Is Expedia Inc Better With Orbitz in the Fold? (EXPE, OWW)

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For the second time in less than three weeks, Expedia Inc. (NASDAQ:EXPE) has made sure it’s poised to remain the powerhouse within the online travel agency arena.

expedia stock, expeIn late January, Expedia acquired privately held Travelocity for $280 million in cash, and it followed that up today by nabbing Orbitz Worldwide, Inc. (NYSE:OWW) – the frontrunner in the “next to be acquired” race — to the tune of about $1.6 billion in cash.

OWW shares surged more than 20% on the buyout offer, but EXPE stock advanced a healthy 17% as well, as investors know what a coup this is for Expedia.

The question is, what can owners of Expedia stock really expect now that Orbitz Worldwide is being brought into the fold?

Details of the Deal Between EXPE and OWW

The offer from Expedia to OWW shareholders was $12 per share, translating into a cash offer of roughly $1.38 billion. But, factoring in the debt that Orbitz Worldwide is bringing with it, the total pending transaction is actually being valued around $1.6 billion.

It’s not a bad deal for EXPE. Orbitz Worldwide has generated $908.9 million in revenue over the past 12 months, and turned about $15.3 million of it into a net profit.

Some owners of Expedia stock might balk at the lack of profits seen from OWW; Expedia just paid 89 times Orbitz Worldwide’s trailing earnings to own the company.

This isn’t a profit-oriented acquisition, though. This is a growth-oriented acquisition that could be on the verge of a serious widening of profit margins. EXPE needed to move quickly and pay what seems like a steep price for OWW before a competitor did.

The specifics: Two years ago, Orbitz Worldwide puts its growth effort into high gear. After generating between $700 and $800 million in revenue per year between 2009 and 2012, the top line grew a solid 8.7% in 2013 and is on pace to grow 10% in 2014.

While it is true that OWW has been inconsistent on the earnings front even with its recent revenue growth, investors have seen more reason for hope than reason for despair with recent bottom lines.

Expedia might be the missing ingredient to that end.

It’s the New OTA Business Model

This was explained in late January in the wake of the Expedia acquisition of Travelocity, but it merits repeating now: Profitability in the OTA world is a matter of scalability.

Bigger is better, and it’s easier (and cheaper) to buy growth than it is to make it yourself.

While online travel agents like Expedia and Priceline Group Inc. (NASDAQ:PCLN) certainly leverage their size and stature to negotiate deals with hotel chains and airlines, Orbitz Worldwide never has such muscle to flex with service providers. Indeed, it should have been somewhat foretelling when Expedia CEO Dara Khosrowshahi explicitly said in January, “They (Orbitz) are doing as well as they can, but they are simply subscale.”

Under the Expedia umbrella, Orbitz will have the scale it needs to start turning acceptable wider profits. Some expenses will certainly be shared with the parent company, and Orbitz should enjoy its parent company’s stronger position at the bargaining table.

In other words, OWW is going to become the potent player as part of Expedia that it just couldn’t become on its own.

Bottom Line for Expedia Stock

The two behemoths in the OTA world were pretty evenly matched before the OWW acquisition, but today’s deal pushes Expedia measurably ahead of Priceline Group in terms of sales. It’s a lead Priceline might want to respond to sooner than later, as growth within this industry allows for more and better growth in the future. Fortunately for Expedia, most of the really good OTA acquisition targets have already been snatched up.

In the meantime, even if Expedia is going to cool its M&A ambitions for a while now that Orbitz is in the loop, there’s a lot to be excited about. This is not only an immediately accretive victory for owners of Expedia stock in terms of revenue, but it’s an opportunity for margin growth. As Dara Khosrowshahi explained in this morning’s conference call, “We believe Orbitz can add to scale and add to our ability to run a more efficient machine.”

Yes, as was noted, it’s all about scale — bigger is better for online travel agents, just because it’s more profitable.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/02/expedia-inc-better-orbitz-fold-expe-oww/.

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