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Shares of Expedia (EXPE) fell 2.2% in Friday's trading session after the online travel agency announced that it has agreed to acquire a majority stake in German based Trivago, in order to boost its European operations.

The Deal

Expedia announced that is has entered into an agreement to acquire a majority 61.6% equity stake in Trivago. Expedia will pay a total of 477 million Euro for the stake, or roughly $632 million. This includes a 434 million Euro cash payment, while the remainder will be paid in Expedia's stock.

Trivago, which is a leading metasearch company, was founded seven years ago. It features search results of 600,000 hotels across a range of booking sites in many countries.

CEO Dara Khosrowshahi commented on the deal, "The Trivago team built one of the largest, fastest growing and most well known travel sites in Europe conducting more than 100 million hotel searches annually through a culture focused on developing great products, building a strong brand and promoting partner's businesses. These attributes closely align with our Expedia strategy and values and we are thrilled to have them join our portfolio."

For the full year of 2012, Trivago is on track to deliver approximately 100 million Euro in net revenue, or around $130 million. Through its cost-per-click revenue and business model, the company has doubled its revenues every year since 2008. The deal values the firm at roughly 8 times annual revenues.

Expedia expects the deal to be accretive to adjusted earnings per share in 2013.

Expedia anticipates to close the deal in the first half of 2013, pending regulatory and anti-trust approval.

Valuation

Expedia ended its third quarter with $2.36 billion in cash, equivalents and short term investment. The company operates with $1.25 billion in short and long term debt, for a net cash position of $1.1 billion. As such, Expedia has sufficient financial resources to acquire Trivago.

For the first nine months of the year, Expedia generated revenues of $3.06 billion. The company reported net income attributable to its shareholders of $273.4 million, or $1.96 per diluted share. The company is on track to generate annual revenues of $3.9 billion. Net income could come in around $350 million, or roughly $2.50 per share.

The market currently values Expedia at $8.0 billion, which values operating assets at roughly $6.9 billion. This values the operating assets at roughly 1.8 times annual earnings and 20 times annual earnings.

Expedia pays an annual dividend yield of $0.52 per share, for an annual dividend yield of 0.9%.

Some Historical Perspective

Year to date, shares of Expedia have more than doubled. Shares started the year around $29 per share and rose to highs of $63 earlier this month. The continued boom in the online travel sector boosted operating performance which drove shares higher, despite intense competition. Shares fell back slightly, currently exchanging hands at $59.50 per share.

Between 2008 and 2012, Expedia grew its revenues by more than 35% to an estimated $3.8 billion this year.

Investment Thesis

Friday's announced deal highlights that the online travel industry continues to consolidate. If Expedia fully consolidates Travigo, the company could boost its annual revenues by some 3.3%.

The deal comes at a price, valued at roughly 8 times annual revenues, which compares to a multiple of 1.8 times for Expedia itself. However the business model differs from Expedia as Trivago is merely a metasearch company, while Expedia is a online travel company.

In November, competitor Priceline.com (PCLN) announced the acquisition of Kayak Software (KYAK) in a $1.8 billion deal. That deal valued Kayak at roughly 5.5 times estimated annual revenues, valuing the firm at 60 times annual earnings.

I remain on the sidelines. Expedia has very strong cash balances and uses it to make bolt-on acquisitions, this time to boost its presence in Europe. As a result of the continued revenue and earnings growth, shares trade at a fair earnings multiple, with shares currently valued at 20 times annual earnings. I remain cautious, as I expect competition between online travel companies to intensify.

Source: Expedia - Shareholders Act Reserved To The Acquisition Of Trivago