HomeAway Distribution Deal With Priceline: More Than What Meets The Eye?

  • HomeAway has struck a large distribution deal with Priceline
  • The obvious benefit of the deal is that HomeAway's inventory will gain good exposure by appearing on Priceline's Kayak metasearch
  • The less obvious, but perhaps more important consequence, is that Priceline could be laying the foundation to acquire HomeAway.
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The world’s largest home vacation rental company, HomeAway (NASDAQ:AWAY), has cut a large distribution deal with the world’s largest online travel agency, or OTA, Priceline (NASDAQ:PCLN). Through the deal, Kayak, one of Priceline’s largest subsidiaries, will include close to 200,000 HomeAway vacation rental listings (roughly 20% of  HomeAway’s total inventory) in its search engine. The integration will go live towards the end of the current year, and appears to be a big positive for HomeAway whose growth has lately slowed down pretty dramatically.

Positive for HomeAway

HomeAway’s Distribution Deal with Priceline will certainly be a welcome reprieve for HomeAway, whose growth has suffered lately. Kayak is one of Priceline’s metasearch engines, which people use as their starting point when looking for hotels and other properties online, much like Google’s (NASDAQ:GOOG) Hotel Finder does. Even though Priceline has never revealed Kayak results, it has consistently been saying that the unit exceeds its expectations. A good amount of Priceline’s traffic comes from Kayak, and having HomeAway’s properties listed on the search engine is a great way to increase exposure. HomeAway is the world’s leading home vacations rental company with more than 1 million properties listed on its site. But, its dominance in the space is now being threatened by the rapid ascension of AirBnB, a privately-owned home rental company. AirBnB saw the number of paid listings on its website almost double in 2014 to close to a million, thereby dwarfing HomeAway’s listings growth which rose 17.2%. HomeAway’s top line growth has come increasingly under pressure, with the company posting a lackluster 12.6% top line growth and EPS growth of 21.4% during the first quarter, a sharp turnaround from the previous year when the company finished with a healthy revenue growth of 23.4% and EPS growth of 28.9%.

HomeAway and AirBnB have traditionally served discontinuous markets, with HomeAway serving the higher end market segment consisting of clients who prefer to have a predictable experience. AirBnB, on the other hand, has been a lot more flexible, and even offers rooms within private apartments and properties for rental. Moreover, HomeAway’s rentals typically last at least six weeks while many of AirBnB bookings last just a couple of days, something that has placed AirBnB in trouble with local authorities.

But, the biggest differentiator between the two vacation rental marketplaces lies in the way they do business, with HomeAway traditionally favoring a subscription-based model while AirBnB favors a performance-based model. HomeAway’s subscription-based model means that the company charges renters a fixed subscription fee every year regardless of whether or not their properties get occupied. AirBnB’s performance-based model, however, only charges renters and homeowners once properties are rented out.

HomeAway has lately been trying to adopt some of AirBnB plays to remain competitive. The company introduced performance-based rentals about a year ago, where it charges homeowners 10% of rental amount upon booking. But, this is still way higher than the 3% AirBnB charges homeowners, which could be the reason HomeAway’s renewal rates fell another 250 basis points during the quarter to 72.4%. Nevertheless, performance-based listings have enjoyed a healthy uptake since their debut, and currently account for one-third of all HomeAway’s listings.

HomeAway Merger Potential with Priceline

The distribution deal with Priceline could be a pointer to bigger things to come. About a year and a half ago, speculations abounded that Priceline was keen on acquiring HomeAway to enhance its Booking.com home rentals unit. Booking.com already does home vacation rentals, but work’s differently from HomeAway since its chief clients are property management companies as opposed to individuals. Rentals by property management companies consists of 40% of the market with the rest being rentals by owners-- HomeAway’s forte. A merger between HomeAway and Priceline would fill an important part of the missing puzzle for Priceline. Though Priceline has time and again insisted that it does not want to be viewed as a serial acquirer (its shares got badly hammered after it bought out OpenTable for $2.6 billion in an all-cash deal), the synergies between the two companies are undeniable, which might prove too alluring for Priceline to pass.

Regarding the constant gripes about HomeAway’s valuation, it all depends on how you look at it. AirBnb is the company that resembles HomeAway the most. AirBnB recently raised a giant round of funding that valued the company at about $20 billion, or close to 40 times 2014 sales. HomeAway currently trades at a LTM PS ratio just 6.4, making it significantly undervalued relative to AirBnB, even after accounting for AirBnB’s blistering top line growth. With rife speculations that AirBnB might file for an IPO in 2015, worries about HomeAway’s supposed pricey valuation might soon evaporate.

Considering HomeAway’s wide moat, I believe that Priceline might be willing to part with 20%-30% premium on HomeAway’s price in the event of a merger, the fact that AirBnB will continue breathing down its neck notwithstanding. This makes it a good speculative play.

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