Not again! Another buyout is being met by fierce opposition from shareholders who are lining up at the lawsuit office. This time it’s the shareholders of the third largest online travel agency Orbitz Worldwide, Inc. (NYSE: OWW) who are objecting to the board’s acceptance of a buyout proposal submitted by the second largest online travel agency Expedia Inc. (NASDAQ: EXPE).
What’s all the hoo-ha about this time? Are the shareholders not getting a fair price? Since the proposed buyout consolidates the second and third largest online travel agencies into one huge company that rivals the king of online travel booking The Priceline Group Inc. (NASDAQ: PCLN) – effectively control some 70% of the online travel booking market share – might the deal not even be approved by anti-trust regulators?
Given these companies’ enormous double-digit margins, returns and growth – some as high as 30% and more – the unfolding drama is worth looking into from a potential investment perspective.
What’s the Big Deal Over this Big Deal?
Over the past several years, the online travel agency industry has been consolidating something fierce. The largest player Priceline acquired Booking.com in 2005, Agoda in 2007, and Kayak in 2013, and is today the king of OTAs with a market cap of over $57.77 billion.
In an effort to compete with its top rival Priceline, Expedia has been on a buying spree of its own – buying Trivago in 2012, followed by the purchase of Australia’s largest OTA Wotif in July of 2014, and recently gobbling-up Travelocity in January of this year. Last week Expedia added another feather in its cap when it announced on February 12th that it will be buying the third largest OTA Orbitz for $12 a share, or $1.6 billion.
The acquisition will add Orbitz’ $1.29 billion company to Expedia’s $11.34 market cap to form a company worth $12.63 billion. While this would still be quite small relative to the Priceline juggernaut – roughly 21.86% its size – you’d be surprised to note the huge revenue disparity going the other way.
While Priceline generated some $8.14 billion in revenue over the trailing twelve months for a ratio of 14.09% over its market cap, Expedia brought in $5.76 billion in revenue ttm for a ratio of 50.79% of its market cap. Orbitz is even leaner, generating $932 million in revenues for a ratio of 72.25% of its market cap. The combined operations of Expedia and Orbitz will produce a lean, mean revenue generating machine of $6.692 billion for a ratio of 52.98% of its future market cap – equating to some 3.76 times better than Priceline’s revenue over market cap ratio.
Yet as impressive as the acquisition looks on paper, shareholders are none too pleased. Within minutes of the official announcement of the buyout by a joint press release by Priceline’s and Orbitz’ boards, lawsuits against the deal started surfacing, including one by heavyweight law firm Levi & Korsinksy, LLP, which describes itself as “dedicated to fighting for aggrieved shareholders and consumers, and obtaining redress from those who have harmed them. Our attorneys have decades of experience representing investors and consumers, and have set ground-breaking legal precedents in high-stakes securities and class action lawsuits throughout the country.” –
So what are Levi & Korsinksy LLP upset about in this case?
“To: All persons or entities who purchased or otherwise acquired common stock of Orbitz Worldwide Inc … prior to February 12, 2015 and continue to hold such shares, you are hereby notified that Levi & Korsinsky, LLP has commenced an investigation into the fairness of the sale of Orbitz to Expedia, Inc,” the law firm announced.
“Under the terms of the transaction,” the complaint explains, “Orbitz shareholders will receive $12.00 in cash for each Orbitz common share they own. The investigation concerns whether the Board of Orbitz breached their fiduciary duties to stockholders by failing to adequately shop the Company before agreeing to enter into this transaction, and whether Expedia, Inc. is underpaying for Orbitz shares.”
We could have guessed it, really. Whenever there’s a high profile buyout, you can bet there will be someone filing a suit trying to get more money out of the buyers. The day before the announced buyout, Orbitz’ stock was trading at $9.62 per share, making the $12 per share offer by Expedia some 24.74% higher than the stock was trading for. That sounds like more than a fair deal to many.
