Yesterday, Expedia announced a plan, approved by its Board of Directors, to split the company into two publicly traded entities TripAdvisor and Expedia. We view this as a material opportunity to unleash the value of TripAdvisor ('Net advertising has much higher multiple vs. OTAs and TripAdvisor has higher growth and better margin profile) and align EXPE more closely with global/regional OTAs. Our SOP analysis generates $33 value, 10% higher than our $30 PT. We expect Expedia to continue to rally as it approaches its Q1-11 EPS release on 28th April. We also believe that sharper focus will help both companies execute their strategies better and expand internationally more aggressively. As highlighted in our April 5th note on EXPE, we find decent upside in the shares. We reiterate our 1/Buy rating and $30 PT.
Key Points
â Sources of hidden value. We believe that this transaction can unleash value for investors since TripAdvisor will start getting Internet advertising-type of multiple as opposed to an OTA multiple. Also, TripAdvisor is a faster-growing business with margin 2x that of Expedia's OTA business. As far as EXPE is concerned, it will trade like other OTAs and upside will be based on revenue margin improvement, market share gains, phasing out of investments, better OIBA margin, and sharper focus.
â SOP Analysis.We estimate that in 2011 Expedia will generate $700mm in EBITDA from its OTA assets and $311mm from TripAdvisor. We assign 8x to OTA assets and 14x to TripAdvisor to reach $33 per share for the combined assets of Expedia.
â Implications for other OTAs. In our view, this split will make the comparison of OTAs easier and the adjustment would only be in terms of US vs. international, agency vs. merchant, and airline vs. hotel.
â Expedia announcement. Yesterday, after markets close, Expedia announced that its Board of Directors has approved preliminarily a plan to split the company into two publicly traded entities: 1) TripAdvisor, which will include the domestic and international operations associated with the TripAdvisor Media Group (includes its flagship brand and 18 other travel media and advertising brands), and 2) Expedia Inc., which will continue to include the domestic and international operations of the company's travel transaction brands including Expedia.com, Hotels.com, eLong, Hotwire, Egencia, Expedia Affiliate Network, CruiseShipCenters, Venere, Classic Vacations, and carrentals.com. It is anticipated that the transaction will take the form of a tax-free stock distribution or stock reclassification and that Expedia's dual-class equity capital structure and the governance arrangements between Barry Diller and Liberty Media will be mirrored at TripAdvisor. The proposed spin-off is expected to close in Q3-11 but is contingent on final approval by Expedia's Board and shareholders. The company plans to provide more detail on its Q1-11 earnings call tentatively scheduled for April 28, 2011.
