Expedia Boosts Its North American Dominance By Acquiring Travelocity

On January 23, Expedia (NASDAQ: EXPE), the world’s second largest online travel services provider (in terms of gross booking volume of $39.2 billion), acquired Travelocity for $280 million, from its parent company Sabre Corp. The acquisition (which is a progression from the 2013 strategic agreement between Expedia and Travelocity) pertains to Travelocity’s websites in the U.S. and Canada ^[1]

Sabre had already entered an agreement to sell Travelocity Europe, better known as LastMinute.com, for $120 million to Switzerland-based Bravofly. The deal is expected to close in the next few months, subject to regulatory approvals. ^[2]

In August 2013, Expedia inked a strategic marketing agreement with rival Travelocity. Under terms of the deal, Expedia provided content, inventory, customer service and technology to Travelocity, while Travelocity focused on brand marketing and received a performance-based marketing fees. The agreement pertained only to Travelocity’s websites in the U.S. and Canada. Expedia’s technology platform began powering Travelocity’s U.S. website in Q1 2014. The Canadian website was migrated to the new platform in May 2014. ^[3] To know further details of the deal, read our article: Expedia Is Better Positioned For Growth After The Travelocity Deal.

The 2013 agreement between Expedia and Sabre, provided Expedia with the option to acquire certain assets from Travelocity at a later date. Sabre entered into the agreement in order to mitigate the losses and expenses it was incurring due to Travelocity. Expedia will gain a greater market share, primarily in North America, as a result of this acquisition. ^[4]

The acquisition will have a positive impact on both the companies. Sabre, the company that owns Travelocity, has a debt laden balance sheet and it is looking for ways to erase some of that. It sold Travelocity’s business travel arm to BCD Travel in 2013, and raised $600 million through an IPO (initial public offering) in April 2014  to reduce a portion of the $3 billion debt. Additionally, Travelocity announced two rounds of lay-offs in 2013 and its CEO, Carl Sparks, left the company in May 2014. Hence, Travelocity, which was globally one of the largest online travel company in the past, was acquired for just $280 million. To add some context, this amount was only $80 million more than what TripAdvisor (NASDAQ: TRIP) paid for tour provider Viator.

Expedia intends to retain the Travelocity brand, alongside Expedia’s signature brands such as Hotels.com, Hotwire, Venere, and so on. The Travelocity brand name will further help Expedia in acquiring the former’s loyal customer base that approximately amounts to 20 million. ^[5]

We discuss below several points regarding how the deal will impact Expedia.

We have a price estimate of $84 for Expedia’s stock, which is at a slight discount to the current market price.

See Our Complete Analysis for Expedia Here

• Expedia’s Current Position In The U.S. Online Travel Market Space

The North American online travel market is forecast to grow at the slowest pace compared to other economies such as Europe, Latin America and Asia-Pacific. Nevertheless, with estimated revenues of over $200 billion in 2013, it remains the biggest online travel market in the world and is expected to maintain an important position at least for the next few years. ^[6] About three-fourths of the North American online travel sales are generated in the U.S., where Expedia is the market leader with over 40% share of bookings. Priceline (NASDAQ:PCLN) controls about 16% of the U.S. online travel agency (OTA) market, but has been aggressively trying to pare Expedia’s lead through: 1) heavy brand advertising; 2) establishing partnerships that power bookings; and, 3) the acquisition of  Kayak in 2013.  All action were intended  to increase the visibility of Priceline’s brands in the domestic market. To counter these competitive thrusts from rival Priceline, Expedia inked a strategic marketing agreement with Travelocity in 2013.

• How Has The Travelocity Partnership Helped Expedia’s Growth So Far?
  

The deal with Travelocity yielded better than expected results for Expedia in the first nine months of 2014. The company displayed a 22% year-on-year increase in revenues for the first nine months of 2014, to $4.4 billion. The key factors propelling this growth were the healthy performance of the hotel room nights and air tickets segments.The company sold close to 136 million rooms globally, exhibiting a 25% year-on-year growth and Travelocity accounted for 4% of that growth. The hotel bookings business is Expedia’s most important and accounts for nearly 70% of our valuation for the company. The effect on air ticket volume growth was even more pronounced. About 30% more air tickets were sold by Expedia, of which 18% were contributed by Travelocity. ^[7]

Travelocity has 16% share in the U.S. OTA market which Expedia has more or less captured through the partnership. Expedia is now ramping up media sales on Travelocity sites. Advertising and media is a high-growth, a high-margin and less capital intensive business, compared to the  hotel and airline bookings business. ^[8] We believe that Expedia stands to gain more since it has not only eliminated some competition but also created an additional distribution channel for itself. Further, the increased scale of operations after the acquisition may help Expedia to negotiate better terms with inventory suppliers and deliver cost savings at the same time.

• Business Rationale For Expedia Buying Travelocity

Travelocity is merely responsible for marketing its brand and Expedia does not have much visibility into the marketing strategy, according to the latter’s Q1 earnings call. ^[8] Therefore, it might make more sense for Expedia to completely integrate  Travelocity and have an cohesuve ecosystem rather than segregate one unit from the others. Expedia has demonstrated its strength in the U.S. by building a formidable market share. The company could replicate or slightly tweak its successful strategy to grow the Travelocity brand in the country.

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1. Sabre and Expedia Announce Expedia’s Acquisition of Travelocity, Expedia Press Release, January 2015 [↩]
2. Bravofly to Acquire Lastminute.com for $120 million, Skift, December 2014 [↩]
3. Travelocity Gives In, Sites To Be Powered by Expedia, Skift, Aug 22, 2013 [↩]
4. Expedia Closing in on Acquisition of Travelocity From Sabre, Skift, January 2015 [↩]
5. Expedia Acquires Travelocity for $280 million, Skift, January 2015 [↩]
6. The New Online Travel Consumer, Euromonitor, February 2014 [↩]
7. Expedia, Inc. Reports Third Quarter 2014 Results [↩]
8. Expedia’s Q1 2014 Earnings Transcript, Seeking Alpha, May 2014 [↩] [↩]