Description

Travelzoo Inc. (Nasdaq: TZOO), whose stock has been annihilated in recent days after a somewhat disappointing earnings report, represents a remarkable contrarian investment opportunity with little or no downside from its current price and 60-100% upside should the company be sold to a strategic buyer, which has been rumored in the past but we believe is increasingly likely today.  Because the company has enormously bloated pure G&A expense ($36mm on an LTM basis), we believe 75% or more of this expense would be readily eliminated by a strategic buyer, implying that the company is presently trading at only 3.8x pro forma strategic EBITDA. 

We believe the shares are worth $28 to $35 to strategic buyers, representing reasonable multiples of 7.5x to 9.5x strategic EBITDA.

In addition, the company has search engines that may be non-strategic to the core travel deals business yet may have meaningful standalone value: 

1. Fly.com, a flight search engine that allows comparison across 400+ airlines and travel sites, including Expedia, Orbitz, Travelocity and Priceline.
2. SuperSearch, a travel search engine that allows search for flights, hotels, vacations and car rentals.

Finally, the stock is closely held, with Ralph Bartel owning 50.4% of the shares and insiders in total owning 53.6% of the shares. 

Short interest is 555k shares, or 8% of the float.

What is in G&A Expense?

• From the 10-K:  “General and administrative expenses consist primarily of compensation for administrative, executive, and software development staff, fees for professional services, rent, bad debt expense, amortization of intangible assets, and general office expense. General and administrative expenses were $41.7 million, $38.7 million and $34.5 million for 2013, 2012 and 2011, respectively.”
• You will see in the analysis below that we have narrowed down to “Pure G&A”

CEO Commentary on Strategic Review of Fly.com and SuperSearch

• Management is clearly trying to figure out a way to get search directly on the Travelzoo site, which could leave Fly.com and SuperSearch as excess assets:  “And then on the growth strategy, I'm very pleased that we have David White, who joined us from Yahoo!  He was on -- I think he's the first employee of Efficient Frontier, which was the search agency that was acquired by Adobe.  And David has already conducted a strategic review.  He's already pulled some cost out of business.  And we're now thinking about Search and what are the positive elements of Search for the broader business.  We see, for example in our performance review, that we do generate a lot of subscribers that we don't account for through Search.  We have not run FX for our travel advertisers and hotels.  But if you use our core search product today on Travelzoo on the homepage, you see it's very limited.  You can't put in your dates.  If you wanted to search for a flight on Travelzoo, it would be very difficult.  You have to go to Fly.com or you could use SuperSearch, but it still -- we don't make it so easy.  And it's kind of ironic because we wanted the strongest Travel brand in the markets in which we operate, and we don't really have an awesome flight experience on our site.  And you know that already we're developing an awesome hotel experience.  The Fly experience, we've got the asset, so I think we could do something quite interesting there.  So I think over the next quarters, you'll see some of these things being tested.  And ultimately, Search on Travelzoo will be the direction we head in.”

Why Now

• Capitulation has occurred.  The stock is washed out, down 51% from its 52 week high and 23% from its April 4 closing price.  On a TEV basis, the company’s implied value has fallen from $448mm earlier this year to only $200mm at present.  Volume has fallen from 425k three days ago to only 90k thus far today.
• Limited downside.  Even if no sale, TZOO trades at multiples of reported revenue and unadjusted EBITDA of only 1.3x and 8.3x, respectively.  This compares with the dregs of online travel Orbitz (1.4x, 10.1x) and Groupon (1.5x, 28x).
• Poor, limited sellside coverage.  Only covered by Ascendiant and Benchmark, neither firm addresses the bloated G&A or strategic value.
• Online travel is hot.  If there is ever a time to sell the company to a strategic buyer, it is now.
• Enormous synergies to be realized, as discussed above and illustrated below.
• Rumored target in the past.  Presumably the time or price was not to Bartel’s liking.  Interestingly, the CFO said on the conference call: “in addition, we expect to incur increased levels of professional cost for various initiatives” – it is possible this is innocuous, but since professional costs are usually legal, accounting or consulting related, it is also possible that they are paying a financial advisor.  In 2012, this article was published by Reuters and this article published by AllThingsD, as Majic noted in his writeup back then.  At the time, the stock traded at ~$27.
• Bartel would probably like liquidity.  He hasn’t sold stock in over a year, since February 2013.  His entities are in the Caymans, Ascona and the Isle of Man, according to the filings.  He may not worry about taxes the way most of us do.

Valuation and Comps ($MM)

Catalysts

• Investor awareness of strategic value and bloated G&A
• Sale of company
• Sale of Fly.com and/or SuperSearch
• Improved operating metrics

Disclaimer:  The author of this idea presently has a long position in securities of this issuer and may trade in and out of these positions without notice.  The data contained herein are prepared by the author from publicly available sources and the author's independent research and estimates.  No representation or warranty is made as to the accuracy of the data or opinions contained herein.

Catalyst