Is Yelp In Priceline’s Crosshairs?

  • Yelp stock has been making good gains on rumors that it might get acquired by Priceline.
  • This is the second time that this is happening this year.
  • How possible is a merger between Yelp and Priceline?

M&A chatter has once again been providing a nice lift to review company Yelp (NYSE:YELP). Yelp stock has gained as much as 8% on some rather vague rumors that the company is once again in the market shopping for a buyer, and that Priceline (NASDAQ:PCLN) was the most likely suitor this time round. More than three times the average daily volume of Yelp stock has been changing hands, perhaps as a result of short covering activity since close to 20% of Yelp stock is shorted.

The rumors came just a few days after Yelp and Priceline-owned OpenTable confirmed that they had officially ended a multi-year partnership as both companies have increasingly been encroaching into each other’s territory. Through the former deal, Yelp drove traffic to OpenTable’s reservation business. But then Yelp purchased SeatMe in 2013, and recently claimed its reservation business has been doing well saying more than 18,000 restaurants use the platform. SeatMe competes directly with OpenTable in the restaurant reservation business.

The fact that IAC recently offered to buy Yelp’s rival Angie's List (NASDAQ:ANGI) could also have played a part in fueling the Yelp takeover rumors.

Why Priceline Might Buy Yelp

The big question here is why Priceline would be interested in buying out Yelp. After all, Priceline’s acquisitive appetite is not in the same league as Expedia (NASDAQ:EXPE), and the company had in the past said that it wants to avoid being viewed as a serial acquirer. Many investors and industry observers had widely expected that Priceline would acquire home rental company HomeAway (NASDAQ:AWAY) since the two companies have an ongoing partnership only for Expedia to end up buying HomeAway.

But, there are a couple of plausible reasons why Priceline would actually be interested in acquiring Yelp. Priceline has never shied away from eliminating the competition by acquiring a rival either. A good number of Priceline’s acquisitions are both offensive and defensive. A good case in point is one of the company’s latest acquisitions. Priceline bought OpenTable for $2.6B in 2013 partly because the company was a fierce rival for its own restaurant reservation business and partly because its business model nicely complimented its own. Yelp’s SeatMe competes fiercely with OpenTable, yet at the same time would be a nice fit for OpenTable’s and Priceline’s business. Moreover, OpenTable itself had developed a reputation as a serial acquirer before itself got acquired.

The second reason is that Yelp’s core review business might be of interest to Yelp. Yelp’s deep bench of users and hundreds of millions of reviews would be a good fit for Priceline subsidiaries including Booking.com and Kayak.com. People could conceivably read hotel reviews on Yelp then head to Priceline to do their hotel booking the way they do with TripAdvisor (NASDAQ:TRIP). This would help Priceline save good money on traffic acquisition costs. Priceline and Expedia pay huge amounts of money to TripAdvisor as TAC. In fact, nearly half of TripAdvisor’s revenue comes from these two giant OTAs.

The third reason why Priceline might be interested in buying Yelp is simply because the company is relatively cheap right now. Yelp stock is down 48% YTD, while the company sports an enterprise value of $1.74B. Meanwhile, Priceline has a free cash flow of $1.27B. If the company was to buy Yelp at a 20% premium, it would have to cough up ~2.1B. The company can buy Yelp using a mixture of cash and Priceline stock, or through borrowing since its long-term debt reading of $5.4B is manageable.

Why Priceline Might not Buy Yelp

Investors should, however, understand that Priceline buying Yelp is anything but a given. On paper, Yelp’s review business seems to be a good fit for Priceline’s hotel booking business with some undeniable synergies. But then again Priceline is very choosy when it comes to mergers. First off, most people go to TripAdvisor and not Yelp when they need to read hotel reviews. HomeAway would arguably have been a closer fit for Priceline than Yelp since it would have directly complimented Priceline’s home rental business. Yet the company chose to forego a merger on grounds that HomeAway’s model of waiting 24 hours before confirming a booking did not fit its own instant booking and confirmation model.

Yelp’s valuation might also be an issue with Priceline. Even after its capitulation, Yelp still trades at a pricey P/E ratio of 96.8 and 11x sales. For a company that is not consistently profitable, that might be a high price tag.

Priceline is experiencing its own growth issues primarily due to ongoing FX headwinds. More than 80% of Priceline’s revenue comes from overseas markets. A strong dollar coupled with heavy international exposure has been wreaking havoc on Priceline’s top line growth.

Takeaway

Whereas a merger between Yelp and Priceline cannot be ruled out, the case is not as compelling as you would imagine at first. Yelp, however, might still find other suitors even if Priceline passes it up. But right now it does not seem like a good idea to buy Yelp stock on the Priceline merger rumor.

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