Why Expedia Is So Attractive After the HomeAway Acquisition

Expedia Inc. (NASDAQ: EXPE) and HomeAway Inc. (NASDAQ: AWAY) were running with the bulls in Thursday’s session on news of an acquisition. Expedia entered into a definitive cash and stock agreement to acquire HomeAway for nearly $4 billion. This is an incredible move in the traveling and short-term rental space and it has attracted the attention of one key analyst.

Oppenheimer upgraded Expedia to an Outperform rating from Perform after the company announced that it will acquire HomeAway for $3.9 billion, or roughly $38.31 per share, a 20% premium to Wednesday’s closing price. The firm believes the transaction is highly accretive, resulting in superior long-term earnings growth, based on HomeAway’s traveler monetization plans, and 1.2 million unique properties leveraging Expedia’s online-optimization capabilities.

Additionally, HomeAway’s leading position in vacation rentals is further solidified, in Oppenheimer’s view, considering Expedia’s significant marketing budget.

The $3.9 billion purchase price “suggests” a fair valuation. Oppenheimer views the transaction as accretive, considering HomeAway likely will benefit from the cross-selling opportunities, as well as leveraging Expedia’s marketing budget.

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Oppenheimer hammered in a few more points that it assumes surrounding its stance as the deal as highly accretive:

  • 10% bookings compound annual growth rate (CAGR)
  • An 8% to 10% take-rate on bookings based on comments for a 6% average traveler fee starting in the second quarter of 2016
  • 20% EBITDA margins, the firm forecasts 2017 synergy assumptions of $100 to $180 million versus its prior 2017 estimates

HomeAway is estimated to drive estimated 2015 bookings of $15 billion on $100 million of advertising. Oppenheimer forecasts Expedia to spend $3.4 billion on advertising in 2016. As a result, the firm believes HomeAway has substantial opportunity to accelerate growth, especially in urban areas, which was difficult to penetrate, given the competitiveness of keyword search in large metropolises.

Oppenheimer concluded its report with this:

Deal likely meets approval; competing offers unlikely. Given HomeAway only represents roughly 15% of global vacation rentals and AirBnB’s growth, we believe the acquisition will be approved. Given the breakup fees, and management’s tone on the call, we see limited chances of a competing offer. We also see HomeAway’s CEO accepting Expedia stock for roughly 75% of his holdings, as a bullish indicator.

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Shares of Expedia were trading up 4.2% at $139.85 Thursday, with a consensus analyst price target of $146.65 and a 52-week trading range of $76.34 to $139.58.

HomeAway shares were trading up over 25% at $40.14, with a consensus price target of $34.32 and a 52-week range of $25.13 to $39.97.

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