Podcast: Viator Spinoff Pros and Cons

Earlier this week Tripadvisor revealed that the company was planning to spin off its tours and activity brand Viator. Skift first focused on the the possibility of a split in early November and what benefits Tripadvisor would get from such an action.

For this bonus episode of the weekly Skift Podcast, senior research analyst Seth Borko and executive editor Dennis Schaal debate the merits of a more independent Viator.

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Episode Notes

Seth Borko: Hello everybody, welcome back to another episode of the Skift Podcast. My name is Seth Borko, I am a senior research analyst at Skift Research, and I’m joined by Dennis Schaal, the founding editor of Skift. Dennis, we are both big Tripadvisor fans, we cover the company a lot, and they just had some major news on their Q4 earnings call, Dennis. I know you wrote a story about it. Why don’t you kick us off and tell us what’s going on?

Dennis Schaal: They actually signaled that they were going to do something like this in November, when they said they were looking for options about how to better monetize, or how to get better shareholder value for both Viator and The Fork, which is the dining reservations platform. Tripadvisor announced this week that it filed an S-1 statement with the SEC to take Viator public. The way it would work is, Tripadvisor would maintain control of Viator, but Viator would become a public company. The reason it wants to do this is A, to increase shareholder value, and B, because it does feel like Viator has a different business model, and The Fork, than the rest of Tripadvisor. It’s more transactional than advertising, so it wants to give greater visibility into the worth of the company. At the same time, it’s conducting parallel talks with third parties about other options. Seth, go ahead.

Borko: Well, I was just going to say, just to sum it up, it’s basically starting the process of spinning off, it’s got this segment that they call their experiences and dining, it’s like you said, Viator, which is this day tour, tourism experiences, online travel agency, and The Fork, which is, they would hate that I use this comparison, but the OpenTable of Europe, and it’s been the growth engine of the company. Now they’re considering, “maybe we can monetize this or spin it off a little.” It’s interesting to me that they’re considering doing this, I know they’d forecasted it. I’ll give you my thoughts, I want to ask you if you think this is a good idea.

Schaal: Yeah, I think it’s a good idea.

Borko: You do?

Schaal: Certainly-

Borko: This is a debate, because I’m not sure it’s the smartest idea. I don’t know if I love it.

Schaal: Okay. Certainly there’s a lot of shareholder value in Viator that’s not being achieved, that’s for sure. What I’m questioning is, Tripadvisor, they’re saying that they have a two pronged strategy. Viator will be the standalone, sell tourism activities as a standalone business, and the Tripadvisor will sell tourism activities as part of a trip, like an OTA. There’s been such brand confusion about Viator. Tripadvisor has emphasized the Tripadvisor brand for tourism and activities at various times over Viator. I don’t really have any confidence that Tripadvisor can do this integrated strategy, and sell tours and activities successfully as part of an overall trip strategy.

Borko: Interesting. That a more fundamental question for the whole thing. I think they’ve done a pretty nice job of keeping Viator independent. They acquired Viator, I think it was $200 million. Do you remember exactly when they acquired it? It was a while ago now.

Schaal: It was 2014 for $200 million.

Borko: 2014 for $200 million. We’re coming on eight years, nearly a decade of Viator. They’ve kept it mostly independent. I think they even said that even to this day, the majority of Viator’s bookings come through viator.com, not through tripadvisor.com. I think you are spot on that they have struggled to, in my opinion they’ve struggled to integrate. When you book an experience on Tripadvisor, it’s not entirely clear that you’re always booking through Viator, it’s not even necessarily clear that Tripadvisor will book you experiences, but there is a synergy there that I like, because Tripadvisor has so many more experiences listed, because they have all the user generate content and the reviews.

Borko: Tripadvisor will have usually every experience in a destination, but not every experience will be bookable via Viator. I definitely think that causes some confusion there, but I think there’s a nice synergy to having Viator as part of the Tripadvisor larger brand. One of the things we should talk about is, they’ve called this potentially a sub IPO. We don’t have any details yet, but speculating that Tripadvisor might retain a large portion, if not majority control of Viator, even after the IPO spin out. Maybe they’re not going to be fully disentangled, I don’t know. It’s an interesting thing to think about.

Schaal: I think they said that they want to maintain control of Viator, that it’s a strategic asset.

Borko: It’s also their main growth driver, right Dennis? For years now, Tripadvisor has been talking about, one, they want to diversify away from pure meta search, because Google’s pressuring that business. And two, they want to show positive growth, and the way they’ve been diversifying and growing, it’s been this experiences and dining segment. That’s what I was alluding to earlier, where I was a little surprised. I know they’d foreshadowed it, but I was a little surprised that they want to spin it off.

