Why Is Expedia Spinning Off TripAdvisor?

Expedia’s board has approved a plan that would break the company into two public companies.

One would be a travel agency, focused on selling air, hotel and car rentals and the other would be TripAdvisor, the travel reviews site that operates in 27 countries and 19 languages.

The split-up was a surprise today, many brows furrowed as to the significance of the timing, since the travel industry is facing a number of major disruptions.

Today, reports said Google and the Justice Department could ink a deal over the next couple of days that would allow the search giant to purchase flight-data company ITA Software for $700 million. One of its biggest partners, Kayak.com, is also zeroing on its IPO. Kayak is also beginning to book hotel rooms directly with its customers, rather than always redirecting to other sites, such as Expedia.

But much of the thought process has to do with what Expedia thinks its business is worth, compared to Wall Street’s valuation.

While Expedia’s travel agency business garners the most attention, it is TripAdvisor that has the bigger growth story, but in many respects is hampered by being tucked under Expedia’s  much larger wings.

Expedia CEO Dara Khosrowshahi told the WSJ that TripAdvisor is now big enough to be on its own. “It is a matter of size, globalization and diversification of revenues…It is really ready to stand on its own.”

On its own, it could be worth as much as $4 billion, according to some estimates, which is way above the $237 million Expedia purchased it for in 2004.

TripAdvisor makes money from advertising as well as from affiliate fees when users book through other sites, such as Priceline or Orbitz. TripAdvisor is the high-growth and high-margin business of Expedia today.

In 2010, TripAdvisor’s revenues totaled $486 million, up 38 percent compared to the year-ago period. Operating income in 2010 totaled $260 million, increasing 33 percent year over year. Its margins are slightly above 50 percent. Contrast that to Expedia’s overall transaction business, which is much larger, but is seeing a more modest annual growth at 20 percent.

But a lot of that growth story is not as easy to see on the surface.

Meanwhile, one of Expedia’s largest competitors, Priceline, continues to be appreciated in the public markets. Its stock hit a recent 52-week high after one analyst boosted its price target to $610 from $575.

In after hours trading yesterday, Expedia shares jumped 14 percent to $25.51 after closing $22.40 in the regular session. Today, Citi Investment reiterated its Buy rating at a $29 price point and called it a value play.

Not all analysts believe the break-up is the right thing to do.

Fitch Ratings, which is watching closely to see how the plan will affect the company’s bond ratings, wrote that TripAdvisor as a stand-alone entity will likely represent a significant new competitor to Expedia. It believes that TripAdvisor will now have much more flexibility to pursue a model that’s similar to competitors such as Kayak, which can promote hotel direct bookings in favor of directing traffic to online travel agencies, such as Expedia.

That is a particular concern because a large majority of Expedia’s revenue comes from hotel bookings, which has higher margins than airplane tickets.


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