The recent deals announced by Salesforce.com to acquire social media outlet Buddy Media for $689 million and Oracle to acquire Collective Intellect, a leading cloud-based social intelligence technology provider prove the appetite for social media outlets is expanding. We see large companies are looking to increase their social media and especially social mobile platform capabilities. We believe the pool of potential acquirers for Travelzoo Inc. (TZOO) has increased. We believe that stories reported by Reuters in April about TZOO mulling a sale are have merit if and only if founder Ralph Bartel is honest in his intentions to do what's right for all Travelzoo shareholders.
The current price to a strategic buyer really has no bearing on what a willing buyer is prepared to pay for such an enterprise. Different buyers with specific goals will pay different multiples of different metrics.
A telling statistic that may reveal that a deal maybe in the works is the reduced short interest in Travelzoo, although its still a very high ratio to the float with increasing "days to cover" number as well. Some former shorts must believe a deal is in the works.
Private equity shops, the most unlikely buyers for TZOO, will pay on a multiple of EBITDA. In this case, taking TZOO's most recent quarter, they generated $9.9 million in free cash flow, according to their presentation. Even the most aggressive PE shops would not view the current valuation as compelling for a buyout unless the growth story, like the one we have articulated in several articles, is clearly defined and cost savings can be quantified such that a $42+ share bid, something that might entice Ralph, looks like a stretch. So this is clearly the more difficult pool of potential bidders.
Strategic buyers, such as industry leaders, including Priceline.com (PCLN) and Expedia (EXPE), are also bottom feeders and probably are not the buyers because they know that Ralph would never want to sell at the current price levels. However they can always pay up for the stock using their lofty currencies as the main consideration for a deal.
The unusual suspects are companies like Oracle (ORCL) and Salesforce.com (CRM) who are getting serious about social media platforms as enabler for vertical integration of their customer bases. These may include floundering but cash rich WebMD (WBMD) or AOL (AOL), who have large customer bases and can benefit from the cash generating business model that TZOO has developed. But lets get more creative with companies who are in search of reinventing themselves: Sears Holdings (SHLD) or J.C. Penney (JCP).
Even further out of the box are disruptors such as Dish Networks (DISH) who wants to control the advertising dollars and give more value to their customers. They could easily create a streaming Travel channel that shows their advertisers products as entertainment. This sort of content popularity can be seen in Foodnetwork.com's Diners, Drive-ins and Dives.
There are many lucrative options for TZOO. An auction needs at least ten buyers in a pool for a great result. There are many more than ten potential acquirers of this company. The real question is what does Ralph Bartel want to do. We urge him to continue this auction process and make something happen to please the minority shareholders of Travelzoo.