Expedia: all the key pieces fall into place
With the US Justice Department approving Expedia’s acquisition of Orbitz, it’s marketing machine whirring and Trivago giving revenues a boost, the future is looking bright, writes Sally White
Has the OTA industry become a duopoly now that the US Justice Department has nodded through Expedia’s $1.3bn acquisition of Orbitz Worldwide? Certainly Wall Street has seen celebrations that only Expedia and Priceline among the monster groups are left standing. (Less research work to do!)
The share prices of the two have been very upbeat since the head of the Justice Department’s Anti-Division, Bill Baer, announcement that “we concluded that the acquisition is unlikely to harm competitors and consumers”.
Expedia trades around $123 a share, against a 12-month range of $71-131 and Priceline around $1266 against $991-1365. Brokers, such as Cowen & Co, gave a round of applause to Expedia and see scope for its share price to rise to $150. It is now very much the largest OTA when it comes to gross bookings.
Of course, the verdict has badly upset some. There were loud dismayed cries of “what the heck were they looking at” from around the leisure industry. The American Hotel & Lodging Association railed against the acquisition in no uncertain terms. OTA commission levels are around 15-30% these days and their share of online sales is rising. Not surprisingly, the relationship between the OTAs and hotels is very far from sweetness and light. For the hotels, bigger OTAs are certainly not better.
“By approving this deal, only two players control the online marketplace: Priceline and the behemoth Expedia, now owning Orbitz, Travelocity, Hotels.com, Hotwire, Cheap Tickets and Trivago. Together, these two players control over 95% of the online travel agency (OTA) bookings in the United States. We continue to believe that increased consolidation is bad for consumers and bad for business,” the Association announced.
We continue to believe that increased consolidation is bad for consumers and bad for business
The American Hotel & Lodging Association
The Association can’t be wrong in thinking that while all its members feel threatened, the small independents among their members are particularly vulnerable. Expedia and Priceline have vast ad and marketing budgets. They spend billions offline with mainstream media (TV, billboards) and online through remarketing and AdWords. Even the major hotel groups are at risk.
What the judgement does mean, the analysts agreed, is that travel brands must smarten up their own online acts. They should not rely too much on the online travel agencies to shoo in business. The large groups, such as Hyatt and Hilton are already offering various incentives to customers to book through the hotels directly. Some chains are offering digital check-in, free meals, WiFi and even the ability to choose a specific room, provided the booking is made directly with the hotel and not through a third-party website.
Where was the Justice Department looking?
The analysts had no doubt that it was the rapid change going on in the industry. “.... the evidence suggests that the online travel business is rapidly evolving. In the past 18 months, for example, the industry has seen the introduction of TripAdvisor’s Instant Booking service and Google’s Hotel and Flight Finder with related booking functionality,” Bill Baer said, explaining his reasoning.
In other words, he thought there would be plenty of pressure to keep commissions down. As he added: “...beyond Expedia and Orbitz, travel service providers have alternative ways to attract customers and obtain bookings, including Expedia’s largest online travel agent rival, Priceline”.
Whatever Bill Baer’s views, investors do not seem to think the future for all is bound to be rosy. Not in the short-term, anyway. The Justice Department named TripAdvisor as an innovator – it has signed up a host of hotels as partners with commissions said to be as low as half those demanded by the behemoths. However, TripAdvisor’s last results were weak – second quarter earnings of 45c a share missed brokers’ forecasts and the shares at around $66 are very near the bottom of their 12-month range of $62-94.
“Higher sales and marketing costs as well as advertising expenses impacted the bottom line, disappointing investors,” commented Zacks’ analyst in its investment research on the company. It also listed the bearish points of “lack of visibility and increasing competition from Priceline”.
A promising future
For Expedia, however, the analysts are only optimistic (for now, at least).
Zacks noted that the group helped itself a lot by being able to announce ‘decent’ second quarter results. The company’s top line increased by 21.1% sequentially and 11.2% year over year to $1.66 billion. The core OTA business was especially strong during the quarter. Revenues in the segment jumped 25% sequentially and 15.4% year over year driven by the Expedia brand and Hotels.com.
At Cowen & Co analyst Kevin Kopelman sees a lot of upside for three reasons: $350 million in Orbitz synergy opportunities long-term, momentum in the company's core ‘marketing machine’ and growing revenue contribution from its 2013 German acquisition, Trivago.
"We believe Expedia is well-positioned to continue gaining market share of the hotel booking industry given its strong portfolio of global brands and competitive technology platform and hotel network," Kopelman said.
Since acquiring the majority stake in Trivago, Kopelman added, Expedia has been running it “at break-even to fund a geographic expansion via aggressive brand marketing, most notably in the US". And he went on, "we expect Trivago's EBITDA (earnings before interest, taxes, depreciation and amortisation) margins to reach and eventually exceed overall Expedia".
Expedia is thus making significant year-on-year progress across all four areas of its marketing machine: technology/conversion, variable marketing spend, direct traffic/loyalty, and supply."
In other words, Kopelman agrees with Expedia that it has 'all of the key pieces in place.'