Description

Deal Background

On April 7, Expedia announced plans to do a tax-free spin-off of TripAdvisor.  Expedia shareholders will receive a proportionate amount of TripAdvisor stock, subject to final approval by Expedia's BOD and shareholders.  CEO Dara Khosrowshahi stated at an investor conference on June 21 that the regulatory filing for the spin-off, which had been scheduled for the spring, would now be made "in a matter of weeks."  The transaction is expected to be completed by the end of 2011.  Specifics have yet to be announced.

We believe that the spin-off will create value for shareholders since TripAdvisor is likely to command a high valuation.  This asset is a high growth/high margin business whereas core Expedia is a collection of transaction-oriented assets with more moderate growth.  TripAdvisor had been somewhat overshadowed by the broader group.  The remaining Expedia will continue to own the domestic and international operations of Expedia.com, Hotels.com, eLong, Hotwire, Egencia, and others.  VIC readers may recall that Expedia was itself a spin off of IAC/InterActiveCorp in 2005.

TripAdvisor Overview

TripAdvisor is the largest travel site globally.  It offers content and advice on a wide array of travel-related issues.  TripAdvisor has 50 million unique visitors per month.  It has operations in 29 countries in 20 languages.  There are 20 million members and over 45 million reviews and opinions.  TripAdvisor's travel brands include TripAdvisor.com, airfarewatchdog.com, bookingbuddy.com, travelpod.com, independenttraveler.com, familyvacaationcritic.com, among others. 

Growth has been extremely strong.  For perspective, TripAdvisor had under 20 million unique visitors in 2007.  Last year, cost per click revenue was 80% of total revenues, CPM display revenue was 16%, and Other (mostly subscription) was 5%.  Growth has been driven by more unique visitors as well as the partial economy recovery causing users to spend more on leisure and travel activities.  EBITDA margins are near 50% today.  Revenues are expected to grow in the mid-20% range this year and above 20% next year.

Expedia Overview

Expedia is the largest online provider of travel services on a global basis.  It owns 96 leisure booking sites that serve travelers in over 60 countries.  Expedia provides hotel booking to more than 130K hotels and offers over 300 airline choices.  Advertisers on Expedia have a means of targeting a valuable community of travelers.

Expedia derives revenue from the following sources: (1) serving as a travel agent/charging commissions per transaction, (2) serving as a merchant/purchasing the air tickets and hotel bookings from the airlines and hotels in large quantity at discounted prices and selling them to customers at higher prices, and (3) selling advertising on its websites.  Expedia's brands include Expedia, Hotels.com, Hotwire, eGencia, eLong, Venere.com, CarRentals.com, Classic Vacations, and Expedia Cruise Ship Centers.

Expedia's revenues increase when total gross bookings and the revenue margin earned on those bookings increases.The Leisure segment (which includes travel and advertising services) accounts for 95% of revenues.  The eGencia segment (which serves corporate travel) accounts for the balance.  Expedia grew revenues by just under 11% last year and had EBITDA margins over 23%.  Revenues this year are expected to increase by roughly 12% this year and 9% next year.  EBITDA margins are likely to be a bit lower this year and next (21%-20%) as compared to historical levels due to elevated spending on international market positioning.

Valuation

The combined Expedia sells for 7x EBITDA whereas multiples of peers are in the mid to high teens.  We value the company in the $35-40 range based on sum-of-the-parts.  We value TripAdvisor similar to peer group multiples of 12-15x EBITDA.  Standalone Expedia should be worth at least 7x EBITDA when compared to peers at 12x (we apply the lower multiple to Expedia due to competitors such as Priceline, Travelzoo, and Ctrip having EBITDA margins of 32%, 31%, and 40%, respectively) compared to 20%+ for Expedia.  The net cash on Expedia's balance sheet is then added back to complete the calculation.  This yields a fair value estimate of $35-40/share.

Risks

• (1) A weakening economy would adversely affect the consumer-facing business of Expedia
• (2) Competitors such as Priceline, Orbitz, and Travelocity as well as regionals such as Opodo and Ctrip have good offerings
• (3) Google/ITA can display travel-related results on Google search engines, which could hurt search rankings for Expedia and thus reduce traffic to its sites

Catalyst