Leading online travel agency, Priceline (NASDAQ:PCLN), announced its decision to acquire OpenTable (NASDAQ:OPEN) for $2.6 billion on June 13. OpenTable helps restaurants to fill tables by offering online reservation services to diners. The acquisition marks Priceline’s entry into the online restaurant reservation business, a category in which OpenTable is a leader in North America, particularly the U.S. 
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Priceline has offered an all-cash price of $103 for each OpenTable share, a premium of 46% to the latter’s closing price last Thursday, June 12. The huge premium suggests that Priceline sees tremendous potential in OpenTable. The announcement of the deal pushed OpenTable’s shares past $104 the following day, indicating that investors are optimistic about a competing bid by other big players in the industry.
Priceline’s operations are huge in scale compared to OpenTable’s. To put things in perspective, Priceline reported a pre-tax income of $2.4 billion from total revenues of $6.8 billion in 2013, while OpenTable’s figures for the period were $46 million and $190 million respectively. Priceline employs the services of 9,000 employees, while OpenTable’s headcount was 664 at the end of Q1 2014. The former’s market capitalization is also huge, nearly 25 times that of OpenTable’s $2.5 billion.
We think that Priceline’s decision to acquire OpenTable is a good move by the company. In this article we highlight the key reasons that make OpenTable a good strategic buy.
OpenTable Is Formidable In Online Restaurant Reservation In North America
OpenTable is the undisputed leader in North America’s online restaurant reservation industry with a market share of over 50% in the region. It reported a restaurant customer base of 31,583 at the end of Q1 2014, and seated a little less than 47 million diners at these restaurants in the first three months of the year—90% of them in North American restaurants. Data compiled by us for every quarter since Q1 2008 shows that OpenTable has seated almost 570 million diners worldwide in the last seven years, with the number of diners growing at an average of 35% each year.
We believe that OpenTable will allow Priceline to enhance its offerings for the North American market. Since many travelers are also diners, the company could integrate OpenTable’s services with its travel products. For instance, restaurant reservations can be provided along with hotel and airline ticket bookings, and as a part of vacation packages. Further, the two companies can engage in cross-promotion and cross-selling.
There’s A Big Opportunity In Online Restaurant Reservation Internationally
OpenTable’s business is highly concentrated in North America, where it caters to about 24,000 restaurants out of its total customer base of 31,500. However, the scope of growth in the online restaurant reservation category is much bigger in international markets than it is in North America. While over 20% of restaurant bookings in the U.S. occur online, the percentage stands at low single digits in nearly every international market. 
Rapid international expansion has been one of the most important drivers behind Priceline’s growth momentum, and the company could leverage the experience to grow OpenTable outside North America. It could also promote OpenTable in Europe via Booking.com and in Asia-Pacific via Agoda.com. Booking and Agoda are Priceline’s subsidiary websites. The number of OpenTable’s restaurant customers outside North America has remained around 7,700 for the last six quarters, and we currently forecast a 5% annual growth in this figure over the future. But Priceline’s strong global presence will help international growth jump to 15-20% annually in coming years.
The Deal Will Result In Cost Savings For OpenTable
As Priceline integrates OpenTable’s technology with its own offerings, it will help cut millions in the latter’s operating costs – especially in support-related expenses which represent the biggest chunk of OpenTable’s quarterly expenses. At the same time, marketing expenses will also be considerably lower for OpenTable, both internationally and in the U.S., as Priceline’s existing sales & marketing workforce will most likely be entrusted with these activities for OpenTable too. While OpenTable will continue to advertise its own products separately, the ensuing reduction in headcount should shrink SG&A expenses.
We have a $642 price estimate for Priceline’s shares and a $70 price estimate for OpenTable’s shares. We are in the process of adjusting our model for Priceline and, once the transaction closes, we will remove OpenTable from our coverage.Notes:
- The Priceline Group Agrees to Acquire OpenTable, Inc., Priceline Investor Relations, June 13, 2014 [↩]
- TripAdvisor’s (TRIP) CEO Stephen Kaufer on Q1 2014 Results – Earnings Call Transcript, Seeking Alpha, May 06, 2014 [↩]