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Expedia Inc. (EXPE - Analyst Report) has agreed to acquire a 61.6% equity stake in hotel search website Trivago for a total of €477 million  or roughly $632 million.

The payment includes €434 million in cash and the remaining €43 million in Expedia stock. The acquisition is expected to close in the first half of 2013, subject to various regulatory and anti-trust approvals.

Trivago is a German search company that focuses on hotels. It compares more than 600,000 hotels across 140 booking sites in more than 30 countries and 23 languages. The company expects to exceed €100 million  (or about $132 million) in net revenue for 2012.

The acquisition will allow Expedia to further boost its corporate travel portfolio and expand into the European online travel markets. The deal will boost cost-efficiency measures and help Expedia pick up some market share.

Upon the completion of the deal, Trivago co-founders and management team will continue to operate independently from Germany. Management also expects the deal to be accretive to adjusted earnings per share in 2013.

We believe that it is important for Expedia to expand internationally, especially since the strategy has worked so well for its main competitor Priceline.com (PCLN - Analyst Report), which owns Booking.com in Europe and Agoda.com in Asia.

Expedia is one of the leading online travel companies in the world. In the third quarter, the company reported strong results, exceeding estimates on both the top and bottom line, helped by a stronger travel market all over the world, contribution from the VIA acquisition and strategic expansion in Asia. The company’s cash and short-term investments were $2.36 billion at the end of the quarter.

We remain encouraged by Expedia’s strong cash position and believe that the company has sufficient financial resources to acquire Trivago. We expect the business to continue on its growth path, due to the greater choice of accommodation that Expedia is now able to offer.

Also, recently, management declared a special cash dividend of $0.52 per share, which was in addition to the company's regular quarterly cash dividend of $0.13 per share. We believe that these special dividends speak about the company’s healthy cash position and are a good way of encouraging investor confidence as they return shareholder value.

However, the company will continue to face challenges from players like Priceline, Orbitz Worldwide (OWW - Snapshot Report) and Travelocity, as well as a growing number of local Chinese players that could make expansion in the fast-growing Chinese market difficult.

Currently, Expedia retains a Zacks #2 Rank (Buy).

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