Borko: You are correct, you’re taking the executive role here Dennis, where it’s about unlocking shareholder value that’s not being recognized. I’m a little surprised to see them taking this piece that has been accomplishing in these two strategic goals of growth and diversification, and putting it into its own little box.

Schaal: Well, let’s talk about this piece, because they also announced that at the same time that they filed to take Viator public, they’re also pursuing parallel discussions with third parties. What other options does Tripadvisor have for Viator? Could they possibly partner or sell it, and maintain some kind of interest in it?

Borko: Well-

Schaal: Could they, yeah.

Borko: The obvious sale is private equity, right? I think that must be what they’re referring to when they say, “we’re looking to IPO the company, but also we’ll entertain other options, other offers.” What they’re basically saying is, “if you’re a private equity company with a pretty big war chest, we’d like to talk to you, reach out.” That’s like a putting a for sale sign in your front yard. I think that’s clearly the other option, and they’re is some very large institutional PE and also venture capital interest in the space.

Borko: We haven’t discussed their competitors much, but GetYourGuide and Clique are probably the two largest competitors in the day tour space. By the way, so is Expedia. Expedia does have a tourism and activities business, and any of those would be, certainly a private equity company could buy, or a competitor would be really happy to buy Viator and merge into their business. It would probably double them in size overnight.

Schaal: People have talked about this, and it’s unlikely that SoftBank, which is an investor in GetYourGuide and Clique, could buy Viator and combine the three companies. I don’t think that’s going to happen. I wonder, do you think there’s any potential for some kind of Expedia partnership with Tripadvisor in tours and activities, because like you said, Tripadvisor is big in tours and activities, they have a history together, Expedia supplies a lot of vacation rental inventory to Tripadvisor. Do you think there’s any potential there?

Borko: In a world where we’re just gaming, if I was an investment banker who was covered in Expedia, I would pitch Expedia the deal. I’d say, “hey, let’s try it.” If I was Expedia, would that I accept that pitch? I don’t know if I would. We’ve talked about this too Dennis, and you’ve covered this a lot. I think Expedia is just, they’re selling off a lot of their ancillary businesses. They just sold the Egencia, they’re getting back to their core, just hitting singles and doubles and doing a really job of it, is how I see it.

Borko: For them to then go out and make a major M and A, because this would be a very big deal. They have close ties in the past, Tripadvisor is an Expedia spinoff. By the way, when we talk about these sub IPOs, the only major example that comes to mind is the Trivago/Expedia sub IPO. They have similar philosophies, similar management, lots of historical ties. I think you can convince yourself it makes sense, but I’m not sure I actually see Pete Kern doing that.

Schaal: You’re totally right that it goes totally against the grain of what Expedia is trying to do right now, simplify the company. It would be a complex acquisition. Where do you think, I know you have some data.

Borko: Yeah.

Schaal: Where do you think Viator stands these days in relation to GetYourGuide and Clique? I feel like Tripadvisor has, in some ways squandered Viator’s position. It was the unquestioned market leader years ago. There have been a lot of things happening, not all Tripadvisor’s fault, market forces and everything. What do you see as Viator’s position these days?

Borko: We did a deep dive into Tripadvisor in September of 2020. Things changed a lot in the last year, but it was still during the pandemic, so it’s still somewhat relevant. We counted up how many listings all of the major tourism activities platforms had. Viator, we counted just shy of 400,000 listings, 395,000 listings. Expedia, we counted 210,000 listings. GetYourGuide 60,000, and then Airbnb 30,000. Clique, it was hard for us to tell exactly, but we think they’re around the same level as Airbnb, in that 30,000 range.

Borko: What that means is that Viator is the largest online travel agency in the tourism activity space, the day tour space, it’s a huge deal. This is a fast growing market, it’s one of the largest markets that’s still mostly offline. The switch to online is happening quickly, only a more dramatic switch to online because of the pandemic. They have number one market share, especially in terms of suppliers and listings. As we all know, one of the hardest things about building an online travel agency is getting suppliers. It’s a real crown jewel asset. It’s a real powerful asset.

Schaal: Well, I’m sorry.

Borko: Stop me from rambling if I am, but I agree with you about squandering the lead a little bit. We also did this proprietary analysis to Skift, where we counted up how many listings each site had in the 100 most popular vacation destinations in the world.

Borko: We’ve done this a couple of times now, and when we did it for the first time in 2018, if you just looked at the top 100 destinations, what we found was Viator had four times the listings of its next closest rival. Today, it has just 25% more inventory than its next closest rival. It’s this two pronged thing. One, they are the largest, they are the crown jewel, they have the most suppliers. But just in 2018, just a couple of years ago, they were standing heads and shoulders above all of their peers. Today it a much, much, much tighter race.

