Leading US-based online travel agency (OTA) Expedia (NASDAQ:EXPE) announced its acquisition of German meta-search engine Trivago in December 2012. Expedia plans to acquire a 61.6% share in Trivago for an estimated 477 million euros of which 434 million euros will be in cash and the remaining in Expedia’s stock. The acquisition is expected to close in the first half of 2013.
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In addition to marking Expedia’s entry in the meta-search space, we believe that Trivago will help increase the company’s footprint in the European hotel market. Conducting more than 100 million hotel searches annually, Trivago is one of the leading meta-search engines for hotel bookings in Europe.  While growth in the U.S. travel market has slowed, European markets offer immense growth opportunities for OTAs. The European online travel sales is expected to grow at a CAGR of 5.7% till 2016 compared to 4.8% CAGR for the US online travel market. In our view, a higher share in the European travel market will augur well for Expedia’s valuation.
In this article we discuss the factors that make Europe an attractive market for OTAs and discuss how Trivago can help Expedia leverage growth opportunities in the region.
What are the growth opportunities in the European travel market?
As the US online travel market nears saturation, the rising opportunities in the European travel market makes it an attractive destination for OTAs. Despite the ongoing debt crisis, the European online travel market accounted for 37.7% of the global market and grew by 9% during 2011-12. In comparison, the US market increased by 4% during the same period.
Online travel sales in Europe increased from $118 billion in 2010 to $141 billion in 2012 and are estimated to reach approximately $180 billion by 2016. OTAs currently contribute 37% to the European online travel revenues and the proportion is expected to increase in the future. 
Here are some of the key trends that will drive growth in the European travel market:
1. Fragmented hotel market – The hotel market in Europe is much more fragmented with smaller, independent lodgings compared to the US where the market is dominated by large hotel chains. Hotel chains are more likely to offer online bookings through their own websites while OTAs are more appealing to small, independent hotels outside the US. Due to the fragmented nature of Europe’s hotel industry, the need for standardization provides immense growth opportunities for OTAs. On average, over three out of 10 hotel rooms in Europe are booked online and the proportion is expected to rise in the future.
2. Increasing online penetration – The relatively low internet penetration in Europe (63.2%) compared to the US (78.6%) presents an upside to online travel industry as customers increasingly access the Internet for travel planning.
3. Growth opportunities in Eastern Europe – The penetration of OTAs in Eastern Europe is still comparatively low and the market continues to be dominated by supplier websites. However, as per PhoCusWright, the OTA market is increasing by >25% annually, increasing their share of air tickets and hotel bookings. It estimates OTA travel bookings share to increase to 10% in 2013 compared to 7% in 2011.  Additionally, while online bookings contributed only 16% to Eastern Europe’s total travel market, the contribution is expected to rise to 23% by 2013. 
Where does Expedia stand in the European hotel market? How does it compare against Priceline?
As per PhoCusWright, the top five OTAs – Priceline (NASDAQ:PCLN), Expedia, Lastminute.com, Ebookers and ODIGEO – contribute more than 60% to OTA bookings in Europe. ((Led by Booking.com, OTAs Fuel European Online Travel Growth, PhoCusWright, January 12, 2012)) Accounting for 40% of total OTA revenue, Expedia’s Hotels.com and Priceline’s Booking.com dominate the outbound hotel bookings in the region. ((Eastern Europe: OTAs Poised for Consolidation, PhoCusWright, August 2, 2012))
Though Expedia attracts a higher number of unique visitors in Europe compared to Priceline, the latter is known to have a wider presence in the European hotel market. Priceline’s booking.com was the main driver of OTA growth in Europe in 2011 and 2012 and is currently estimated to account for 6% of the European hotel market. 
Priceline’s business is more hotel-focused compared to Expedia. While hotel bookings contribute 97% to Priceline’s total revenue, the segment accounts for 74% of Expedia’s earnings. Hotel bookings is the fastest growing segment in the online travel market and with more than 20% revenue margin (revenue earned by OTAs as a percentage of gross hotel bookings), it is also the most profitable compared to airlines (~2%) and car rentals & cruises (~9%).
How can Trivago’s acquisition help increase Expedia’s footprint in the region?
Expedia’s Hotels.com currently offers an inventory of only 145,000 hotels globally. In comparison, Priceline’s booking.com covers over 180,000 hotels in Europe alone. We believe that the acquisition of Trivago will provide greater visibility to Expedia in the European market and will help expand its hotel portfolio in the region.
Trivago has managed to double its revenues each year since 2008. Building direct relationships with hotels has been one of its key strategies. Trivago has an inventory of more than 600,000 hotels over 140 booking sites in 23 languages across 30 countries in Europe. With close to 20 million unique monthly visitors, Expedia claims that Trivago was one of the fastest growing channels which generated rising traffic for its website last year. 
Though the two companies will operate as separate entities after the acquisition, we think that Expedia’s collaboration with Trivago will increase its visibility in the European market which in turn will lead to rising user traffic on its website.
Our current price estimate of $63.12 for Expedia is at a slight premium to the current market price.Notes:
- Expedia to buy majority stake in European metasearch Trivago for $632 million, Skift.com, December 21, 2012 [↩]
- European Online Travel Agencies: Navigating New Agencies [↩]
- Eastern Europe: OTAs Poised for Consolidation, PhoCusWright, August 2, 2012 [↩]
- All Eyes on Russia as Eastern Europe Travel Market Shifts Online, PhoCusWright, July 12, 2012 [↩]
- Booking.com big for Priceline but only scratching the surface in Europe, Tnooz, February 29, 2012 [↩]
- Expedia pays $632 million for majority stake in Trivago, let the travel search games begin, Tnooz, December 21, 2012 [↩]