Will Priceline's Purchase of OpenTable Leave a Nasty Taste in Shareholders' Mouths?

Source: OpenTable

June 13 was a fantastic day for investors holding shares of OpenTable (UNKNOWN: OPEN.DL  ) . After news broke that OpenTable had agreed to be purchased by Priceline.com (NASDAQ: PCLN  ) , shares of the former soared 48% to close at $104.48. While this is good news for OpenTable's investors, the premium the business is trading for above its buyout price suggests more offers might be on their way. Does this present the Foolish investor with an interesting opportunity to buy OpenTable, or is the real value with Priceline?

OpenTable's a pricey but interesting prospect!
According to Priceline's press release announcing the deal, the company will acquire OpenTable for $2.6 billion in cash. On a per-share basis, this equates to a price of $103. However, just because a deal appears to be expensive doesn't mean it's a bad move for shareholders.

Over the past three years, OpenTable's revenue has grown 36% from $139.5 million to $190.1 million. In its most recent annual report, the company attributed this rise in revenue to a 39% increase in the number of restaurants using its services in the U.S., which rose from 17,150 in 2011 to 23,824 by year-end 2013. As a result of this improved location count, the number of diners seated during this period soared 61% from 89.5 million to 144.1 million.

OPEN Revenue (Annual) Chart

OpenTable revenue (annual) data by YCharts

Internationally, the company's results were a bit more mixed. During this three-year period, OpenTable saw the number of restaurants using its services decline by 3% from 7,969 to 7,729. Despite this decrease, the business reported a 96% jump in the number of diners seated abroad from 7.1 million to almost 14 million.

Looking toward the bottom line, OpenTable did even better. Over the past three years, the company saw its net income skyrocket 55% from $21.6 million to $33.4 million. This was due, in part, to the rising sales management reported but can also be chalked up lower costs, primarily in its cost of goods sold, which dropped from 28.2% of sales to 25.4%, and its taxes, which fell from 8% of sales to 6.8%.

The transaction means a lot for Priceline's shareholders
Probably the only downside for Priceline investors is the fact that the business is paying a big premium for OpenTable.  At 78 times 2013's earnings and 54 times the company's forecast earnings for 2014 it's hard to argue that the deal is a bargain.  Even at these levels though, Priceline might be able to justify the cost. In addition to being able to pay for the transaction without debt (given Priceline's $6.7 billion in cash on hand), there is another factor that Priceline can use to its advantage.

Source: Priceline

In its press release, Priceline claimed to service more than 1 million guests, on average, per night in 480,000 properties throughout at least 200 countries and territories globally. After completing the deal, Priceline can use its significant market presence in the global tourism market to rapidly increase the revenue and earnings from OpenTable's operations. This is probably especially true in OpenTable's international business given the recent decline in restaurant count the company experienced.

Foolish takeaway
Based on the data provided, it seems like Priceline is paying a hefty price for OpenTable. But given the company's scalability under the Priceline umbrella, this could mean significant upside for the travel site's shareholders. There is one more caveat, however, that the Foolish investor should keep in mind. While Priceline would likely be the way to play this moving forward, there is a possibility that OpenTable could see its stock trend higher.

The reason behind this is that the company's shares are currently trading more than 1% above the buyout price it and Priceline agreed on. This does not mean that anything will happen, but it points to a scenario where Mr. Market is anticipating a higher bid coming for the company from another source somewhere.

In the event that Priceline's competitors recognize the potential of the company, it wouldn't be unreasonable to expect something of this nature, but it shouldn't be something that the Foolish investor should bank on.  Instead, the Foolish investor should focus more on the upside the deal could bring to Priceline which, if the business is integrated and grown appropriately, could be significant.

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