Why the Priceline and OpenTable Deal Makes Sense

Priceline's (NASDAQ: PCLN  )  richly valued deal to acquire restaurant reservation service, OpenTable (NASDAQ: OPEN  )  was a great move by the company. Even though Priceline paid a large premium, OpenTable should blend in very nicely with Priceline's worldwide airline and hotels booking platform and make Priceline even stronger in the rapidly growing online travel space.

Good strategic move
Priceline's $103/share bid for OpenTable was accepted unanimously by the Boards of both the companies. OpenTable was valued at $2.6 billion for a cash transaction by Priceline and that valuation implied a premium of roughly 46% to OpenTable's pre-announcement market cap. 

Priceline management stated that the transaction will be slightly accretive to Priceline's non-GAAP EPS of 2014, so it will give a slight boost for the company right away. OpenTable is a growing company. In the last quarter it grew 18% year-over-year to $54 million. So Priceline can expect more than $200 million annually in incremental revenues from OpenTable. If Priceline Group succeeds in extensively marketing OpenTable's restaurant reservation service, the annualized revenues of OpenTable can be much higher than $200 million. 

OpenTable will operate independently under the current management, and operations will remain decentralized. Many acquisitions fall apart because merged companies fail to properly integrate post-acquisition. However, this problem will not be faced by Priceline due to its decision to maintain independent operations. Booking.com, which is largest accommodation site in the world and owned by Priceline, can significantly grow the addressable market for OpenTable by reaching out to existing property and hotel owner relationships of Booking.com.

Potential synergies 
Priceline's global reach will ensure that OpenTable is marketed heavily and cross-promoted to customers and restaurant owners alike. Priceline already has relationships with more than 490,000 properties in more than 205 countries. And considering that OpentTable is pre-dominantly U.S. based, the acquisition price can be justified because of Priceline's ability to take OpenTable worldwide. OpenTable already seats more than 15 million restaurant-goers every month in more than 31,500 restaurants.

In the conference call, Priceline's CEO Darren Huston stated that he expects significant synergies from the marriage between OpenTable and Priceline. As expected, he stated that there is room for significant international expansion to generate demand worldwide for OpenTable. 

In the last quarter, OpenTable got roughly 15% of its total revenues from its International operations and the rest was from the North American region. So the OpenTable's international ambitions can be fast-tracked by being a part of Priceline which has relationships with almost half a million properties across the globe.

More M&A for Priceline?
The deal between Priceline and OpenTable sparked speculation in the market that led to the stock price of comparable companies like Yelp and GrubHub rising suddenly due to this associative speculation. Yelp has fended off acquisition offers in the past, so GrubHub might be a more reasonable target in the space. The popular take-out service is growing revenues and earnings rapidly, but is very richly valued already ever since its recent IPO. 

Priceline has been an active acquirer of growing companies in its adjacent markets, and might be tempted to go acquire more local based companies like GrubHub and even Groupon. Priceline is a fantastic high margin business and the company has made numerous acquisitons work very well, in the process, successfully growing its top and bottom line. Priceline's deal with OpenTable was a great strategic buy, and the company might be tempted to acquire more 'local market' companies to continue its robust growth trajectory.

 

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