Priceline’s Acquisition Will Unlock Kayak’s Value

Kayak (NASDAQ:KYAK), a travel search company, announced that it would be acquired by leading online travel agency Priceline (NASDAQ:PCLN) in November last year. The two companies signed a definitive agreement for a stock and cash agreement of $1.8 billion, with Priceline agreeing to pay $500 million in cash and the remaining ($1.3 billion) in equity. The $40 per share price tag offered by Priceline marks a 54% premium over Kayak’s initial listing price of $26.

Priceline intended to close the transaction by the first half of 2013, but the deal has been delayed due to the pending review by the UK office of Fair Trading (OFT). The OFT review is anticipated to finish in May 2013. Priceline does a significant portion of its business in Europe and thus is subject to antitrust reviews by regulators in the UK and the European Union.

The acquisition has been approved by Kayak shareholders with 96% voting in favor of the deal. Kayak believes that Priceline’s global reach will accelerate its growth trajectory in international markets and help it develop as a company. Additionally, the combined expertise of the two companies can help build a strong mobile foundation, which can significantly expand user base in the future.

Though they will operate as separate entities after the acquisition, we believe that the two companies stand to gain from each other’s expertise in the online travel domain. (Read: How Can Kayak’s Acquisition Fuel Priceline’s Growth?)

See Our Complete analysis for Kayak’s stock here

Expanding International Presence

Currently, Kayak operates its local website in 18 countries. Historically, it has added about 2 geographies to its list every year. In the last few months however, it has accelerated the pace and has added 4 new geographies with services now in Brazil, Russia, Poland and Portugal, among others. Kayak has also been increasingly focused on including more travel providers to its network. Nevertheless, it receives about 80% of its revenue from the U.S., and has somewhat struggled to retain its foothold in the international markets.

Google’s meta-search initiative is considered to be a growing threat for travel queries received by Kayak as it does not have enough of an international footprint to take on Google’s global presence. On the other hand, with the acquisition of Booking.com, Agoda and TravelJigsaw, Priceline has managed to successfully expand its presence in international markets, especially in Europe. Though Kayak and Priceline do not plan to launch shared platforms, we feel the former can leverage on Priceline’s marketing expertise and rapidly expanding global footprint to increase its international presence.

Stronger Mobile Platform To Accelerate Growth In User Base

With an increasing number of people using mobile devices to go online, we believe the mobile platform offers immense growth opportunity for travel services. Presently, queries received via Kayak’s mobile application account for around 15% of the total search queries received by the company.

In Q3 2012, Kayak registered an 87% y-o-y increase by processing 56 million queries via its mobile applications. Kayak’s mobile applications were downloaded 3.1 million times in Q3, a 95% increase over last year, and the company believes that it has a more loyal mobile user base as compared to the PC user base.

Though Priceline does not disclose its mobile revenue in its SEC filings, the company declared in its recent earnings call that it is witnessing rapid growth in its mobile platform. Developing a mobile platform requires significant costs in terms of design and development. We feel that by leveraging each other’s expertise in mobile, Priceline and Kayak can grow its mobile user base even faster.

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