Priceline Acquires OpenTable: Is HomeAway Now In Its Cross Hairs?

Priceline (NASDAQ: PCLN  ) has agreed to buy OpenTable (UNKNOWN: OPEN.DL  ) , the world's largest restaurant reservation and table management business, for an all-cash sum of $2.6 billion. There is also widespread speculation that Priceline might gobble up Yelp as well.

Just a few months ago, there was some water-cooler talk that Priceline was considering buying out HomeAway (NASDAQ: AWAY  ) , the world's largest vacation rental marketplace. However, judging from their respective business models, a merger between Priceline and HomeAway seems to make more sense than a Yelp takeover.

OpenTable takeover was both offensive and defensive
Priceline shareholders have been quick to punish shares after details of the merger hit news feeds, with the stock tanking 3%. Investors accused Priceline of profligacy for agreeing to pay what looks like a prince's ransom for a business whose growth has started showing serious signs of slowing down. Before the deal was announced, OpenTable shares were trading at 45 times expected earnings for fiscal 2015; throw in a 46% premium and you get a valuation that's hard to digest.

OpenTable recently announced that its top line was going to expand at sub-20% levels going forward. The company also returned an operating loss during the last quarter. However, in its defense, OpenTable has been profitable.

Valuation matters aside, the potential synergies between the two businesses are quite obvious. Priceline's core business is hotel and flight reservations. OpenTable's business of restaurant reservations looks like a perfect complement for Priceline, as travelers are also diners, after all. OpenTable boasts a network of 30,000-plus hotels in the U.S. and a few more abroad.

The company's biggest problem, however, seems to be its inability to expand into overseas markets, which has been hampering its growth. Taking a peek at OpenTable's last 10-K reveals that the company managed to bring an average of 6,050 diners for each of its listed American restaurants, but just 1,806 for its overseas restaurants. Moreover, OpenTable issued a press release in May that showed it had managed to seat 40 million diners since its inception. However, just 3 million, or 7.5%, of these came from international markets. OpenTable charges restaurants $1 per diner, plus other system fees. This implies that to-date, roughly 7.5% of its revenue has come from overseas markets.

Priceline's revenue model is a complete antithesis of OpenTable's. The giant OTA, or online travel agency, derives more than 85% of its revenue from international markets, mainly through Netherlands-based Booking.com, with the U.S. contributing just 15% of its top line. Priceline can, therefore, quite easily leverage its vast experience in these markets to help grow OpenTable's business. Priceline finished fiscal 2013 with revenue of $6.8 billion and operating income of $1.9 billion, compared to OpenTable's $190 million revenue and $33.4 million net income.

On the defensive side, Priceline bought OpenTable to keep up with the likes of TripAdvisor, which recently acquired La Fourchette, a Paris-based online and mobile hotel booking website with a network of 12,000 across Europe.

Why HomeAway would be a perfect match for Priceline
A marriage between Priceline and HomeAway would create synergies similar to those shared with OpenTable. HomeAway has 890,000 paid listings and operates in the same space as Airbnb, with 600,000 listings.

Unlike OpenTable, HomeAway is still growing rapidly and managed to increase its overall volume of paid listings, and revenue, in 2013 by 25%. At a casual glance, HomeAway shares look expensive trading at a price-to-sales ratio of 8.5 and a 12-month trailing P/E ratio of 172. However, a recent round of funding valued Airbnb at 40 times 2013 sales, making it a lot more expensive than HomeAway. Moreover, HomeAway has no debt to speak off.

HomeAway operates quite differently from Airbnb. The company charges rental property owners an annual subscription fee, while Airbnb only charges when listed properties are rented (3% of the rental amount for homeowners and 6%-12% for renters). HomeAway, however, benefits because many property owners pay up front, boosting its cash flow.

HomeAway concentrates on established rental markets that provide a predictable consumer experience, while Airbnb has more of a do-it-yourself focus. However, the two companies are increasingly encroaching into each other's territory, and it's not uncommon to find properties listed on both websites.

One area where HomeAway could use Priceline's expertise is e-commerce. HomeAway has 869,000 listed properties, out of which just 169,000 are e-commerce-enabled. Only 12,000 can be distributed directly through OTA's such as Priceline and Expedia. This is, perhaps, one of the first areas that Priceline could examine in the event of a takeover.

HomeAway is also weak in mobile commerce. Most of its mobile apps have yet to gain traction, whereas Priceline has some powerful mobile apps. Priceline could integrate HomeAway's business into its popular mobile apps, which would, no doubt, improve business for the latter.

Conclusion
During the announcement of the OpenTable deal, Priceline insisted that it was not turning into an acquisitive company, but many investors remain skeptical. A merger with HomeAway has all the necessary ingredients that Priceline would look for, which makes the company a prime acquisition target.

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