Borko: Maybe a little bit of tortoise and hare there, where you think you’ve got this huge lead to start, but if you nap for a year or two, if you take a quick break, you’ll be shocked at how quickly your competitors catch up to you. By the way, speaking of capitalization, they’re all very well funded. GetYourGuide just raised more debt, Clique just raised more equity, and the idea that Viator is going out to raise some capital to fuel growth is not crazy,

Schaal: Seth, I wrote that Tripadvisor’s Q4 earnings call yesterday seemed like a sales pitch for Viator. One of the things the CFO said is, Tripadvisor has said this repeatedly over the years, that their tourism activities business has similar margins to what OTAs get when they sell hotels, he made that comparison. He said Tripadvisor in 2021 has taken share in the U.S. domestic market, where it hasn’t been strong in the past. It’s mostly been strong in English speaking countries, in cities. Why hasn’t Tripadvisor been, first of all, do you think that’s true about the hotel-like margins? Isn’t it a failure of Viator that it hasn’t been able to get more global than it is?

Borko: Well, all right. You asked me a couple of questions there. I’m going to try and disentangle a bunch of them. The first is about the margins of the experiences business. The answer there is a half and half. My understanding is that they can earn hotel-like margins, that is correct, on a percentage term, which is important. I’m just trying to pull up some of the numbers. Historically this segment has managed to earn, let’s see, pre-COVID they were able to earn some pretty good margins. We believe it’s something like a 20% commission, on average, and we’ve seen that born out in the actual data.

Schaal: It’s a much lower price tag, you said, percentage-wise.

Borko: Yeah, you’ve got it exactly right, what I was alluding to, which is that the margins can be hotel-like, by which we mean 10% to 20%, 15% midpoint. On a hotel, you are booking usually multiple nights, usually at several hundred dollars a night. A 10% commission of a $400 ticket or a $500 ticket is a lot more dollars than a 20% commission of a tour for $40 bucks. Even though the dollar margins can be similar, you need to pump a lot more volume through the system to make similar EBITDA.

Borko: You asked about expanding internationally. I think you might have been a little mean here Dennis, call it a failure to expand internationally. I think everyone struggles to expand into a market where you don’t speak the language, and even to any foreign market is incredibly difficult, especially in the travel industry. We’ve seen Expedia travel struggle to do it, we’ve seen Booking struggle to do it, we’ve seen trip.com struggle to do it, that’s just the reality of this game. That’s why in the hotel space, you have guys like Traveloco or Despegar or MakeMyTrip, who succeed precisely because they speak the language both literally and metaphorically. I don’t know if I would call that a failure. It’s an opportunity, and it’s a tough not to crack though.

Schaal: Seth, the elephant in the room is that all this is taking place while Tripadvisor is looking for a new CEO. Steve Kaufer, who’s been the CEO for the company for 22 years, is leaving. It’ll be up to the new CEO to figure all this out. They also talked about their corporate strategy this will week, and they still really haven’t figured out anything for Tripadvisor plus. All this occurs in the context of a leadership void, and a further grappling for a viable strategy for Tripadvisor going forward.

Borko: I agree with you entirely Dennis. This is something that we’ve discussed in the past. I think you have some strong thoughts on this Dennis, you can keep going. I’ve talked enough on this podcast perhaps, but it does feel like Tripadvisor sometimes, they’re going to hate me for saying this, but they can get a little distracted by the shiny new thing, so to speak. I do feel like they definitely go, “we’ve got this great meta-search business,” then meta-search starts to slow. And they’re like, “we’ll do this great B2B business, and then we’ll buy these experiences businesses, and then we’ll launch a subscription B2C product.” I think they’re all really good ideas, and I think they can all be executed well. I think that the company has, and they would obviously disagree, but I think they’ve struggled to integrate all of those.

Borko: Now they’ve got these little bits and pieces of these potentially really powerful businesses. I think they need to decide which ones to really nurture. That’s a fundamental key question for the future of this business, I would agree. It’s going to be up to the next CEO, ultimately, to decide, “do we want to be a more focused business? Or, if we’re really going to commit to all these different lines of businesses, how are we going to raise the capital to do that, and to invest in that?” Which, by the way, the sub IPO might play perfectly into that and say, “let’s raise some money from some investors, and we’ll use that money to fund the Viator expansion, then we’ll use the internal cash flow to fund the Tripadvisor plus expansion.” Maybe that’s the strategy. The disparate parts of this business can be both a potential advantage, but I also think it can be a bit distracting sometimes.

Schaal: Seth, we’re out of time. Great thoughts, great conversation. It’s clear to me that the focus going forward with Viator is to make sure that it maintains its status as a shiny new thing and a growth engine for the company.

Borko: Yep. Agree Dennis, great chatting with you as always. I can’t wait to see what happens going forward. It’s exciting times for this business, and I’m excited to see Viator and Tripadvisor’s future, it should be good.

Schaal: Ditto.