In what came as a surprise to many in the industry, Priceline (NASDAQ:PCLN), a leading online travel agency, announced yesterday its acquisition of Kayak, a leading travel search company. The two companies signed a definitive agreement for a stock and cash agreement of $1.8 billion, making it the biggest acquisition for Priceline so far. While the deal has been approved by both companies’ board members, it is awaiting shareholder and regulatory approval.
Priceline has agreed to pay $500 million in cash and the remaining ($1.3 billion) in equity. The company will pay Kayak shareholders $40/share, which marks a 29% premium over its closing price on November 8 and almost a 54% premium over Kayak’s initial listing price of $26. Kayak went public in July this year.
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Priceline is the second largest online travel company in the world (in terms of gross bookings). It provides its customers a broad range of travel services, which include bookings for hotel stays, airline tickets, car rentals, cruises and vacation packages. On the other hand, Kayak is a travel search company which offers travel suppliers and OTAs an efficient channel to sell their products and services to potential users.
While both companies have inherently diverse business models, the key risks/threats faced by them remain largely the same – intense competition in online travel, consolidation in airline industry, adverse macro conditions, increasing threat from large search engines such as Google (NASDAQ:GOOG), among others. However, there are many factors such as growing opportunities from emerging markets and increasing online penetration that offer tremendous opportunity for growth in online travel. According to EMarketer Inc, online travel sales may reach $151.9 billion by 2016 from $107.4 billion in 2011. 
While Priceline’s revenue has historically been higher compared to Expedia, the latter has a higher market share in terms of gross bookings. However, Priceline recently narrowed its market share gap with Expedia (US only) to a mere 2.5%. 
We believe that with Kayak on board Priceline could further close down the competition with Expedia. Presently, queries posted on Kayak show results from Priceline, Expedia (NASDAQ:EXPE) and others. However, having shelled out $1.8 billion for Kayak, Priceline could leverage the same to its advantage in the future.
The transaction is expected to close in the first quarter of 2013, and Kayak will operate as an independent unit within Priceline.
Our price estimate of $584 for Priceline is in-line with its current market price.Notes:
- Priceline Buys Kayak for $1.8 Billion Expanding in Travel, Bloomberg, November 9, 2012 [↩]
- Priceline claws back ground from Expedia – Top US travel sites, July 2012, Tnooz, August 6, 2012 [↩]