HomeAway shareholders are cheering the news of the company's planned sale to Expedia. They’re cheering so hard, in fact, that the stock surged more than 25 percent in intraday trading Thursday, soaring right past Expedia’s cash-and-stock proposal -- which may only be a start.
What's got HomeAway shareholders so happy is less the Expedia offer, which was valued at just under $39 a share as of Thursday afternoon (HomeAway's stock traded closer to $40), and more that the vacation-rental company is now in play, with room for higher bids.
Wall Street, for one, thinks Expedia could pay more, mainly because HomeAway’s introduction of a consumer-booking fee midway through next year will translate into such significant future revenue and earnings growth that it makes the deal valuation look meager. In other words, Expedia's offer sets a low base and may invite a counter-bidder. Priceline, the $74 billion industry giant whose stock is trading near an all-time high, could be in a good position to deliver a knockout blow.
Unlike Expedia, whose presence in the vacation-rental market was limited to showcasing a portion of HomeAway properties in the U.S. and Europe on its own website, Priceline already has a foothold through Villas.com. The site has some 380,000 listings, with the majority in Europe. It would make strategic sense to combine those with HomeAway’s 1.2 million properties, enabling Priceline’s vacation-rental business to become more global while closing the gap on Airbnb, the leader with 2 million listings.
And unless Expedia is able to top whatever offer may come, Priceline could leave its smaller rival scrambling for another way into vacation rentals.
Piper Jaffray analyst Michael Olson is among the believers: He lifted HomeAway’s price target to $42 a share on the basis that other bidders could trump Expedia’s somewhat lowly offer.
And a topping $42 a share bid funded predominantly with cash would be immediately accretive to Priceline even before factoring in any synergies, according to data compiled by Bloomberg. (There's also the matter of a $138 million termination fee that HomeAway will have to pay Expedia if it does another deal. That translates to $1.43 a share, and appears well within Priceline's budget.) That’s not the case for Expedia, which expects the addition of HomeAway to dilute its earnings for the first year. That dilution could be magnified if it is forced to lift its bid in reaction to one from Priceline, though Expedia also has the benefit of trading at an all-time high.
Priceline reports its third quarter earnings on Monday when it could become clear whether a bidding war is in the cards. For HomeAway investors, it’s worth the wait.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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