On Friday, Priceline (PCLN) announced it was buying OpenTable (NASDAQ:OPEN) for $2.6 billion or $103 per share in an all cash deal. There are a number of reasons why I believe this is a smart move for PCLN.
Taking OpenTable Global
Currently, most of OpenTable's business is in the U.S. Comparably, PCLN has a more global business with a lot of strength outside of the U.S. I believe PCLN will be able to leverage its international expertise to help OpenTable grow in key international markets. The result should be significantly increased revenue and earnings at OpenTable.
Dynamic Pricing With OpenTable?
I believe one of the biggest opportunities that exists today is for dynamic pricing in the restaurant business. In my opinion, there should never be a restaurant that always has a two hour wait. While this is not the case at most restaurants, a number of the most popular restaurants in big cities such as New York City, Washington D.C., San Francisco, and Boston often have significant waits at peak dining hours. If menu prices were to adjust upward or downward depending on the time of the reservation, restaurants would be able to command higher prices at peak times and offer customers lower prices at non-peak times. The result would be increased revenue for the restaurant. This is the strategy that is already employed by airlines and hotels through PCLN. For example, a flight from any major city in the northeast to Florida would, on average, likely be more expensive in the winter than the summer. The same flight would be priced most highly around the holidays. This is just one example of dynamic pricing. The same concept also applies to hotel rates. What I am getting at is that if there is significantly more demand for tables between 7 and 8 PM than 5 PM, then the restaurant should charge different prices. The combination of OpenTable's existing customer base and PCLN's experience with dynamic pricing makes dynamic pricing in the restaurant business a real possibility.
OpenTable Differentiates Priceline From Rivals
Another reason why I like PCLN's move to acquire OpenTable is that it will help differentiate PCLN from its peers, Expedia (NASDAQ:EXPE) and Orbitz (NYSE:OWW). Right now, for many customers there is little difference between what you can do with the major online travel providers. When comparing rates between Expedia, Priceline, and Orbitz, the prices are often the same. However, with the addition of OpenTable, PCLN will have the ability to offer special dining deals that rivals cannot offer.
OpenTable Trading Above Offer Price
OpenTable is currently trading above the $103 price that PCLN offered. Unfortunately for PCLN, this means that the market thinks it is highly likely that another buyer might step in. Given the potential value of the OpenTable platform, I would not be surprised to see a number of bidders emerge including Google (NASDAQ:GOOG), Yahoo (YHOO), and Expedia. PCLN will likely be forced to raise its bid significantly if it wants to acquire OpenTable. That being said, for the reasons already mentioned in this article, I believe PCLN has the most to gain from buying OpenTable and will be able to close the deal at a higher price.
What is OpenTable Worth?
At this point, all traditional valuation metrics are of little use when trying to determine what OpenTable is really worth. OpenTable's PE ratio or price to cash flow does not matter. Potential buyers are buying an idea, a platform, and a brand. Due to this, and OpenTable's relatively small market cap of $2.48 billion, the final deal price could be significantly higher. It is easy to argue that OpenTable, as a concept, is worth over $3 billion. Maybe it's worth $3.5 billion. I don't know. What I do know is that smart money appears to be betting that a higher offer is likely, and I can't disagree.
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