Travelzoo (NASDAQ:TZOO), a leading global Internet media company that provides information on travel, entertainment and local deals, sold its Asia-Pacific business for $3.6 million to Azzurro Capital in October 2009. Travelzoo’s Asia-Pacific division had been performing poorly compared to the company’s other two divisions — North America and Europe. For the twelve months ending June 2009, the division posted an operating loss of $7.8 million on a relatively small revenue base of $1.5 million, due to high sales and marketing expenses related to subscriber acquisition. 
Since the sale, Travelzoo has not had any significant ongoing involvement or vested economic interests in the Asia-Pacific business. The business is now operated by Travelzoo (Asia) Ltd. and Travelzoo Japan K.K., wholly-owned subsidiaries of Azzurro Capital and together known as Travelzoo (Asia-Pacific), under a license agreement with Travelzoo.
In this article, we analyze why Travelzoo should consider buying back its Asia-Pacific unit. Our price estimate of $23 for Travelzoo marks our valuation at a discount of about 10% to the current market price.
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How Travelzoo Could Benefit From The Travel And Advertising Markets In Asia-Pacific?
Asia-Pacific houses the world’s fastest growing emerging markets, including India and China. The region is broadly characterized by trends such as rising disposable income, decreasing unemployment rate and rising internet penetration rates. These factors drive growth in online travel demand and e-commerce adoption.
1. Booming Online Travel Demand Could Lift User Base Higher: Asia-Pacific is expected to become the largest travel market in the world, with total travel sales rising from $290 billion in 2012 to over $350 billion by 2016. Further, rising internet penetration and growing mobile usage are expected to lift the percentage of these sales occurring online from 23% to 37%, during the same period. 
Travelzoo (Asia-Pacific) operates in China, Australia, Taiwan, Hong Kong and Japan. All these countries are showing growing appetite for travel.  Travelzoo had close to 1.5 million subscribers in the region at the time of the sale of its Asia-Pacific business. Today it has about 3.7 million subscribers, which is still small compared to Travelzoo’s other two markets (North America: 16 million and Europe: 6.5 million), but represents an annual growth rate of 25% during 2009–2012.
Additionally, consumer research firm, Euromonitor, expects both per capita disposable income and per capita expenditure to grow by about 35% in real terms between 2013 and 2020.  Since Travelzoo broadly targets affluent customers who have an appetite for high-end travel deals, we believe that the Asia-Pacific region is a big opportunity for the company to further expand its subscriber base.
2. Online Advertising Market To Grow By 50% By 2016: According to eMarketer, online ad spending in Asia-Pacific is expected to register y-o-y growth of more than 10%, reaching $45 billion by 2016 from $30 billion in 2012.  China and Japan are forecasted to have a combined share of more than 60% of the market. Although Australia lags behind China and Japan in total ad spending, it has the highest online ad spend per internet user in the world. 
Since Travelzoo derives more than 50% of its revenue from advertising, buying back the Asia-Pacific business would provide it access to some of the faster growing markets for online ads. This in turn can help it earn higher ad revenues per subscriber, which has been on a decline due to increasing competition in the advertising space.
The Challenge: Rising Competition From Travel Booking Websites
In the U.S., Travelzoo competes with online travel agencies such as Priceline (NASDAQ:PCLN) and Expedia (NASDAQ:EXPE). These travel booking websites have already forayed into the Asia-Pacific market. Expedia caters to the region via its Expedia, Hotwire, Egencia and Hotels.com brands. It also operates a joint venture with a low cost air carrier, AirAsia, to jointly grow its online travel agency business. On the other hand, Priceline has a dedicated brand in the region, Agoda.com that allows customers to make hotel reservations through the website’s extensive network of about 300,000 hotels. According to PhoCusWright’s Asia Pacific Travel Trends Report, Agoda is the most popular online travel agency in five out of nine countries in Asia-Pacific. 
Trefis Conclusion: The prospects for travel and advertising in Asia-Pacific have improved since Travelzoo sold the business. The Asia-Pacific arm suffered losses in 2009 primarily due to high subscriber acquisition costs. For the future, we think that Travelzoo will not have to aggressively compete for dollars as travel demand in the region is expected to boom in the next few years. The company should benefit from overall market growth in the travel and advertising industries.
At present, there is a revenue sharing contract between Travelzoo and Travelzoo (Asia-Pacific), pertaining to the cross-selling of products and services, but the companies do not disclose the terms of the contract in detail. We believe that acquiring the Asia-Pacific business will certainly be more advantageous for Travelzoo than simply sharing revenues, due to the region’s bright prospects.
At the time of the sale, Travelzoo signed an option agreement with Azzurro Capital under which the former has an option to buy back the Asia-Pacific business during the 2011 – 2020 period. In June 2011, Travelzoo’s CEO, Mr. Chris Loughlin, expressed the intent to exercise the option but didn’t hint when this would happen.  The company has not taken any steps toward this since then. We feel the company should exercise the option before it’s too late to capitalize on the growth opportunity in the region.Notes:
- Travelzoo to Sell Asia Pacific Division, Business Wire, August 2009 [↩]
- Online Travel Sales Explode in Latin America, eMarketer, November 2012 [↩]
- Travelzoo Asia Pacific Survey Highlights Burgeoning Regional Travel Appetite, PR Newswire, January 2013 [↩]
- Regional Focus: Asia Pacific’s Changing Consumption Patterns Spur New Opportunities, Euromonitor International, April 2013 [↩]
- Despite Digital Growth, Total Ad Spending Slows in China, APAC, eMarketer, June 2013 [↩]
- Australia Tops World in Digital, Total Ad Spend Per User, eMarketer, September 2012 [↩]
- Priceline Group Gaining Ground in Asia Pacific, PhoCusWright, September 2013 [↩]
- Travelzoo Might Buy Back Asian Businesses, Investor’s Business Daily, June 2011 [↩]