Is Expedia (EXPE) Trying to Buy Travelocity?

FBR Capital analyst Jake Fuller weighed in on Expedia (NASDAQ: EXPE) after the FTC granted clearance for a transaction between EXPE and SABR involving Travelocity.

Fuller recalls that EXPE has a white label deal to power the Travelocity site, which is owned by SABR. The announcement lists EXPE as the acquiring party and Travelocity as the acquired entity. There is no further information and neither EXPE nor SABR would comment.

On background, Fuller notes: The white label deal includes options for EXPE to buy Travelocity from SABR. Why would EXPE acquire Travelocity? 1) Recapture the Travelocity revenue share paid to SABR by EXPE, 2) Gain control of Travelocity marketing (SABR pays for advertising out of its revenue cut), 3) Get strategic control of the asset.

Looking at numbers, the analyst notes SABR’s 2014 guidance includes $180-190M of revenue for Travelocity and $15-20M of EBITDA.

On a Scenario Analysis, Fuller said: A hypothetical on EBITDA to EXPE: If we assume total Travelocity revenue of $310M, with $185M paid out to SABR and another $65M of OpEx incurred by EXPE, the current EBITDA contribution to EXPE would be ~$60M. If EXPE acquires Travelocity, gets the $185M revenue share back, spends $165M of advertising (the amount we believe that SABR is spending) and still incurs the $65M of OpEx, EBITDA to EXPE would be ~$80M for a pick-up of ~$20M. Of course that acquisition scenario assumes EXPE spends ~53% of revenue on advertising vs. a more typical 30-40%. Assuming EXPE might be more efficient on advertising than SABR (probably a safe assumption), the EBITDA pick-up would be bigger. With ad spend at 45% of revenue, for example, the EBITDA pick-up would be $45M

Commenting on how much Expedia would have to spend to acquire Travelocity, the analyst said assuming an 8-9x multiple on a $20M EBITDA pick-up would imply a value for Travelocity of $160-180M. The firm sees EPS accretion in the range of 1%, based on this.

As a caveat, Fuller said he cannot say for sure that the FTC clearance does indeed relate to EXPE acquiring Travelocity, but he said it is hard to see what else it might relate to.

The firm maintained an Outperform raintg and price target of $100.00

For an analyst ratings summary and ratings history on Expedia click here. For more ratings news on Expedia click here.

Shares of Expedia closed at $85.39 yesterday.

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