Expedia To Buy HomeAway For $3.9 Billion - A Good Buy For Expedia?

  • Expedia will buy HomeAway, the world's largest home vacation rental company, for $3.9 billion.
  • Priceline has said it will not launch a rival bid which opens the way for Expedia to complete the merger.
  • A scrutiny of what HomeAway will bring to the table reveals that the company is one of Expedia's better buys.

Expedia To Buy HomeAway For $3.9 Billion

News is out that Expedia (NASDAQ:EXPE) has agreed to buy HomeAway (NASDAQ:AWAY), the world’s largest home vacation rental company, for $3.9 billion. Meanwhile, Expedia’s key rival Priceline (NASDAQ:PCLN) has put an end to rife speculations that it would likely launch a counter offer for HomeAway by saying that it will not make a rival bid for the company. This clears the way for Expedia to complete the merger. Expedia shares are down marginally while HomeAway shares have rallied 20%, just a shade below the $37.73/share offer price.

EXPE stock chart

Expedia stock price vs HomeAway stock price chart by amigobulls.com

Expedia’s move appears to be a strategic defensive tactic to prevent Priceline from buying out HomeAway. Early in the year, Priceline and HomeAway struck a large distribution deal that saw 200,000 HomeAway properties made available on Priceline’s Kayak metasearch platform. Speculations abounded that Priceline was contemplating buying out HomeAway. Priceline was thought to be hesitant about making a large acquisition at a time when organic growth has slowed down pretty dramatically to avoid sending the wrong signals to investors. Priceline has in the past said that it would not like to be viewed as a serial acquirer, a tag that perfectly fits Expedia. Priceline’s stance is not hard to understand considering how badly its shares got hammered when it bought out OpenTable for $2.6 billion last year.

Priceline stock has in the past outperformed Expedia’s due to its stellar top line growth and much higher profit margins. But major currency headwinds have decimated growth for the world’s largest online travel agency, or OTA. Priceline derives about 88% of its revenue from international markets compared to around 43% for Expedia. A strong dollar has caused Priceline’s growth to almost come to a standstill while Expedia continues to enjoy healthy domestic growth. Consequently Expedia shares have tucked on robust gains of 56.2% YTD compared to Priceline’s 27.2% gain.

Expedia (Light Blue Line) vs. Priceline YTD Share Returns

EXPE stock chart

Expedia stock price vs Priceline stock price chart by amigobulls.com

The Home Rentals Space Gets Hotter

Expedia has all along been interested in building a strong presence in the lucrative home rentals industry. But competition has been intense, thanks to explosive growth by AirBnB. AirBnB has seen its listed properties grow astronomically from 50,000 in 2011, to over half a million by the end of 2014.

HomeAway-23

Source: WSJ

Meanwhile, HomeAway has seen its own growth slowdown pretty dramatically from high 20s percentages to high single-digits currently. Many analysts see AirBnB’s meteoric rise as the chief reason why HomeAway has been hammered.

AirBnB managed to grab market share from HomeAway due to its attractive business model. AirBnB relies on a performance-based model where the company charges homeowners 3% of the rental amount. HomeAway has traditionally favored a subscription model where homeowners pay a fixed annual fee upfront whether or not their properties actually get occupied. Although HomeAway recently adopted a performance-based model, the 10% the company charges is considerably higher than AirBnB’s.

Why The Acquisition Is A Good Deal

Expedia owns properties such as Venera, Orbitz, Travelocity, Hotwire, and Hotel.com that have exposure to the home vacation rental business. By bringing HomeAway into the mix, the company will be able to immediately command a strong presence in the market, something that would take years for it to accomplish through homegrown initiatives. The acquisition will grow Expedia’s revenue base by about 7%. But the real impact will be on Expedia’s bottom line where EBITDA is likely to grow by close to 30%.

HomeAway’s distribution deal with Priceline seems to be yielding results. The company’s top line managed to return to double-digit growth during the last quarter by posting 11.6% Y/Y growth (19.8% FX neutral) while EBITDA jumped 27.2% Y/Y(39.7% FX neutral). It’s quite likely that Expedia will integrate HomeAway into its popular hotel booking websites which will further increase HomeAway’s exposure and growth.

Overall, HomeAway appears to be one of Expedia’s better buys.

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