Expedia Inc (EXPE - Free Report) announced that its Board of Directors had given preliminary approval to a proposal to spin off its TripAdvisor business. If the deal is formally approved by the Board and shareholders, Expedia shareholders would either receive a proportionate number of TripAdvisor shares, or there would be a reclassification of Expedia stock, in either case a tax-free transaction. Expedia shares jumped 12.9% in response to the news.
The decision was probably already taken and the announcement made as soon as Google Inc got regulatory approval for its acquisition of ITA Software. This is because the addition of ITA may be expected to strengthen its Google Places offering, thus increasing competition for TripAdvisor.
Therefore, on the one hand, Trip would need to focus on its advertising business if it was to maintain position and grow revenues from parties other than Expedia. On the other, any market share loss to Google Places (or any other competitor) would not impact Expedia shares. It also enables investors to immediately cash in on TripAdvisor’s value by offloading the shares.
The transaction seeks to separate out the media business from the transactions-based business, with the entire media business coming under the TripAdvisor umbrella and transactions coming under the Expedia umbrella. This may not be such a good thing.
Online travel companies usually spend quite heavily on advertising either in the form of cost per click ("CPC") or cost per impression ("CPM"). Expedia is not likely to be different, since its advertising on Google has proved lucrative for Google.
However, because Expedia also had the media business, which generated advertising revenue even when transactions were soft, it was something of a buffer to significant margin contraction when revenues took a hit. Expedia stands to lose this benefit.
Expedia’s press release did not shed much light on the decision, so we need to wait for the earnings call for further color. For now, it seems to be a good thing for shareholders.
Expedia shares carry a Zacks #3 Rank, implying a short-term Hold recommendation.