Late Wednesday, hotel and travel site Expedia (EXPE) announced that it had reached an agreement to buy "alternative accommodation" site HomeAway (AWAY) for $3.9 billion. While this is an attempt to fill a hole in Expedia's strategy, this is a risky deal since both companies are losing market share to disruptive startup Airbnb. I believe the deal will wreck the combined company's margins.
Expedia agreed to pay $10.15 in cash plus 0.2065 shares for each HomeAway share. The total price tag works out to $3.9 billion. The deal is an 18% premium over HomeAway's last closing price of $32.04. Expedia has been keeping an eye on the alternative accommodation market for the past few years. The company has been building a relationship with HomeAway for the last two years. Expedia has been listing HomeAway's vacation rentals and second-home listings next to its hotel listings. Buying HomeAway allows Expedia more control over the market for apartments and vacation homes.
Expedia's listings are mostly hotels, and the deal should help it compete with vacation-based websites like Priceline (PCLN) and TripAdvisor (TRIP).
But this doesn't solve HomeAway's largest problem, which is its mixed listing environment. HomeAway started out as a subscription site. Property managers and owners paid a fixed monthly subscription to list their rentals. Owners could pay additional fees to feature their property on the site. Bookings flooded in and property owners made a lot of money.
Then privately held Airbnb came along and offered property owners a model called pay-per-booking. Instead of paying a subscription fee, property owners could list their rental for free and only pay a fee if the place rented. This commission-based model proved very popular with property owners since they would only pay if their unit actually rented. In addition, property owners have between 24 and 48 hours to reject any reservation, so the commission model carries no risk. List your property for free and, if it rents, you can decide if you want to take the money.
HomeAway has been struggling to make its pay-per-booking model work. When the company reported its third-quarter results in late July, HomeAdvisor had more than 300,000 commission only listings. Subscribers are upset because they are paying fees whether their property rents or not and the site is featuring properties that only pay commissions. As users have become dissatisfied, churn has increased.
Now, throw Expedia into the mix. HomeAway and Expedia have been working together to battle Airbnb, which continues to take market share, since its business model is more attractive to property owners and there is no conflict between subscription users and commission users. Airbnb doesn't have a mixed platform, so all the properties it features on its site only pay commissions.
With the HomeAway acquisition, I'm afraid Expedia's margins will come down. Hotel bookings have a much higher commission rate. Hotel commissions are between 15% and 18%, while pay-per-booking commissions are between 5% and 6%.
Expedia's management believes that it can drive more revenue by putting HomeAway's listings on its own hotel and travel platform. HomeAway won't be integrated into Expedia and will be allowed to run independently.
While Wall Street will love this deal (what deal doesn't the Street love?), I see significant risk. While the companies are trying to figure out how to monetize their platform, Airbnb will continue to plug away without any distractions, and Expedia's margins may come under pressure during the transition.
I would stay AWAY.
