Expedia Sells Its Majority Stake In eLong And Enters Into An Alliance With Ctrip

In a major divestment move, Expedia (NASDAQ: EXPE) ended its 10-and-a-half year relationship with eLong by selling its 62.4% stake in the company to investors, including Ctrip, on May 22nd. The other investors who also purchased a stake in eLong include Keystone Lodging Holdings, Plateno Group and Luxuriant Holdings. The Plateno Group is an association of hospitality brands in China that includes one of China’s largest loyalty programs with 80 million members. Ctrip (NASDAQ:CTRP), the leading Chinese online travel agency (OTA), acquired a 37.6% stake on its erstwhile rival, eLong. Prior to the acquisition, Ctrip’s main competitors in China included Qunar and eLong. ^{[1] [2]}

eLong is a leading travel service provider in China. Over the years, eLong had bolstered Expedia’s growth in the Chinese market, one of the most important business destinations for the company. However, recently eLong has been floundering in the face of aggressive competition in China. Expedia’s otherwise successful performance in the past few quarters has been dampened by eLong’s losses.

In Q4 2014, eLong incurred a $27 million loss in adjusted EBITDA. In Q1 2015, eLong recorded a $33 million EBITDA loss. This in turn dampened Expedia’s EBITDA which grew by 25% excluding eLong, but declined by 5% after including eLong. ^[3]

Prior to the sell-out, Expedia’s management had been vehement about recovering eLong’s growth. The management had earlier spoken about plans to gear up investments in China as it viewed the China market to possess great long-term potential.

Our $93 price estimate for Expedia is at over 15% discount to the current market price.

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Is Expedia’s Partnership With Ctrip A Cause For Priceline’s Worries?

Priceline (NASDAQ:PCLN) might be a bit uneasy with Ctrip’s agreement with Expedia. In August 2014, Priceline expanded its partnership with Ctrip by investing $500 million. Priceline has an agreement, whereby it can own up to 10% of Ctrip’s stock. In a recent public statement, Priceline has mentioned that its relationship with Ctrip goes back to 2012 and Ctrip’s new partnership with Expedia will help Priceline’s partnership with Ctrip to grow further.

Currently, the Expedia-Ctrip partnership is limited to vacation packages and has not been extended to standalone hotels. According to Morgan Stanley’s note to investors, Expedia and Ctrip have decided to share inventory in certain geographies, mainly in the air and packaged tours segment. Priceline, which currently owns 4.66% stake in Ctrip, will remain Ctrip’s primary non-China hotel partner. But the note also said that Expedia and Ctrip are expected to share hotel inventories as well. ^[2]

Expedia had been concentrating on the Asian markets with a presence in India, Japan, Singapore, Thailand, Malaysia, Hong Kong and Korea. More important was its strong emphasis on soon-to-be the largest travel market, China. Its presence in China is in question post the eLong sell-out. However, Expedia maintained that its commercial partnership with Ctrip will enhance its prospects in China.

Expedia’s Acquisition Momentum Received A Halt With Its First Sell-Out In 2015

After an eventful 2014, a year in which Expedia acquired the Australian and New Zealand OTA leader, Wotif, the company started 2015 on an aggressive consolidation mode.

In January 2015, Expedia acquired Travelocity. The acquisition is a progression from the 2013 strategic agreement between Expedia and Travelocity, wherein Expedia provided content, inventory, customer service and technology to Travelocity’s U.S. and Canadian websites, while Travelocity focused on brand marketing and received a performance-based marketing fee. ^{[4] [5]}

In February 2015, Expedia announced its intention to acquire Orbitz Worldwide, the Chicago-based online travel agency (OTA) responsible for brands like Orbitz.com and Cheaptickets.com. Expedia expects the deal to close by the second half of 2015, once regulatory approvals are achieved. ^[6]

Expedia might own up to 75% of the U.S. online travel market post the Orbitz acquisition, according to the 2013 market shares provided by PhoCusWright. Online travel agencies (OTAs) together account for 16% of total gross travel bookings from the U.S. ^[7]

In March 2015, Expedia expanded its existing partnership (initiated in 2002) with Latin American Online Travel leader Decolar.com, Inc. This partnership offers Expedia better exposure to the Latin American travelers. ^[8] By 2016, Latin America is predicted to be one of the leaders in global online travel sales growth.

However, eLong’s lackluster performance triggered Expedia’s decision. Not only did it offload a loss-making company but in turn gained partnership with China’s most powerful OTA giant, Ctrip. With a 55.9% share in revenues (as of Q3 2014), Ctrip is the market leader in the Chinese online travel market, followed by Elong and TongCheng with a revenue share of 9.7% and 6.3%, respectively. The market is concentrated with the top three players accounting for 72% of revenues. ^[9]

Ctrip’s expanded partnership with Priceline strengthened the latter’s position in China. The additional hotel listings from Priceline’s network should contribute to further revenue growth for Ctrip, especially from international markets. At $373 million, Ctrip’s net revenues for Q1 2015 grew by 46% year on year. The main contributors to this growth were accommodation (contributing to 41% of the revenue) and transportation ticketing (contributing 41%).

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1. Expedia sells stake in eLong to Ctrip and others for $671 million, tnooz, May 22, 2015 [↩]
2. Expedia Reverses Course and Sells eLong Stake, Priceline Snubbed, Skift, May 22, 2015 [↩] [↩]
3. Expedia (EXPE) CEO Dara Khosrowshahi on Q1 2015 Results – Earnings Call Transcript, Seeking Alpha, April 30, 2015 [↩]
4. Sabre and Expedia Announce Expedia’s Acquisition of Travelocity, Expedia Press Release, January 23, 2015 [↩]
5. Expedia Acquires Travelocity for $280 million, Skift, January 23, 2015 [↩]
6. Expedia to buy Orbitz in cash deal worth $1.6 billion, tnooz, February 12, 2015 [↩]
7. Expedia Will Pay Orbitz $115 Million if Antitrust Complications Scuttle Acquisition, Skift, February 13, 2015 [↩]
8. Expedia and Decolar.com Strengthen Partnership, Expedia Inc. Press Releases, March 10, 2015 [↩]
9. China Online Travel GMV Grows to 70 Bn Yuan, iReasearch Views, November 2014 [↩]