Expedia would own 14 percent of online travel agency Despegar post-IPO. But contemplating the odds of an Expedia takeover is a "rompecabeza,” or a head-breaker.
Latin American online travel provider Despegar hopes to raise up to $332 million in an initial public offering on the New York Stock Exchange on Wednesday as it priced its shares at $26 a share. When it goes public, as expected Wednesday, it would list under the symbol DESP.
That’s at the high end of the price range it had planned for. It had said it hoped to raise $100 million in a securities filing this summer, but that number was a placeholder.
The IPO proceeds would include see the company getting a majority of it while a portion would go to existing shareholders
Investors seek to sell 4.1 million shares.
New York-based investment firm Tiger Global Management, one of the largest investors in Brazilian startups, controls Despegar.
Tiger is selling 3,356,020 of its shares in the IPO. The hedge fund would still retain at least a 43 percent stake in the company after the IPO.
Other shareholders, including Accel Partners Management, will sell about 700,000 shares and take the proceeds.
One shareholder is not selling, though: Expedia is keeping all of its shareholdings. It would own 14 percent of the company after the IPO. Despegar says Expedia provides hotel and other lodging products that it provides for all countries outside Latin America.
As for Despegar, two-thirds of the 12.7 million shares it is selling will generate direct proceeds that it said it would use “for potential acquisitions or other strategic opportunities.”
The idea of acquisitions is tantalizing for a handful of Latin America’s travel startups, a set of companies that includes Brazil’s Voopter and Colombia’s Viajala.com.co.
But the only acquisition many stock market investors seem to be interested in is a potential Expedia takeover of Despegar at a premium sometime in the future.
Yet that dream is unlikely to happen anytime soon. Expedia has agreed not to acquire more than 35 percent of the voting or economic power of the company’s outstanding shares within three years of the IPO unless it offers to buy out Tiger’s controlling stake after a grace period.
Despegar would have to prove that it can scale up and improve its margins.
Despegar’s ability to grow, in turn, depends on the performance of the largest economies in Latin America. In 2016, Brazil accounted for 41 percent of Despegar’s transactions and Argentina accounted for 25 percent of them. Those two countries may continue to face macroeconomic headwinds for some time.
Valuing the IPO
The market would decide tomorrow if Despegar’s pricing of $26 per share is reasonable.
Despegar’s debut — if it indeed gets the $26 per share it seeks — would be 1.4 times as much as its trailing 12-month sales. In comparison Expedia’s market cap is 2.2 times its trailing 12-month sales, while Priceline’s is seven times.
If you’re an investor who thinks that online travel companies have performed unusually well over time — with Priceline’s stock up 2,200 percent in the past decade, then you might think this is a good price to get in on the apparent ground floor of a “Latin American Priceline.” Or Expedia, that is.
To be sure, wherever there are potential rewards, there are risks. Despegar is unlikely to be as well managed and lucky as Priceline’s management team has been.
In the past two years, Despegar has swung from loss to modest profit in anticipation of an IPO.
This year Tiger installed a new CEO, and Despegar’s gross margin has steadily risen to a claimed 73 percent in the first half of 2017.
Despegar, which operates in more than 20 Latin American countries, is hoping for that rapid growth to continue.
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Photo credit: On Wednesday, the "Expedia of Latin America" -- Despegar -- hopes to raise more than $330 million in an initial public offering on the New York Stock Exchange. New York Stock Exchange