Is Expedia a Buyout Candidate?

01/10/2011 12:01 am EST


Igor Greenwald

Chief Investment Strategist, MLP Profits

The cheaper of the two best-known online travel portals enjoys a surge on hopes of an ownership change—but could pay off even if Barry Diller stays in charge, says’s Igor Greenwald. (Nasdaq: PCLN) has the $430 shares, the name-your-own-price goldmine and William Shatner’s endearingly shameless antics. But it wasn’t the darling of call option buyers Tuesday.

That distinction went to online travel rival Expedia (Nasdaq: EXPE), which saw its highest option-trading volume in more than a year. Bullish calls swamped bearish puts by a ratio of 27 to one, according to Bloomberg.

Expedia shares have bounced since holding support at their 200-day average a week ago to halt a steep four-month slide. Inevitably, for this perennial buyout candidate, the rise has fueled rumors that the company’s ship has finally come in.

This wouldn’t be a bad time for that to happen: A month ago, Expedia chairman Barry Diller and John Malone of Liberty Media resolved a long-running feud by disentangling most of their joint ventures—with the notable exception of Expedia, in which Liberty maintains a 24% stake while ceding operational control to Diller. This is not an arrangement that has worked out well for the two tycoons at Diller’s Interactive Corp (NYSE: IAC), nor elsewhere.

The incomplete corporate divorce has furthered speculation that Expedia will be the final shoe to drop, once the tycoons figure out how to maximize their payouts.

A leveraged buyout would certainly be one way to make that happen, notwithstanding Diller’s persistent denials.

Expedia is currently priced at 13 times estimated 2011 earnings and nine times cash flow, versus 24 times forward earnings and 27 times cash flow for Priceline, which gets the premium for its speedier growth rate and loftier margins. By some measures, Expedia is by far the better value. For example, over the last 12 months it’s generated more revenue and cash flow than Priceline, which the market considers almost three times as valuable.

With travel stocks pacing market gains so far this year, Expedia’s reasonable earnings multiple looks attractive whether or not a buyout materializes. The company has assets that could fast-track growth, including the Chinese travel subsidiary eLong (Nasdaq: LONG) and TripAdvisor, whose trove of “sticky,” user-generated travel content is growing steadily more valuable.

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