We Won't Join Steve Cohen at OpenTable

 | Oct 25, 2012 | 11:30 AM EDT
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OpenTable (OPEN) popped earlier this week when Yahoo! (YHOO) was reported to be interested in acquiring the now $1 billion restaurant-reservation and diner-management company. Analysts were skeptical, but the market, which is convinced that new Yahoo! CEO Marissa Mayer must make a company-defining acquisition in the near future -- and why not a hot consumer and business services company? -- has persisted in keeping the stock higher.

Our thought at the time was that OpenTable wouldn't make sense as a purchase for Yahoo!, since the Internet portal would be better served by improving its core operations rather than branching out into services.

Billionaire Steven Cohen's SAC Capital Advisors, however, seems to think that there is something to the news (or that OpenTable is attractive as a stand-alone business). A Securities and Exchange Commission filing has disclosed that the fund as of Tuesday (the day after the Yahoo! speculation moved the stock price) owned just over 5% of OpenTable's shares outstanding, with a total of 1.2 million shares in its portfolio as of the filing.

At the end of June, SAC hadn't owned any shares of OpenTable; it had owned about 160,000 shares at the beginning of April, but apparently had sold those during the second quarter. We don't know how many shares the fund had bought during the third quarter or earlier this month. Bain Capital's Brookside Capital, meanwhile, had initiated a position of about 930,000 shares at the end of June.

OpenTable grew its revenue by 15% in the second quarter of 2012 compared with the same period in 2011, led by better numbers in North American reservations revenue. Subscription revenue, which consists of monthly fees paid by restaurants to use the Electronic Reservation Book service as opposed to the per-reservation fees that OpenTable charges restaurant customers, was also up; international reservation revenue was down slightly.

Higher costs caused earnings per share to decrease by a penny, to $0.25 from $0.26 in the second quarter of last year. In the first half of 2012, earnings per share grew from $0.43 in the same period in 2011 to $0.46 this year. OpenTable currently trades at 50x trailing earnings, which seems high for a company that's seeing very little earnings growth (and a decline in its most recent quarterly report). Wall Street analysts' expectations imply a forward P/E of 24; that would still be high for us, and it certainly depends on growth assumptions that are higher than what we're comfortable with.

Yelp (YELP) focuses on reviews, and Groupon (GRPN) focuses on charging restaurants and other local businesses to provide discounts, but we believe these two companies are probably the closest publicly traded peers for OpenTable. It should be noted that neither of these companies is profitable, yet they have higher market caps: Yelp is valued at $1.6 billion after a pop today from news of a European acquisition, and Groupon -- even after cratering from its IPO price -- has a market cap of $2.9 billion. Yelp is also expected to be barely profitable next year, though its revenue was up 67% in the second quarter from the same period in 2011. Sell-side analysts say that Groupon's growth will continue (revenue in the second quarter was 45% higher than a year earlier), and its forward P/E is 12. These companies may not be generating earnings yet, but they are getting much better top-line growth. We don't believe that we'd buy any of these three companies from a value perspective.

In terms of Internet companies being acquired recently, an important perspective for looking at a Yahoo! purchase of OpenTable, Ancestry.com (ACOM) got about a 10% premium in a $1.6 billion buyout announced on Monday. The company's current price, which is a small discount to the acquisition price, represents 21x its trailing earnings and 16x analyst expectations for 2013. Ancestry.com managed to increase its revenue by 18% in the second quarter compared with the second quarter of 2011, and earnings growth was actually a bit higher than that figure. So any acquisition of OpenTable would be at considerably higher multiples than where Ancestry.com would be taken private.

Therefore, any purchase by Yahoo! would require significant synergies between the two businesses. This is something that we just don't see. Yahoo! does have plenty of cash and cash equivalents to fund a deal, but it is primarily an advertising-supported Internet portal. OpenTable would represent a completely different business unit which would be unlikely to drive traffic to Yahoo!'s other properties, unless Yahoo! plans to nab a Yelp-like company in the bargain and try to launch a one-stop shop for restaurant reviews and reservations, an acquisition doesn't make much sense to us. (And note that Expedia (EXPE) apparently believes that reviews and reservations work better separately in the travel industry, given its spinout of TripAdvisor last year.) From a financial basis, Yahoo!'s trailing earnings are skewed because of Alibaba-related income, and it carries a forward P/E of 14.

We don't believe that OpenTable is a particularly good fit for Yahoo!, we don't think the company is a good value at its current price, and we certainly don't think that Yahoo! should pay a substantial premium over the current price (which could be nearly triple the trailing earnings multiple that Ancestry.com is being acquired at). Our impression is that Cohen and SAC are relying on Yahoo! to make a bad deal, and that's not enough for us to recommend following him into OpenTable at the chance for a 10% or so premium.

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