Why $2.6B for OpenTable may be a bargain
At a more attractive valuation near the $70 level, existing investors may be able to count on an upswing in new interest drawn to OpenTable's round of fresh strategic initiatives.
Online travel services provider Priceline (PCLN) announced Friday it had agreed to buy restaurant-bookings Web site OpenTable (OPEN) for $2.6 billion in an all-cash deal. The deal is expected to be completed in the third quarter and values OpenTable at $103 a share, a 46 percent premium over Thursday's closing price.
OpenTable was surging 47 percent to $103.50 while shares of Priceline were slipping 1.8 percent to $1,203.84.
The acquisition comes at a time when shares of OpenTable, which books 15 million diners a month at more than 31,000 restaurants, were struggling to regain momentum. The stock suffered a steep setback from March and April's substantial tech selloff that was spurred by concerns about high valuations and another dotcom bubble.
While many momentum shares have recovered, OpenTable has yet to make a full rebound, owing to worries about its room for future growth in the face of a rising number of electronics reservations bookings services.
Holders of the stock have seen shares decline more than 11 percent this year, following a more than 15.5 percent drop between the sharply swooning March and April months. But even prior to Friday's announcement, the selloff appeared to have bottomed. Shares were trying to make their way back up and the stock was at $70 a share Thursday while the company appeared poised for a round of fresh new strategic initiatives.
The Outlook Before Priceline
During Bank of America's annual technology conference held on June 4 in San Francisco, OpenTable Chief Financial Officer Duncan Robertson looked optimistic as he highlighted OpenTable's recent decision for the first time to invest in consumer acquisition marketing to drive seated diner growth and the company's nascent mobile payments offering. The CFO said mobile payments has the potential to encourage higher user engagement on the OpenTable app and attract new users, according to a Bank of America note.
OpenTable indicated earlier this year that it plans to spend $9 million in consumer marketing in the U.S. and internationally in 2014, ramping up after spending just $1.7 million for each region in the first quarter. Up until 2013, the company invested a negligible amount of money on advertising, relying on growth through viral and word-of-mouth marketing.
The company also expects to roll out its mobile payments solution to 20 cities in 2014. Robertson said if the payment initiative achieves some scale, the company may be able to negotiate lower credit card fees to add incentive for restaurants to join the program.
Following Robertson's comments about the benefits of consumer marketing, Bank of America analysts said they now have increased confidence that OpenTable's seated diner growth will accelerate sequentially in the second quarter. They have an $87 price objective for the stock for next 12 months, up from the $70 level.
Prior to Friday's announcement, analysts were bullish on the stock. Telsey Advisory Group analyst James Cakmak had a 12-month price target of $91 for OpenTable, saying it makes sense for the company to begin spending money on advertising as it starts to roll out the next stage of what the dining experience is going to look like -- and that's mobile payments.
"The reason why I'm bullish on OpenTable most of all is because of this mobile payments opportunity, because what it's going to do is transform the way diners interact with servers during the checkout process," said Cakmak. "If there's a little bit of money behind it, I don't have a problem with that."
The payments system could, of course, improve convenience for diners, who would no longer have to wait for the server to bring the bill. They might also like the efficiency of being able to manage the entire restaurant transactions process from one location, from reservations all the way down to payments. Furthermore, it would provide the opportunity to split the check if diners are going to a restaurant as a group.
That could help drive OpenTable app downloads for those who want that functionality, thereby fostering user engagement. The ease of the payments system could also speed up table turnovers for the reservation-taking restaurants, which would help them run their businesses more efficiently especially during peak lunch hours.
With North America EBITDA margins greater than 50 percent and no imminent threat to its strong brand name and powerful network of reservation-taking restaurants in the region, OpenTable's dominant competitive positioning and leadership in electronic booking looks very much secure despite losses internationally.
In recent months, there's been growing speculation that OpenTable's market share is under threat by cheaper electronic booking systems, as punctuated by Yelp's (YELP) acquisition of SeatMe and the May launch of the no-fee-required Yelp Reservations service incorporating SeatMe technology. Currently OpenTable charges restaurants a monthly subscription fee of $199, a one-time installation fee of $650 and recurring coverage charges of $1 and $2.50 per cover. By comparison, Yelp's SeatMe charges a $99 monthly subscription fee with no installation nor charge-per-diner fees.
While Yelp itself has publicly touted the cost benefits of its booking services over OpenTable's, it's becoming a well-known secret that Yelp is not trying to take over or encroach on OpenTable's territory. The two remain strong allies. OpenTable's main focus has been on the 35,000 core reservation-taking restaurants in North America; the very reservation-heavy ones that need servicing. With SeatMe and Yelp Reservations, Yelp has been going after the longer-tail or non-core reservation-taking restaurants and just providing the booking capability as an additional service for advertising on its platform.
Yelp's key focus continues to be forging relationships with every local service and product vertical out there. At its core, it remains a broker between consumers and businesses including OpenTable, without the end-to-end solution of actually servicing the businesses.
"When you think about the low-cost competition, you know the guys that can undercut them on price, you have to ask yourself, if you're a restaurant, where are the diners?," says Cakmak. "The diners are with OpenTable."
OpenTable still has a great amount of seated diner penetration potential, thus minimizing the correlation between economic headwinds and consumer health to the outlook of the company. Even as the established leader in restaurant bookings in North America, it's only penetrated 19 percent of North America market. In the U.K., it's only entered 5 percent of the market. Aside from Yelp, the other players that have been moving into the space include Livebookings, Eveve, and Groupon Reserve, all of which Morningstar consumer equity strategist R. J. Hottovy says have not created much of a dent in North America.
One caveat that comes with the growth outlook for OpenTable is more and more people are using restaurant-delivery services such as GrubHub (GRUB), which could eventually divert traffic away from restaurants. "That's not going to be good for OpenTable," comments Hottovy.
The other caveat is the risk of slow mobile payments adoption. That could happen for a number of reasons: There's a lot of competition in the mobile wallet space, including from players such as ISIS, Google (GOOG) Wallet and MCX. Also, restaurants may view the presentation of the check as part of the service experience and a chance to upsell, and therefore be reluctant to join OpenTable's mobile payments plan. Furthermore, processing fees for the mobile payment options are higher, and it remains to be seen whether OpenTable would be able to achieve enough scale to negotiate them lower. Bradley Safalow, the founder and CEO of PAA Research, said OpenTable's mobile payments initiative is "a classic solution without a problem."
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