Priceline pays highly to reserve OpenTable

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SAN FRANCISCO (MarketWatch) — Hitchhikers and railroad-riding hobos aside, Inc. Chief Executive Darren Huston was pretty spot on when he made what might just be the understatement of the year Friday.


“Travelers are diners,” Huston said. And if you’ve ever stayed in a Holiday Inn Express and gone downstairs for the free breakfast buffet, you have certainly seen a fair share of travelers dining.


But there’s more to travelers filling their gullets than free biscuits and gravy at a discount hotel chain. Which is why Huston made that statement in announcing that Priceline PCLN, +0.98%  decided $2.6 billion would be the right price to pay for online restaurant reservation company OpenTable Inc. US:OPEN That deal values OpenTable at $103 a share, a 46% premium to OpenTable’s Thursday closing price of $70.43 a share.


Hey, it’s one thing to tip heavily on good service at a nice restaurant, but …46%? Even the swankiest and hippest eating joints in OpenTable’s food-obsessed hometown of San Francisco generally charge only an 18% gratuity on parties of six or more.


But, with its catalog of more than 31,000 restaurants, and claims to seat 15 million diners a month, OpenTable may just be worthy of that Priceline premium.


Here’s Cantor Fitzgerald analyst Naved Khan’s take on it: “While certainly not cheap, the deal makes strategic sense to us, given the significantly expanded addressable opportunity from OpenTable’s international expansion as well as the potential synergies from cross-selling traffic across the two properties.”


And Priceline is all about cross-selling its traffic.


“We view this acquisition as a natural extension of Priceline’s product offering,” said Mark Mahaney, of RBC Capital Markets. “Cross-selling [and] offering restaurant reservations to travelers makes a lot of sense.” He also called the deal “likely part of Priceline’s move into offering a much broader range of local e-commerce services to what is a very attractive customer set.”


While Priceline is still probably best-known for tracking down airline deals via its name-your-own-price option to air travel, its hotel business is now its main source of sales and success. A visit to Priceline’s site immediately throws at you the option to search for big deals on hotels, and a summer hotel sale. Scroll down a bit, and you get a list of featured hotel destinations. When Priceline reported its first-quarter results in May, it said its hotel business booked 83.4 million room nights during the quarter, a 32% increase from a year ago.


And its mostly that success in the hotel market that has helped Priceline build up a reserve of cash large enough so that, maybe, OpenTable.was able to name its own acquisition price and Priceline didn’t blink at the fee.


“They have $2.6 billion cash because they’ve been hugely successful in the hotel reservation market, particularly in Europe, with this a lucrative opportunity if you execute well. They also bolstered their resources by raising some debt last year,” said James Cordwell, of Atlantic Equities.


As is the case with many acquisitions, the company that is doing the buying saw its stock price take a bit of hit Friday. In the case of Priceline, that was a loss of 2%, which sent the company’s shares down to…$1,201.


That’s right. In case you missed it, a share of Priceline costs a little more than 12-hundred bucks. Kind of makes that $1,000-a-share level it crossed back in September 2013, when it became the first S&P 500 SPX, +0.36%  stock top the $1,000 mark, look like a pretty good deal in retrospect.


But, even with all of its success in the online travel market, and now its expansion into restaurant reservations, is Priceline worth $1,200 a share? Even Apple only allowed its share price to get to around $650 a share before it enacted a 7-for-1 split less than two weeks ago


“The question is not whether the stock is worth $1,200, but is Priceline worth $60 billion [in market capitalization] and should the company issue more than the 50 million shares currently in circulation,” Cordwell said. “Some kind of share split would make the stock more accessible for retail investors, but it wouldn’t really change the company’s value.”


Priceline, however, feels that OpenTable will add to its value and drive even more reservations from more travelers. And with that, we can probably look for William Shatner and Kaley Cuoco to be dining out in the next round of Priceline TV commercials.

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