Expedia Moves to Spin Off TripAdvisor

Apr. 8.11 | About: Expedia, Inc. (EXPE)
I’ve covered Expedia (NASDAQ:EXPE) recently and maintain that it's a cheaply valued company with strong brands and significant upsidfe. Yesterday Expedia laid out a preliminary plan to split into two separate public companies. This move has shaken up an otherwise underperforming stock by shooting it up over 14% in early trading. Here are some takeaways from the press release.
The first company will be the result of EXPE spinning off its TripAdvisor brand into a standalone corporation. The press release states that:

TripAdvisor, which will include the domestic and international operations associated with the TripAdvisor(R) Media Group, which includes its flagship brand as well as 18 other travel media and advertising brands.

TripAdvisor had recently come under attack in the earnings call because Google (NASDAQ:GOOG) is now giving precedence to its Google Places. However, TripAdvisor is an international brand that is growing rapidly outside of the U.S.; Google Places is primarily an American functionality. Spinning off TripAdvisor will let it focus on its niche and brand sustainability, while EXPE focuses elsewhere. The release continued to say that:

Expedia, Inc., which will continue to include the domestic and international operations of the company's travel transaction brands including Expedia.com®, Hotels.com®, eLong, Hotwire®, Egencia®, Expedia® Affiliate Network, CruiseShipCenters®, Venere, Classic Vacations® and carrentals.com.

So the transaction-based brands will remain strictly Expedia-branded. Basically, EXPE will split into two public companies; one will be advertising-based and one will be transaction volume-based. This will allow the strategies of the two companies to more accurately align with the challenges of those two strictly different revenue models. The transaction will be a distribution of stock:

It is anticipated that the transaction will take the form of a distribution of stock of TripAdvisor to Expedia stockholders or a reclassification of Expedia stock, with the holders of Expedia stock receiving a proportionate amount of TripAdvisor stock, in either case in a tax free transaction.

This will most likely be a tax-free transaction, and one that could be potentially lucrative for EXPE shareholders. The market must agree, given the uptick in stock price this morning.

The transaction is subject to a number of conditions including final approval by Expedia's Board of Directors of transaction specifics. In addition, it is expected that Expedia will seek stockholder approval of the transaction. The proposed spin-off is expected to be completed in the third quarter of 2011.

CEO Dara Khosrowshahi was recently quoted as saying that TripAdvisor was ready to stand on its own. It has grown and shown sustainability:

It is a matter of size, globalization and diversification of revenues. It is really ready to stand on its own ... Expedia's ability to compete is based on the quality of our service, our inventory and how fast we innovate.

Basically, Expedia doesn't rely on TripAdvisor for a competitive advantage and TripAdvisor has been hampered by association with the slower growth EXPE stock. More strictly media/deal plays like TravelZoo (NASDAQ:TZOO) trade at much higher multiples than the recently underwhelming Expedia. This move should allow TripAdvisor to be valued independently, despite the fact that astute analysts would have been cooking TripAdvisor into the value of EXPE all along.
Expedia has been coming under fire over the past few months, and like other stocks scorned by the market (Cisco (NASDAQ:CSCO), anyone?), change is afoot. I would imagine stockholders would approve of this proposal and that we’d see two new ticker symbols in the third quarter of this year.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.