Online travel leader Priceline (NASDAQ:PCLN) announced on Friday the acquisition of online restaurant reservation platform OpenTable (NASDAQ:OPEN) in a $2.6 billion cash deal. Although the price represents a considerable premium versus recent market prices for OpenTable, it looks like Priceline is making a smart move and positioning itself to capitalize on substantial growth opportunities in the years ahead.
Buying a place at the table
Priceline will be paying $103 per share for OpenTable, a premium of nearly 46% versus the closing price of around $70 per share for OpenTable on Thursday. Understandably, this could create some concern among investors, who may feel that Priceline is paying too much -- however, it's also worth noting that OpenTable still offers enormous room for growth.
According to Priceline President and CEO Darren Huston: "OpenTable is a great match for The Priceline Group. They provide us with a natural extension into restaurant marketing services and a wonderful and highly valued booking experience for our global customers. We look forward to helping the OpenTable team accelerate their global expansion, increase the value offered to their restaurant partners, and enhance the end-to-end experience for our collective customers across desktop and mobile devices."
OpenTable covers a network of more than 31,500 restaurants, and the company makes more than 15 million reservations per month. Profit margins are under pressure as the company is actively investing for growth, but OpenTable is generating impressive sales growth.
Revenues during the quarter ending on March 31 increased 18% versus the same period in the prior year to $53.8 million, while seated diners totaled 46.7 million, a 25% increase versus the same quarter in 2013.
Valuation is always a matter of debate, especially when it comes to a highly dynamic growth company such as OpenTable. However, the acquisition makes a lot of sense from a strategic point of view.
OpenTable is still in its initial stages when it comes to international expansion. The company produced approximately $7.8 million in revenues from global markets during the last quarter, representing less than 15% of total sales.
As of the end of the first quarter, OpenTable has international presence in the U.K. with 4,097 restaurants, Germany with 2,057 locations, and Japan with 1,567 restaurants. This means a total of 7,721 international restaurants, less than 25% of the total restaurant base of 31,583 locations.
One key area where Priceline has excelled over time is international expansion. The company is the undisputed market leader in hotel reservations in Europe via its widely popular Bookings.com platform, which covers a network of 455,000 hotels and other accommodations in 200 countries.
Priceline is performing remarkably well on the international front: International bookings increased by 37% during the first quarter of 2014. According to management, this was due to "increased penetration of core Western European and North American markets, but also very attractive growth in newer markets, including Eastern Europe, the Middle East, South America, and the Asia-Pacific region."
Priceline's presence and experience in international markets could be enormously valuable for OpenTable, and there are clear opportunities for cross-promotion, as travel and restaurants are closely related industries.
Both Priceline and OpenTable benefit from the network effect, meaning that their services become more valuable as they become bigger. OpenTable's platform becomes more attractive to diners as it offers a wider network of restaurants to choose from, and restaurants naturally benefit from a growing audience of potential customers. Diners and restaurants attract each other to the platform.
The same is valid for Priceline. Travelers want to go to the platforms where they can find more and better options, and companies like hotel operators, airlines, and car rental businesses choose to partner with the online travel agencies that can bring in more clients.
A bigger business means not only more money for Priceline and OpenTable, but also a more valuable service and increased competitive strength.
Priceline didn't pay a cheap price for OpenTable, but there is much more than money to consider in this transaction. Priceline is buying a leadership position in the online restaurant reservation business, and this means substantial opportunities for growth in the years ahead, especially considering Priceline's presence and successful track record in international markets. Both companies should complement each other quite well, and the merger will consolidate their competitive positions.
Andrés Cardenal owns shares of Priceline Group. The Motley Fool recommends OpenTable and Priceline Group. The Motley Fool owns shares of Priceline Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.