I’m normally quite upbeat on leading online travel site Ctrip (Nasdaq: CTRP), but I really don’t understand the logic behind its new decision to sell 10 percent of itself to US peer Priceline (Nasdaq: PCLN). On the surface, the deal looks reasonable enough, pairing Ctrip’s strength in China with Priceline’s in the US and other western markets. But anyone familiar with Ctrip knows the company is fiercely independent and doesn’t work very well with other strategic partners. What’s more, this deal will put even more money into Ctrip’s already bulging cash pot, giving it more funds than it needs.
Let’s start with a quick summary of this latest tie-up, which will see Priceline and Ctrip build on an existing marketing partnership begun several years ago. (company announcement; English article) Under the deal, Priceline has purchased $500 million worth of Ctrip convertible bonds, and has also received permission to buy Ctrip shares on the open market over the next 12 months. If Priceline buys all the open market shares and converts the bond to more shares, it would own 10 percent of Ctrip.
The companies have worked together since 2012, mostly cross-promoting each other’s services on their platforms. Ctrip investors certainly liked the deal, bidding up the company’s shares more than 7 percent after the announcement came out. The addition of $500 million from Priceline means Ctrip now has about $2.2 billion in cash, more than enough to buy most of its major rivals. Priceline shares rose a more modest 1 percent on the news, indicating a bit more skepticism from its investors.
I’m equally skeptical about the deal, mostly based on historical experience. Ctrip’s founders are extremely capable and focused and have built the company into a powerhouse with a market value of $8.8 billion over the last decade. But that said, many of the company’s attempted and actual alliances have ended in disappointment or failure, largely due to Ctrip’s insistence on maintaining near or total control in most situations.
Such insistence most recently reportedly killed a deal that would have seen Ctrip merge with smaller rival Qunar (Nasdaq: QUNR), China’s second biggest online travel site by market value. (previous post) But the case I remember most clearly came in 2004, when Ctrip sold an even larger 20 percent of itself to Japanese e-commerce company Rakuten (Tokyo: 4755). In that instance Rakuten ended up dumping the stake just 3 years later after it failed to achieve any synergies with Ctrip.
Signs of similar trouble are already emerging before this latest deal even happens, as reflected by terms regarding Ctrip’s board. Specifically, Ctrip said it will give Priceline the right to appoint an observer to its board of directors if Priceline ultimately acquires the 10 percent stake. That seems like a tiny concession for such a large stakeholder, and also seems to reflect Ctrip’s determination not to cede any control at all to Priceline despite would be an investment of nearly $1 billion.
Clearly I’m not too excited about this deal, but at least Priceline should be praised for its cautious approach. It can always choose not to convert the bond into shares if it decides the relationship has limited potential, and it also has up to a year to purchase its Ctrip shares on the open market. Of course there’s always the chance that things will be different this time and Ctrip will be more receptive to a closer alliance with Priceline than it’s been with other previous partners. But this deal is more likely to come unglued before it’s finalized, which is probably in the best interests of both Ctrip and Priceline anyway.
Bottom line: Ctrip’s equity tie-up with Priceline is likely to run into problems over control issues, causing it to fall apart before it gets consummated within a one-year deadline.