Expedia; Market Cap: $16.6bn (as of 12/11/2015)

HomeAway; Market Cap: $3.5bn (as of 12/11/2015)

Introduction

On November 4, Expedia, after a two-year partnership with HomeAway, announced the acquisition of the latter company for a $3.9bn cash and stocks consideration. With this acquisition Expedia will widen its portfolio of brands while, at the same time, entering new businesses. Moreover, Expedia will be able to boost traffic to its lodging listings. HomeAway will benefit from distribution, technology and expertise coming from Expedia itself. The Boards of Directors of both companies unanimously approved the transaction, which represents the largest and most recent acquisition in Expedia’s history. The deal remains subject to regulatory approvals and is expected to close in the first quarter of 2016.

Industry Overview

The online travel industry is growing faster than ever with an overall 27% increase of website views YoY. The trend is the same for revenues which increased 11% from the previous year to $35.1bn overall. Major online travel agencies are Expedia, Priceline, Orbitz and Kayak. The competition is now focusing on mobile services opportunities since bookings made via smartphones are constantly growing, highlighting a users’ shift from desktop to mobile.

About Expedia

Expedia, headquartered in Bellevue, Washington (US), is one of the world’s leading online travel companies. Since its foundation in 1996 in a small division within Microsoft (spun-off in 1999), it has been providing customers with a revolutionary way to search and book hotels. Over the last years, Expedia has been acquiring many businesses including Trivago and AutoEscape Group while at the same time it spun-off its TripAdvisor, a business it acquired in 2004. Last in the list is the acquisition of Orbitz Worldwide Inc. for an enterprise value of $1.6bn. The strategy for Expedia is to become the best online travel company worldwide exploiting economies of scale in order to foster efficiency and revenues.

During the last quarter, Expedia grew 16% in revenues, 21% in gross bookings and 36% in room nights confirming its strategic position in a fast changing and highly competitive market. Expedia’s EBITDA registered an increase of 13% YoY thanks to the strong results in terms of sales and gross margins. Expedia is pursuing a solid growth driven by Air revenues which increased 19% in the third quarter as well as by advertising and media revenues, which increased by 17% in the same period. Overall, all the other businesses increased 15% during the third quarter delivering great results to shareholders.

About HomeAway

HomeAway, headquartered in Austin, Texas (US), is a world’s leading online marketplace for the vacation rental industry. The company has more than one million live vacation rental listings in more than 190 countries all over the world. The websites VRBO.com, VacationRentals.com and BedandBreakfast.com are part of the HomeAway holding.

Following the IPO in 2011, HomeAway became of the fastest growing online travel booking companies all over the world with an average revenues growth of more than 20% from 2011 to 2014. The company aims at growing its market share and gaining competitive advantage over its main competitors such as Airbnb. Moreover, the company heavily invested in marketing since March 2015, with the campaign “Whole Vacation”, to differentiate itself from competitors such as Airbnb: Ninety-five percent of HomeAway’s inventory is second homes, mostly in beach, ski and country locations; Airbnb, on the other hand, has more inventory in cities and it is not always an entire house.

Deal Structure

Expedia agreed to pay $38.31 a share for HomeAway representing a 20% premium compared with the Austin, Texas-based HomeAway’s price before the announcement of the deal. The payment, which accounts for a total of about $3.9bn, will consist in a mix of cash and stocks. In particular, under the terms of the transaction, Expedia will offer to acquire each of the outstanding common stocks of HomeAway in exchange for $10.15 in cash and 0.2065 of a share of Expedia common stock based on the closing price on November 3, 2015.

Deal Rationale

Expedia could see this acquisition as a way to improve the effectiveness of HomeAway’s listings: these strategic moves are also driven by the mounting competition posed by Airbnb’s growing platform, which is threatening HomeAway’s business model. Months ago, HomeAway’s CEO Sharples reported that the traffic overlap between them and Airbnb amounted to only 2% of listings, because HomeAway targets families seeking vacation homes, while Airbnb is focused on apartment rental. However, more recently the potential collision between the two became clearer; HomeAway CFO Lynn Aitchinson admitted that the overlap amounted to 12% and that their respective markets were converging.

As far as Expedia’s strategy is concerned, the online travel company has looked at the alternative accommodations market for some years now, to expand its platform’s reach. According to Expedia’s CEO, the HomeAway acquisition is a “logical next step” in channeling the company’s efforts to build a global online marketplace for travelers, after the partnership they have set up in 2013, which lead to more than 120,000 HomeAway listings placed on Expedia. The way this partnership was handled drew some criticism, as the vacation rental search was not even a separate option on Expedia, but listings rather came up when searching for a hotel and looking at specific geographies. With Expedia’s interest in HomeAway after the acquisition, and the vacation rental platform’s announcement of introducing a booking fee for travelers (possibly amounting to an increase of $1bn in revenue), the renewed and strengthened partnership will gain focus, as Expedia’s CEO said that the additional inventory of listings will be complementary to Expedia’s offering.

Valuation and Considerations

On the same day of the acquisition announcement, HomeAway reported its Q3 revenues and net income, and both beat analysts’ expectations. Total revenue amounted to $130.7m, up 11.6% YoY, and the company also reported a 96.8% increase on its online bookable listings with respect to Q3 2014, reaching approximately 665,000 total listings. HomeAway will still be run relatively autonomously from Austin, and this decision could be related to the vacation rental website’s track of financial success and positioning.

Even though Expedia will pay $3.9bn in cash, HomeAway has a net cash position of roughly $600 million, given its cash balance of $919.7m and its debt amounting to $330m. With LTM EBITDA of $61.38m, operating cash flow of $153m, and implied Enterprise Value of $3.3bn, the transaction multiple was 53.8x LTM EBITDA. The acquisition looks expensive when compared to the recent acquisition by Expedia Orbitz for $1.6bn; the implied valuation was roughly 16x LTM EBITDA.

Considering the size of the bid, a question arises spontaneously: does it make sense for Expedia to pay such a premium? It clearly depends on the synergies that the acquisition will bring along. Despite the fact that options such as HomeAway and Airbnb are fairly well-known, there is still an important portion of the travel population that does not consider them. Thanks to the acquisition of Expedia, HomeAway listings will benefit from a greater visibility that will encourage those who have not yet signed up for HomeAway to do so. According to management, the deal will be dilutive to Expedia’s EPS in 2016 but it is expected to be accretive from 2017 onwards. Expedia expects to more than double HomeAway’s EBITDA by 2018 to $350m from the current level at $120m, improving its visibility and monetization rate of web traffic, currently one-third the rate of Trip Advisor and Airbnb.

Market reaction seemed to accommodate the deal. After announcement, HomeAway shares rose by more than 33% from $30.02 to $40.15 on Thursday, and Expedia shares jumped 2.3% to $137.31. With HomeAway shares surging even higher than the offer it is plausible to consider the concrete possibility of a competing bid in the following days. Realistic candidates could be competitors such as Airbnb Inc. but also other players such as Priceline.

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