and apps are making it easier to book travel, these smaller players have limited options. This in turn is escalating the move to online booking, making it ever easier for online players.
Expedia has shown a good appetite for acquisitions in the recent past, snapping up Travelocity earlier this year for a paltry $280 million and Australian travel booking site Wotif in December for $650 million. Other important acquisitions included a 62% stake in Trivago for $632 million back in 2013, which followed the acquisition of VIA Travel.
Priceline, its only real competitor in the space acquired four companies in 2014, of which the largest was OpenTable for $2.6 billion. Its other important acquisition was Kayak, on which it spent $1.6 billion in 2013.
Regulatory Hitch?
Since Expedia and Priceline are now the only major players in the online travel market, some may wonder whether regulatory approval will be easy. But this is where the market fragmentation will play an important role. Moreover, not only is Priceline a worthy competitor, but there is nothing technically stopping any other major technology company from entering the space. So the deal is likely to be completed after the statutory period.
Recommendation
Expedia shares carry a Zacks Rank #4 (Sell) similar to Priceline. Orbitz is ranked #3 (Hold).
(We are reissuing this article to correct a mistake. The original article, issued on Feb 13, 2015, should no longer be relied upon.)
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