Analysis: What Does the Kayak-HomeAway Deal Really Mean?

Kayak’s decision to start listing vacation rentals from HomeAway later this year has a lot of people thinking that the prospect of a Priceline Group acquisition of HomeAway is getting closer, but there is another school of thought that all the acquisition talk is overblown.

The Priceline Group brands, including Booking.com, Agoda, Priceline.com, Kayak, OpenTable, and Rentalcars.com, are run fairly independently but Priceline Group management certainly had to approve the Kayak-HomeAway tie-up because Booking.com competes with HomeAway and has emphasized vacation rentals as a vital supplement to hotels in recent years.

Still, whatever revenue Kayak eventually earns from installing a vacation rentals tab, which would include inventory from HomeAway and Booking.com, would be inconsequential for the Priceline Group, which clearly is focused on the growth of its signature Booking.com brand above all else.

Let Kayak Dabble With Vacation Rentals

Following this line of thinking, Kayak can play around with HomeAway and vacation rentals on the periphery yet it doesn’t signal a potentially closer relationship between Booking.com and HomeAway.

Brian Sharples, the HomeAway CEO, it should be pointed out, developed ties with Kayak when he was appointed to the Kayak board in January 2012, and served on it until 2013 when the Priceline Group completed its acquisition of Kayak.

We’ve have argued in the past that Priceline Group CEO Darren Huston isn’t a big fan of metasearch and that the Group’s decision to grow Kayak on a profitable basis only while Expedia Inc. has invested heavily in Kayak rival Trivago at a loss essentially shows that Kayak isn’t a huge priority for the Priceline Group — especially compared with the franchise, Booking.com. However, in the first quarter of 2015, Trivago notched $4.6 million in operating income on $119 million in revenue.

Consider that Kayak likely generates only about 5 or 6 percent of the Priceline Group’s total revenue. In the first quarter of 2015, the Priceline Group’s $146.7 million in advertising and other revenue, which includes advertising revenue from Kayak and restaurant reservations and subscription revenue from OpenTable, accounted for merely 7.9 percent of the Priceline Group’s total revenue.

If Booking.com had partnered with HomeAway and tested what an integration might look like, goes the theory, then that would have been a far more significant foretelling of a Priceline Group acquisition of HomeAway.

It remains to be seen if management of the Priceline Group, including of course, Booking.com, would be satisfied with HomeAway’s definition of an online bookable property since it still gives vacation rental owners 24 hours to decide if they want to confirm the online reservation. HomeAway will require all of its listings to be online bookable in this manner by the end of 2016.

But Booking.com, a technology-centric company, provides instant confirmations of its vacation rentals. There’s no 24-hour wiggle room, and the two models are very different.

The Other Side of the Story

The more mainstream interpretation of the Kayak-HomeAway partnership is that “Priceline showed incremental interest in expanding its relationship with HomeAway this week when it initiated a distribution relationship with the company,” as Piper Jaffray put it, and that Priceline is the leading candidate to acquire HomeAway. “Other potential acquirers exist, such as Expedia (who would enjoy similar synergies) and, less likely, TripAdvisor. While Airbnb has the capital flexibility and desire to dominate in higher-end vacation rentals, cultural differences could kill any potential deal.”

Piper Jaffray argues that HomeAway “under-indexes other listing services by 3-4x on fees” and that any online travel agency acquirer would focus on increasing HomeAway’s monetization.

Sharples of HomeAway argued along similar lines last week when he said the company is evaluating ways to increase its “take rate.” He pointed out that Booking.com receives around a 15 percent commission on vacation rentals, Airbnb gets 12-13 percent in fees from hosts and guests, and HomeAway generates fees of less than 5 percent.

Piper Jaffray argued that HomeAway, which closed at $31.28 on June 5, could get taken out for $40 per share and if “the acquiring company expanded the company’s [HomeAway’s] effective take rate by 290bps, the implied valuation would be 6x Enterprise Value/EBITDA, a very attractive price for the highest visibility vacation rental website on the Internet.”

Vacation Rentals by Owner

One factor arguing in favor of a Priceline Group acquisition of HomeAway is that HomeAway is much stronger than Booking.com in vacation rentals by individual owners, which is still the dominant part of the market and a lot harder to scale up than signing on property managers.

If Booking.com, Expedia or TripAdvisor want to eventually get comprehensive in vacation rentals then they really have to crack the individual owner segment. Sharples argues that it is a daunting task and that TripAdvisor, for example, gave up on it after trying for a few years.

Nothing Imminent

If the Priceline Group and Expedia indeed are the leading candidates to acquire HomeAway then no deal is likely imminent.

Why would Kayak sign a deal with HomeAway if Kayak’s parent company, the Priceline Group, were close to acquiring HomeAway?

And Expedia, which partnered with HomeAway to distribute vacation rentals a couple of years ago, hasn’t yet done much with the relationship and after acquiring Travelocity, Wotif and Orbitz Worldwide (pending), Expedia has way too much on its plate to pull the trigger anytime soon even if it wanted to.

Still, the Kayak-HomeAway partnership will be an interesting test for the Priceline Group, Expedia and any other potential buyer to observe.

Unlike Expedia, which buried HomeAway’s vacation rentals within Expedia.com hotel searches, Kayak apparently plans on listing vacation rentals within a much-more accessible vacation rentals tab.

That will be something for all interested parties to observe.