But the plaintiffs may have a case, here, given Obritz’ tremendous revenues for such a small company as noted above. Orbitz also has much higher returns on equity currently at 30.63%, as compared to Expedia’s returns on equity of 14.69%, again underscoring Orbitz’ outstanding efficiency. What is more, Orbitz’ earnings growth of 36.6% is far superior to Expedia’s earnings growth of negative 30.4% (shrinkage), and is better than even Priceline’s 27.5% earnings growth.
Yet there is one other concern over this buyout that threatens to derail the entire plan – at the hand of the government itself.
Anti-Trust Concerns
There exists the possibility that the U.S. Department of Justice’s Antitrust Division might prohibit the acquisition on the grounds that the elimination of the third largest OTA would concentrate too much of the marketplace into the hands of just two companies – Priceline and Expedia.
As Dan Reed explains writing for Forbes, “Assuming that Expedia consummates its deal with Orbitz, it will have something near 70% of the U.S. OTA market.” Factoring-in Priceline’s share would mean that more than 95% of the online travel agency business would be controlled by just two companies.
Yet such a concern is likely NOT to result in a disapproval by the Justice Department, which evaluates a market’s playing field by something known as its “relevant market”. Reed explains:
“Anti-trust watchdogs pay attention to a concept called the ‘relevant market’. It’s a term that defines the boundaries of the markets in which companies compete… If OTAs were the only source for purchasing travel, then Justice almost certainly would move quickly to block Expedia’s acquisition of Orbitz. However, Justice is not likely to view the OTA market as a ‘relevant market’ for antitrust consideration because there are so many other ways consumers can buy travel. Consumers can buy direct from the airlines, hotels, cruise lines, etc., themselves. Or travel can be bought from other obvious third party service providers – conventional bricks-and-mortar travel agency.”
Hence, while the vast majority of the online travel agency business would be controlled by just two major players, these two would not control the majority of the online travel “booking” activity overall, given the enormous alternative means consumers have of meeting their needs.
Which Is the Better Investment?
Outside of all this drama concerning what is a fair price and what is a fair market share, we have ordinary investors who are simply concerned with which of the two stocks makes the better investment choice.
We have already considered revenue ratios, where Expedia scores a point over Priceline given Expedia’s superior revenue over market cap. Priceline, for its part, has scored a point over Expedia on the basis of earnings growth. And Priceline has scored another point over Expedia on the basis of returns on equity. Yet we have three more chief metrics to consider to help us determine a winner:
• Margins, measuring the amount of revenues that a company keeps are profit after all expenses. Where Priceline’s profit margin is 28.83%, Expedia’s profit margin is 6.91%, while Orbitz’s is 1.85%. In this metric, Priceline scores another point.
• Current Ratio, which compares a company’s assets and debt to determine how well equipped it is to cover its debts if they were all due today; the higher the ratio the better. Where Priceline’s current ratio is 4.6, Expedia’s is 0.7 and Orbitz’s is 0.57. Priceline scores another point here.
• P/E Ratio, which compares the current stock price to forward earnings over the next 12 months; the lower the ratio, the better the value; the higher the ratio, the more overpriced the stock is. Where Priceline’s P/E Ratio is 18.58, Expedia’s 19.04 and Orbitz’s is 24.33. Priceline again scores another point as its stock price represents better value relative to future earnings.
The result? Where Expedia scores one point for its superior revenue over market cap, Priceline scores five points for its superior earnings growth, return on equity, operating margin, current ratio, and P/E ratio.
Even so, Expedia’s stock could still surge with greater momentum than Priceline’s in the early part of the acquisition given the operational improvements gained by synergizing the two companies’ operations and eliminating overlap. Yet over the longer term, analysts are putting their chips on Priceline, with 4 strong buys, 15 buys and 4 holds, versus Expedia’s 4 strong buys, 8 buys and 12 holds.
All in all, Priceline promises to be the better investment even after Expedia adds another website to its portfolio.
Joseph Cafariello
