Quick Take

Only a few months after becoming a publicly listed company, leading travel search company Kayak (KYAK) announced its acquisition by leading online travel agency Priceline (PCLN) in November 2012.

The two companies signed a definitive agreement for a stock and cash deal of $1.8 billion, with Priceline agreeing to pay $500 million in cash and the remaining ($1.3 billion) in equity. Priceline will pay Kayak shareholders $40 per share, which marks approximately a 54% premium over Kayak's initial listing price of $26. The transaction is expected to close in the first quarter of 2013, and Kayak will operate as an independent unit within Priceline.

Kayak believes that Priceline's global reach will accelerate its growth trajectory in international markets and help it develop as a company. Kayak receives about 80% of its revenue from the U.S., and has somewhat struggled to retain its foothold in the international markets. Google's meta-search initiative is considered to be a growing threat and Kayak does not have enough international presence to take on Google's global presence.

Earlier this month, Kayak announced the appointment of former media director for Sony Europe, Dominic Fawcett (who was previously media director for Sony Europe), as its European media director, in line with its strategy to develop its European business. Fawcett's hire follows the recent appointment of ZenithOptimedia to manage the company's traditional media planning across Europe.

As the U.S. online travel market nears saturation, the rising opportunities in the European travel market makes it an attractive destination for online travel companies. We feel that leveraging Priceline's marketing expertise and rapidly expanding European footprint can fuel Kayak's strategy to develop its European business.

European Travel Market Offers Immense Growth Opportunities

Despite the ongoing debt crisis, the European online travel market accounted for 37.7% of the global market and grew by 9% during 2011-12. In comparison, the U.S. market increased by 4% during the same period. Online travel sales in Europe are estimated to reach approximately $180 billion by 2016.

Here are some of the key trends that will drive growth in the European travel market:

Fragmented Hotel Market: The hotel market in Europe is much more fragmented, with smaller, independent lodgings compared to the U.S., where the market is dominated by large hotel chains. Hotel chains are more likely to offer online bookings through their own websites, while OTAs (online travel agencies) are more appealing to small, independent hotels outside the U.S. Due to the splintered nature of Europe's hotel industry, the need for standardization provides immense growth opportunities for online travel companies. On an average, over three out of ten hotel rooms in Europe are booked online, and that proportion is expected to increase in the future.

Increasing Online Penetration: The relatively low Internet penetration in Europe (63.2%) as compared to the U.S. (78.6%), presents a huge upside to the online travel industry, as customers increasingly access the Internet for travel planning.

Growth Opportunities in Eastern Europe: The penetration of OTAs in Eastern Europe is still comparatively low and the market continues to be dominated by supplier websites. However, as per PhoCusWright, the OTA market is increasing by more than 25% annually, increasing their share of air tickets and hotel bookings. It estimates OTA travel bookings share to increase to 10% in 2013, compared to 7% in 2011. Additionally, while online bookings contributed only 16% to Eastern Europe's total travel market, the contribution is expected to rise to 23% by 2013.

Priceline Can Add Value to Kayak in International Markets

While Kayak has struggled to expand its foothold in the international markets, Priceline's gross bookings from international markets have gone up from 55% in 2007 to around 82% in 2012. With the acquisition of Booking.com, Priceline has managed to significantly expand its presence in Europe and key European markets represent around 60% of its total room nights booked. Booking.com accounts for 6% of the European hotel market, and we expect the market share to increase in the future.

Though Kayak and Priceline do not plan to launch shared platforms, we feel the former can leverage on Priceline's expanding presence in international markets, especially Europe. We expect Kayak's international revenues, which currently stand at $17.3 million, to continue growing in the future.