Ctrip.com International Ltd. (CTRP:US) – Market Cap as of 26/11/2016: $22.4bn

Introduction

On November 23, 2016, Ctrip.com announced the acquisition of the UK travel website, Skyscanner, for £1.4bn.

Ctrip looks to consolidate its position in the European market providing services for an increasing number of Chinese people flying to Europe (120 million last year – more than double the figure of five years ago). Chinese mobile users are growing fast and Ctrip looks to merge with Skyscanner in a move to provide its clients with a large platform that integrates Chinese and European travel markets.

About Skyscanner

Skyscanner Ltd is a global metasearch engine that allows people to compare flights, hotels and car-rental prices offered by several providers. It was founded in 2001 by Gareth Willims (currently serving as CEO), Barry Smith and Bonamy Grimes. In addition to its Edinburgh headquarters, it has satellite offices in strategic locations such as London, Glasgow, Shenzen, Singapore and Miami. Available in over 30 languages, it represents one of the top online travel brands serving 60 million users monthly.

Having exceeded £1bn in value, the company had been considering the possibility of a stock market listing against that of a potential takeover. However, the declining revenue growth over the last three years may have led the management to opt for the latter. Indeed, Skyscanner’s revenue grew 28% in 2015 compared to a 42% increase in 2014 and an outstanding 96% in 2013.

In the last few years, Skyscanner has been active in the M&A market closing two deals in Asia: in 2014, it acquired fellow Chinese metasearch website Youbibi hoping to combine the company’s mainland China expertise with its comprehensive coverage of international flights. Skyscanner’s development in Asia continued in 2015 with the start of a $2.5m joint venture with Yahoo Japan.

About Ctrip.com     

Ctrip.com International Ltd. (Ctrip) is a travel service provider for accommodation reservation, transportation ticketing, packaged tours, and corporate travel management in China. Little known beyond the boundaries of its domestic market, Ctrip is responsible for 70% of Chinese online travel transactions.

Ctrip.com went public in the second half of 2003 and since then has reached a market capitalization of c. $22bn. The company is expanding its presence through local and international alliances as well as takeovers. In early October, Ctrip formed partnerships with three US based tour operators. Furthermore, last year the firm announced a $3.4bn tie-up with Chinese rival Qunar Cayman Islands Ltd and its backer Baidu Inc through a share swap. Ctrip gained ownership of 45% of shares of Qunar while Baidu took a 25% stake in Ctrip. The deal was aimed at improving profitability of both companies after a fierce price war in the Chinese travel sector over the previous couple of years.

Industry overview

The online travel agency (OTA) industry is currently experiencing rapid change: mobile channel, personalization and peer-to-peer travel services being the main disruptors. Particularly, the rise of the mobile channel is changing booking patterns, consumer behavior and business models within the industry.

The OTA market has relatively low entry barriers as it requires limited capital expenditure. Indeed, in the last few years, a myriad of online providers made their appearance in the market. Most of them with scarce results. None-the-less the main players are currently Expedia, Kayak, Mobissimo, eLong, and (to some extent) TripAdvisor.

Overall, the sector’s previously booming revenue trend is now experiencing a slowdown. Double digit growth rates are unlikely to continue, the main reason being the industry entering in a mature stage. However, the sector profitability may be sustained in the coming years by the growing Chinese travel market as well as the increased access to internet and the growing disposable income among middle class in emerging markets.

Deal Structure

Ctrip.com reached an agreement with Scottish Equity Partners – Skyscanner’s majority shareholder – to acquire all shares in their possession (about a third of the company’s equity). The deal represents an attractive exit strategy for Scottish Equity Partners, as they will cash c. £470m, a remarkable amount considering they originally invested only £9m. Secondly, Ctrip.com will offer to acquire all the other shares from the remaining shareholders for a total value of £1.4bn ($1.7bn). Ctrip will pay Skyscanner shareholders mostly in cash. Yet, a small part of the transaction will be financed with Ctrip ordinary shares.

Both companies’ boards have approved the transaction, which is subject to customary closing conditions, and is expected to close by the end of 2016. Skyscanner’s current management team will continue to manage Skyscanner’s operations independently as part of the Ctrip group.

Deal Rationale

Recently there has been a substantial M&A appetite among Chinese investors for European companies. The acquisition wave has been increasing almost exponentially since 2013 (see related article here).

As the leading online travel service provider in China, Ctrip has recently been looking to expand into new markets through acquisitions, even though historically they have mainly preferred organic growth.

Skyscanner is one of the largest travel search platforms in the world with 60m monthly active users, and bears clear strategic advantages to Ctrip. The two businesses are highly complementary to each other, and Ctrip aims to combine its massive booking capabilities and industry expertise with Skyscanner’s easy to use search engine and strong positioning outside China to enhance long-term growth drivers and improve travel ticket distribution.

Furthermore, Skyscanner has recently been growing in China through their acquisition of Youbibi in 2014, and this makes them even more appealing to Ctrip.

On a second note, Skyscanner’s management has been largely independent until last year when it received $192m through fundraising. This was done in order to finance the company’s investments through 2016 as well as provide liquidity to shareholders without having to commit to an IPO. Thus, it is reasonable to assume that selling to Ctrip, rather than risking an exit on the stock market. can be largely attributed to retaining operational independence. Indeed, under the term of the agreement with Ctrip, Skyscanner will keep its current management team and continue its operations independently as a part of the Ctrip group.

Skyscanner will account for 7% of Ctrip’s revenues. Furthermore, Ctrip’s optimistic projections, forecast a YoY net revenue growth after the acquisition of around 70-75%. This growth is very much needed by the company whose operating margins in 2015 were only 3.5%, compared with 5.7%and 7.6% for Expedia and Kayak respectively

Conclusions

Ctrip’s acquisition of Skyscanner is a logical step for the Chinese firm in the consolidating OTA industry. On the one hand, retaining their management, Skyscanner will be able to pursue its strategy without dramatic operating changes deriving from the takeover. On the other hand, there are a lot of potential revenue synergies to be unlocked as more and more Chinese people are looking for travels in Europe.

The deal is the latest in a wave of outbound Chinese M&A activity. However, this time the rationale is strong and the integration of the two companies will likely provide the merged entity with a stronger position in the market.

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