Expedia’s Buy of Orbitz – Travelzoo Implications

February 12, 2015 at 2:05 pm Leave a comment

As most stocks in the online travel space rally 15-20% on the news of Expedia’s acquisition of Orbitz for $1.6 billion, we note that Travelzoo’s intraday bump of 3% brings its cash adjusted market cap to around $80 million. While we recognize that a comparison of Orbitz and Travelzoo is not apples to apples, we marvel at the fact that the travel spend of Travelzoo’s 24 million subscribers over the last 3-4 years have led to Travelzoo earnings being much higher than Orbtiz for the same period. Additionally, we note that this purchase was driven by Expedia’s desire to acquire a “strong brand (orbitz) and impressive team”, essentially a grab for market share, brand and talent.

Within weeks of Amazon’s confirmed entry into the travel space, Expedia has now executed the acquisition of both Travelocity and Orbitz in a 20 day time frame. With Alibaba, Amazon, Groupon and other non-OTA players entering the space, we expect that the consolidation will continue, possibly at an advanced pace as the scramble to acquire the best brands and talent in the online travel space gets more heated. Travelzoo continues to be the cheapest stock in the space and we believe the one with the most earnings upside as the company’s ability to leverage its subscriber base with a higher margin hotel booking business is still in its infancy. This potential upside is not reflected in Travelzoo’s valuation, nor is the potential for an acquirer with an existing high margin hotel booking business to step in and take advantage of this potential. Trip Advisor (Nasdaq: TRIP) has been a heavy acquirer in recent months and we would not be surprised to see an attempt by TRIP management to acquire Travelzoo. Additionally, we see Groupon (Nasdaq: GRPN) , Amazon (Nasdaq: AMZN) , Expedia (Nasdaq: EXPE)  and Alibaba (Nasdaq: BABA) as strong candidates to acquire the Travelzoo assets.

We are aware of multiple shareholders (including the manager of one of the largest hedge fund owners of Travelzoo) attempting to reach out to Travelzoo management over the last few weeks to see if they would consider putting the company up for sale. Despite the fact that Travelzoo is no longer in the pre-earnings release quiet period, management has not been returning calls. Given the rapid pace of consolidation in the space and Travelzoo’s position as one of the few remaining small cap online travel assets, we would not be surprised to learn that management is not returning calls because they are already in talks to sell the company.

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Entry filed under: alibaba, micro cap, short squeeze, small cap. Tags: , , , , , , , , , , , , , , .

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