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Hotel search-engine operator travel B.V., Dutch affiliate of the German travel portal Trivago, is about to launch its IPO. Many people are familiar with the brand thanks to its frequent TV advertising. Here is a brief look behind the counter at the fundamentals of the company, and the particulars of its upcoming issue.


Checking in

Travel B.V. -- which will officially undergo a name change to Trivago, in order to be aligned with its core asset -- has a fairly straightforward business model. Trivago is a hotel search engine, and it earns money when a user selects a hotel to consider for a potential booking.

The company calls this "referral revenue," and it comprises nearly all of its top line. Advertisers bid for the amount they want to pay for each referral from Trivago. It's important to note that users do not book through Trivago. Instead, to explore and reserve, they are redirected to a third-party site, typically an online travel agency.

According to the company, as of the end of September, it offered access to roughly 1.3 million lodgings in more than 190 countries around the world.

Trivago's qualified referrals -- defined as "a unique visitor per day that generates at least one referral," a referral being a click on an advertiser's offer -- amounted to just over 413 million in the first nine months of this year, well up from 260.5 million in the same period of 2015.

As a result, the company's overall revenue has been climbing dramatically. Last year it totaled just over 493 million euros ($524 million), well up from the 309 million euros ($329 million) of 2014.

One of the big reasons for this, however, is advertising spend, and all that TV air time costs a pretty penny. Trivago's selling and marketing expenses, far and away its top-cost line item, comprised 94% and 93% of the above revenue figures, respectively.

Not surprisingly, this dynamic has resulted in consistent losses: The company booked a shortfall of slightly over 23 million euros ($24 million) in 2014, deepening to over 39 million euros ($41 million) the following year.

A long stay

Trivago won't be entirely new to the public markets. Around 62% of it was bought in late 2012 by Expedia (NASDAQ:EXPE); Expedia and Priceline Group (NASDAQ:BKNG) are the two dominant online travel agencies on the market. By the way, the many portfolio companies of Expedia and Priceline are responsible for most of Trivago's referral revenue.

Expedia isn't selling any of its shares in the issue, so when the smoke clears it'll still control the company (more details in the section below).

That's certainly not a bad development, as Expedia is an experienced and profitable operator. But investors will have to accept that Trivago is probably going to be managed for how it can help the majority owner, more than the small class of outside shareholders.

Trivago also operates at a net loss, and I'd imagine that trend will continue. Hotel booking is a tough, competitive segment, with Priceline already commanding a huge chunk of the market, and Trivago will surely feel the need to keep up its brand recognition through marketing. We shouldn't expect that ad spend to go down, and these expenses will continue to hamper profitability.

That said, Trivago operates in a business that is growing. The company cites research from Phocuswright indicating that global hotel spend rose at a compound annual growth rate of nearly 4% from 2010 to 2015, excluding Canada, Latin America, and Eastern Europe, to land at $375 billion.

Over that stretch of time the U.S. economy expanded and its currency strengthened, two factors which bode well for the future of American-owned or affiliated travel companies.

Thanks to those conditions, plus the dearth of specialty travel stocks on the market, I'd imagine that the Trivago IPO will be attractive to the market. It's best to avoid consistently unprofitable companies, but with Expedia at its side, Trivago looks set to stick around for a while. And if it can establish itself as the hotel booking site on the market through that relentless advertising, it has a good chance to turn a healthy profit down the road.

So this is a long-term play for investors who believe that the travel market will continue to be robust, and are willing to take on a bit of risk.

The details

The IPO will see the shares of Trivago -- technically, a Netherlands-listed company -- divided into two classes, A and B. What's on offer in the IPO are American depositary shares entitling the holder to one A share per ADS. The B shares confer nearly all of the voting rights in the company; not surprisingly, a majority stake of just over 60% of that stock will be held by Expedia. This will give it around 65% of the voting power.

The ADSes will go on sale Friday on the Nasdaq under the ticker symbol TRVG. Slightly over 28.5 million are being sold in the IPO, at a price of $13 to $15 per ADS.

Heading the sizable underwriting syndicate are JPMorgan Chase unit J.P. Morgan, Goldman Sachs Group, and Morgan Stanley. Other companies participating are Bank of America Merrill Lynch, Citigroup, and Deutsche Bank Securities.