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Why Priceline's Acquisition of OpenTable Makes Sense


Priceline just made a great addition to its travel services empire. Here's why.

Shares of Priceline Group Inc. (NASDAQ:PCLN) dropped over 3% on Friday on news it would acquire restaurant reservations company OpenTable Inc. (NASDAQ:OPEN) for $2.6 billion. 

The negative reaction stemmed from the belief that Priceline was overpaying for OpenTable.

This is a mistaken perception based on the premium paid. Priceline's $103-per-share bid was 46% above OpenTable's average close over the previous 10 days, and nearly 110 times forward earnings. 

But if you look at the purchase price in terms of absolute dollars and the strategic fit, it is a good deal that is long-term bullish for Priceline. 

Priceline is valued at $62 billion, with over $3 billion in net cash.

Given that OpenTable has no debt, this purchase is easily digestible.  

And it's worth asking, if Priceline is overpaying, why are shares of OpenTable trading at a $1.50 premium to the $103 bid? 

Obviously some investors think that another suitor like Google (NASDAQ:GOOG) or Facebook (NASDAQ:FB) could come along with an even higher bid. 

This is because OpenTable offers an expandable platform with exponential growth potential, not just a business.

From a bigger-picture perspective, OpenTable fits in with Priceline's portfolio of hotel, airline, and car rental services, bringing it one step closer to its goal of becoming a one-stop shop for all travel-related needs.

The ability to expand a hyper-local business across the global stage has been the basis for the eye-popping values placed on businesses such as taxi service Uber. 

And Priceline is perfectly positioned to leverage the cross-selling opportunities between travelers and diners.

OpenTable has a proven business model of charging not only a fixed monthly fee to the restaurants for software, but also transaction fees to diners. It is profitable and growing revenues at healthy a 27% annual rate. 

The deal would immediately be accretive, giving Priceline annual pro forma combined earnings of $2.4 billion on revenues of $8.6 billion.

OpenTable currently gets over 70% of revenue from the US, leaving the door open for high global growth.

And with its acquisitions of, Kayak, and, Priceline has proven it can successfully integrate and expand other platforms. The addition of OpenTable will also help differentiate Priceline from other travel sites such as Expedia (NASDAQ:EXPE).   

The key is applying the dynamic pricing model to the restaurant business.

Imagine if menu prices were to adjust upward or downward depending upon reservation times.

Restaurants would be able to command higher prices at peak times, and offer customers lower prices at non-peak times to get them in the door. The result would be increased revenue for the restaurant. There would also be shorter wait times and wider table availability for customers, leading to a reinforcing network effect. 

This is the strategy that is already employed by airlines and hotels, and it is a crucial part of Uber's pricing model. 

And given the current cultural trends, it is not far-fetched to see a world where wealthy patrons get into bidding wars for a "hot" meal.
On Monday, Priceline shares hit a low of $1,183.

Option Plays

Given Priceline's high dollar cost of nearly $1,200 per share, I would look at using an at-the-money call spread to gain upside exposure at a reduced capital outlay. 

For example, with shares trading near the $1,190 level, the August $1,180/$1,220 call spread could be purchased for an $18 net debit. 
Selling out-of-the-money puts might make sense for traders with a very high risk tolerance.. For example, the August $1,160 put could be sold for $45 per contract. I would only do this if you're willing and able to be assigned the shares should the stock dip below $1,160. In this case, the cost basis for the trade would be $1,115 ($1,160 - $45), a 6.4% discount from current price.

And on a side note, with Priceline's bid firmly in place, one could purchase some low-cost call options in OpenTable as a limited risk way to play for a higher bid. With shares trading at $104.50, the October $105 calls are trading at about $1.50 per contract.  Remember, shares of OpenTable traded as high as $115 in April 2011.

Twitter: @steve13smith

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No positions in stocks mentioned.

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