Putting coupons and travel together might not seem like the most natural business combination, but for a company like Groupon (GRPN -1.85%), nothing's out of the question. After starting up in 2008, the coupon-selling business entered into a joint venture with Expedia (EXPE -0.24%) in 2011 to begin offering online travel deals through its new Groupon Getaways. Since this program began, results have been encouraging, but is it possible that performance metrics could attract Priceline.com (BKNG -0.69%) as a potential buyer?
Priceline is dominant in the online travel business
Today, Priceline.com is, beyond any doubt, the leader in online travel deals. With a market cap of $58.6 billion, the company dwarfs other travel sites like Expedia and Orbitz Worldwide (NYSE: OWW), with market caps of $9 billion and $761 million, respectively.
In terms of revenue, Priceline.com surpasses its peers just as it does in market cap. For its 2013 fiscal year, the company saw sales come in at $5.3 billion, 29.3% higher than the $4.1 billion it earned in 2012. In comparison, Expedia saw its sales come in at $3.6 billion for the year, only 16.1% higher than the $3.1 billion it saw a year earlier. Meanwhile, Orbitz reported revenue of $649.6 million, 10.3% above the $589.1 million it earned during 2012.
Looking at net income, the story doesn't change much. Over the same time frame, Priceline.com saw its net income rise 190% from $489.5 million to $1.4 billion. To put this growth rate in perspective, let's look at both Expedia and Orbitz. In juxtaposition, Expedia's net income fell by 6.4% from $299.5 million to $280.2 million, while Orbitz's net loss increased by 10.5% as it rose from $337 million to $301.7 million.
But why Groupon?
Based on the data above, Priceline.com's financial situation is stronger than either of its peers. Not only does the company have higher revenue and revenue growth, it also has a far better bottom line. For these reasons, it probably isn't the best option for the company to buy up one of these competitors, as it would likely have no benefit because of their inferior operating results. But what about a company whose travel results are better than even Priceline.com's? Now that would be appealing!
Unfortunately, Groupon reports its segments based on geography instead of its different operations, but the company does supply some information specific to its travel and "other" categories. Among this information is data on revenue, gross profit, and gross billings (the company calls it gross billings, but travel sites refer to it as gross bookings). This data can be seen in the table below:
Using the table, we can see how profitable travel-related activities are for Groupon as well as its travel-only peers over the last full fiscal year. Looking at the gross profit margin, we can conclude that, at 84.3%, Groupon outshines its competitors. This is even true of Priceline.com, the most dominant business in the industry.
Another important metric to analyze is each company's revenue/billings. What this represents is the amount of sales a company generates from every dollar in sales of its travel services. Just as in the case with gross profit margin, Groupon beat out the rest in terms of performance. These data points suggest that the company has found a way to generate more revenue and more profit at a high point on the income statement than the laggards in the industry and even more than the market leader.
Whether or not the company is successful in keeping costs lower all the way down the income statement cannot be observed given the lack of data that management provides, but if this holds true throughout, then the company may have found a nice niche.
Currently, Groupon's travel operations account for around 5% of sales. At this level, the category is still very much a minor portion of the business, but it could still serve to be attractive for a company like Priceline.com. In addition to buying up a small portion of a business that operates above and beyond Priceline.com's results, an acquisition of Groupon could serve as a nice way to diversify its business away from travel. While focusing on travel has proven profitable for Priceline.com so far, another revenue stream to fall back on if things go south couldn't be a bad thing.
With Expedia being a member of the joint venture with Groupon, it might also see a bid for the coupon site as attractive. However, with a market cap only slightly higher than Groupon's, cash on hand of $1.8 billion, and nearly $1.2 billion in debt, a buyout would involve a great deal of debt.
On the other hand, Priceline.com has $6.6 billion in cash and only $1.7 billion in debt, so it would likely have to borrow considerably less and would probably receive more attractive financing terms because of its position as the market leader. While this doesn't mean that Priceline.com will make a bid for Groupon or even just its travel operations, Groupon's financial results suggest that the company should at least take a deeper look.