Expedia Shareholders Should Cheer the TripAdvisor Spin-Off

Expedia (NASDAQ:EXPE), which competes with Priceline (NASDAQ:PCLN) and Kayak in the online travel industry, announced its plans to spin-off its media and advertising business arm TripAdvisor into a separate publically traded company.

Founded in 2000 and acquired by Expedia in 2004, TripAdvisor gathers and publishes user-generated content such as hotels, restaurants and travel destination reviews that travelers use for research prior to making bookings. With over 50 million unique monthly visitors at its 18 popular travel-brand sites in 27 countries across the globe, TripAdvisor generates revenue by offering advertising placements at its websites and accounted for a substantial 15% of Expedia’s revenues and close to 35% of Expedia’s operating income in 2010. ^[1]

TripAdvisor constitutes almost 24% of our $29 price estimate for Expedia’s stock, making it the second largest value driver for the company after hotel bookings. Our price estimate implies a roughly 20% premium to market price.

Here we explore the rationale behind the proposed spin-off and the impact this might have on Expedia’s stock value.

Why TripAdvisor’s Spin-Off Makes Sense?

Different Businesses

While both Expedia and TripAdvisor cater to the travel industry, they actually have very different businesses. Expedia is an online travel agent and earns a commission on travel bookings via Expedia.com, Hotels.com and Hotwire.com. TripAdvisor is a travel-media company driven by advertising revenues. Since the businesses are so different in nature, operating these as separate entities lets management better concentrate on each.

Potential to Unlock TripAdvisor’s Value

TripAdvisor’s strong revenue growth has until now been overshadowed by Expedia’s relatively sluggish performance. TripAdvisor’s revenues grew 38% in 2010, far outpacing the company as a whole, which reported a 13% growth in revenues.

Expedia announced in February that it has impending investments in technology and marketing. As Expedia expands in Asia-Pacific and Latin America, it is considering new social media and mobile platforms as well as loyalty programs that could drain cash reserves in the future. The spin off should remove the burden of these impending expenses from TripAdvisor.

Timing of the Announcement

The timing of this announcement is particularly appropriate given the recent regulatory approval for Google’s acquisition of ITA Software, the provider of air travel schedules and fares. Since this acquisition is expected to strengthen Google’s “Places” offering, it increases competition for TripAdvisor. Hence, any loss in TripAdvisor’s market share to Google Places would not impact Expedia’s stock value.

How Does TripAdvisor’s Spin-Off Affect Expedia?

Expedia acquired TripAdvisor in 2004 for $200 million. TripAdvisor represents roughly 24% of our $8 billion valuation for Expedia stock, implying a $1.9 billion valuation for TripAdvisor. The spin-off could reportedly value the travel-media entity as high as $4 billion, ^[1] more than 2x our implied valuation. Beyond that, the $4 billion estimate would give Expedia a 1900% return on investment, given its $200 million purchase price for TripAdvisor.

The transaction is expected to be tax-free and take the form of a distribution of TripAdvisor’s stock to existing Expedia shareholders. While further details are yet to be revealed, it seems that Expedia shareholder’s stand to make handsome gains.

See our complete analysis of Expedia stock here

1. Expedia to Spin Off TripAdvisor, Wall Street Journal, April 8 2011 [↩] [↩]