Why Priceline Paid Up Big Time

Would you pay $146 for a $100 bill? That's essentially what Priceline (NASDAQ: PCLN  )  announced. In a move to gobble up dining reservation company OpenTable (UNKNOWN: OPEN.DL  ) , Priceline agreed last Friday to pay $2.6 billion in cash -- a 46% premium to OpenTable's market value at the time. 

This move has been met with some criticism, with analysts and investors alike fearing that Priceline overpaid, especially considering that the space is littered with other players. The answer is two-fold. First, OpenTable was a wonderful deal even at the premium price. And second, OpenTable is the best fit for Priceline.

The great deal
Of all the suitors out there, it looks like OpenTable gave Priceline the best bang for its buck.

Company Market Cap Cash TTM Revenue Profit Margin
OpenTable $1.7 billion* $118 million $198 million 11.4%
Yelp $5.5 billion $399 million $263 million -3%
GrubHub $2.8 billion $113 million $170 million 5.8%
Groupon $4.3 billion $1.04 billion $2.73 billion -4.7%

Source: Yahoo! Finance

*Market cap at time of buyout bid

For Priceline to acquire a different business it would have had to shell out more cash. Notice that Yelp  (NYSE: YELP  ) , Groupon  (NASDAQ: GRPN  ) , and GrubHub  (NYSE: GRUB  )  are all valued at above what Priceline paid for OpenTable. Even when considering each company's cash reserves, OpenTable was the most economic option.

OpenTable's business may also be the healthiest of the four -- its profit margin is the highest of the bunch.

And the business is growing. OpenTable works directly with restaurants. The more restaurants that are on board, the bigger OpenTable's potential. Participating restaurants in North America increased 19% year-over-year last quarter, which took the total restaurant count close to 24,000 locations.

So with this purchase Priceline got the most efficient business, with growth like wildfire and a lower valuation than peers.

OpenTable's compatability with Priceline
It gets better for Priceline. Each of these online dining companies has a completely different business model. No two are the same and none aligns better with Priceline than OpenTable.

Everything about Yelp's service is free for users. They can use the service to rate restaurants, post pictures, and discover new places to eat. The site is extremely popular with over 132 million users in the first quarter. Yelp's business model is to generate revenue by displaying relevant ads for its large user base.

GrubHub is also free to use. Its site allows users to order food online. Many large restaurant chains already have websites and apps that allow for ordering, but the majority of restaurants that use GrubHub are small independent restaurants that don't have the means to handle remote ordering. GrubHub's business model is to be the middleman between the small restaurant and the diner, and it collects a small fee from the restaurant in return for this.

Many businesses struggle to reach the masses with advertising. One common way to increase traffic is by running sales or offering coupons, but these methods can also fail to reach the masses. With Groupon's service, businesses can run deals that will hopefully increase their brand awareness and traffic. Groupon's business model is to sell vouchers (coupons) and then collect a previously determined percentage of the total sales.

Each of these peers is growing at a good clip. Last quarter Yelp grew its revenue 66% year-over-year. GrubHub and Groupon grew their revenues 49% and 26%, respectively. Yet none of these businesses could have integrated as easily into Priceline's system. It's not completely an issue of future growth potential, but one of ease of integration.

OpenTable is a dinner reservation website. It's not about placing orders, running ads, or enticing you with special deals. It's about getting you seated at a table in the restaurant. The business model is to collect a fee from the restaurant for handling the booking -- very similar to the way Priceline operates.

The potential
Some may still feel like Priceline overpaid, simply looking at OpenTable's measly $200 million in revenue. But OpenTable's potential is far greater than its current reality.

Very little of OpenTable's revenue currently comes from outside the US -- just about $8 million last quarter. Management talked about more international expansion on its conference call, but Priceline will make sure that happens. Priceline has a growing presence across Europe and Asia and will undoubtedly put OpenTable on the fast track to international recognition.

Not to mention the fact that integration with Priceline will drive OpenTable's existing market sales. We don't know how many transactions it processes, but consider that Priceline did $12.3 billion in sales in the first quarter, compared to OpenTable's $54 million. Without a doubt Priceline has thousands of users who have never used OpenTable's platform. As the two integrate, I fully expect OpenTable's bookings to receive a gigantic boost.

Final thoughts
Priceline wants to do everything possible to remain the international leader in online travel reservations. Paying up for OpenTable is yet another smart move which looks to keep Priceline a step ahead of competitors Expedia and Orbitz into the future.

Your credit card may soon be completely worthless
The plastic in your wallet is about to go the way of the typewriter, the VCR, and the 8-track tape player. When it does, a handful of investors could stand to get very rich. You can join them -- but you must act now. An eye-opening new presentation reveals the full story on why your credit card is about to be worthless -- and highlights one little-known company sitting at the epicenter of an earth-shaking movement that could hand early investors the kind of profits we haven't seen since the dot-com days. Click here to watch this stunning video.

Read/Post Comments (0) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 3004310, ~/Articles/ArticleHandler.aspx, 8/30/2015 2:26:58 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Jon Quast

I've been a contributor with the Motley Fool since 2012. My love of good food keeps me mostly analyzing the restaurant sector. But I'll jump into any sector when I see a shining value opportunity.

Today's Market

updated 1 day ago Sponsored by:
DOW 16,643.01 -11.76 -0.07%
S&P 500 1,988.87 1.21 0.06%
NASD 4,828.33 15.62 0.32%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

8/28/2015 4:00 PM
EXPE $116.51 Down -0.94 -0.80%
Expedia, Inc. CAPS Rating: ***
GRPN $4.60 Up +0.32 +7.48%
Groupon, Inc. CAPS Rating: *
GRUB $26.91 Up +0.81 +3.10%
Grubhub CAPS Rating: **
OPEN.DL $0.00 Down +0.00 +0.00%
OpenTable CAPS Rating: *
OWW $11.50 Down -0.07 -0.61%
Orbitz Worldwide,… CAPS Rating: *
PCLN $1259.39 Up +7.38 +0.59%
Priceline Group CAPS Rating: ****
YELP $23.96 Down -0.02 -0.08%
Yelp CAPS Rating: **