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Australia’s biggest provider of online accommodation bookings is trading about 8 percent lower than the A$3.30-a- share bid from Bellevue, Washington-based Expedia, offering a better return than almost all of the deals in the region. The Australian Competition & Consumer Commission is determining whether the A$703 million ($629 million) deal would hand Expedia enough market power to charge local hotels higher commissions. A verdict is due Oct. 2.
Competition is healthy enough to allay concerns raised in the regulator’s preliminary report, JPMorgan Chase & Co. said, noting that traditional bricks-and-mortar travel agents also generate business online. After reviewing the deal, the commission will probably end up clearing it, especially if Expedia offers to cap hotel commissions in Australia, said Rivkin Securities Pty.
“Based on what I think the risks are, it’s trading lower than it should,” Shannon Rivkin, special-situations analyst and director at Rivkin, said by phone. “There’s a strong likelihood the deal is going to get approved.”
Representatives for Expedia, Wotif and the ACCC, as the watchdog is known, declined to comment on the prospects for approval.
Expedia, whose brands include Hotels.com and Hotwire.com, agreed July 7 to buy Wotif, offering shareholders A$3.06 and a special dividend of 24 cents a share, which would be paid by Wotif. Wotif stock surged 25 percent in Sydney that day to A$3.29.
The shares reversed course on Sept. 4, falling after the ACCC said it would investigate whether the deal would weaken competition in Australia. Expedia, which has an $11 billion market value, charges hotels lower commissions in Australia than in other countries and competition from Wotif might be one of the reasons, the ACCC said.
Shares of Brisbane, Queensland-based Wotif have continued their retreat since then, closing yesterday at A$3.03.
The spread between the stock price and Expedia’s offer has left traders with an opportunity to make about an 8 percent return including the special dividend, if the takeover gets approved, according to data compiled by Bloomberg. It’s one of the five biggest potential returns among this year’s pending deals of at least $500 million in the developed part of Asia.
“If they were putting a high probability of risk it wouldn’t go ahead, it would be a lot lower,” John O’Shea, an analyst at Bell Potter Securities Ltd. in Melbourne, said by phone. “The market’s saying they still think it will go ahead.”
Competition would still exist even if the deal goes through, said Daniel Mueller, a Sydney-based analyst at Morningstar Inc. New sites are widening the choice for consumers scouring the Internet for hotels, he said.
“There are a lot of new technologies emerging and there are no real barriers to entry in the online space,” Mueller said. “Over the long term, there are lot of mitigating factors and a very strong case as to why the takeover should go ahead.”
Wotif may have to raise commission rates anyway as it struggles to lift profit in the face of bigger rivals such as Norwalk, Connecticut-based Priceline Group Inc., which offers its namesake website as well as Kayak.com in Australia, he said.
Net income at Wotif in the year ended June fell 15 percent to A$43.2 million, and is projected to drop 3.5 percent this fiscal year, according to analysts’ estimates compiled by Bloomberg.
“That’s not because it isn’t a competitive market,” John Maysles, an event-driven analyst at Elevation LLC in Los Angeles, said by phone. “That’s precisely because it is. It doesn’t make much sense for the regulator to reject this deal.”
The grip that intermediaries such as Expedia and Wotif have on hotels is likely to weaken, whether the two combine or not. Services including Google Inc.’s Hotel Finder let travelers deal directly with hotels instead of working through a middleman.
In addition, Flight Centre Travel Group Ltd., Australia’s largest travel agent, booked 27 percent of the country’s retail travel market in 2012, Euromonitor International said in a report last year. With 2,500 shops, the travel agency also now generates 50 percent of its enquiries online, Armina Soemino, a Sydney-based analyst at JPMorgan, said in a Sept. 4 report.
The definition of the online hotel accommodation market in the ACCC report is artificially narrow, partly because it excludes retailers such as Flight Centre, said Rivkin at Rivkin Securities. Either way, if Expedia offered to cap commission increases in Australia for five years, that might be enough to win over the regulator, he said.
Still a Bet
Even with concessions, risks to the deal remain. The ACCC can be more conservative than investors, making it difficult to predict the outcome of investigations, said Mueller at Morningstar. The regulator also has said its current timeframe for a final decision might change, which could affect traders’ ability to profit from the spread.
For those investors betting on the deal, the ACCC’s not enough of a deterrent, said O’Shea at Bell Potter.
“They are putting a little bit of risk around it,” he said. “The general consensus is it will go through.”
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