Bottom line: Priceline’s new China foray with Ctrip will get off to a positive start, but will run into problems and ultimately collapse due both sides’ inability to gain much from the partnership.
Just days after global online travel giant Expedia (Nasdaq: EXPE) announced its withdrawal from China, rival Priceline (Nasdaq: PCLN) is moving in the other direction with a significant boost to its partnership with local sector leader Ctrip (Nasdaq: CTRP). I’ve previously been quite skeptical of this particular partnership, after previous similar tie-ups failed due to the fiercely independent nature of Ctrip’s top management. I’m still quite skeptical, though a string of other major tie-ups by Ctrip recently seem to show it’s realizing it needs to be more flexible to fend off the growing threat from fast-rising local rival Qunar (Nasdaq: QUNR).
This latest deal could see Priceline ultimately end up owning as much as 15 percent of Ctrip. (Ctrip announcement; Priceline announcement) Priceline, known for its discount travel offers, bought convertible bonds last year worth $500 million as part of a deal that could have ultimately given it 10 percent of Ctrip. (previous post)
This latest deal will see Priceline buy another $250 million worth of convertible bonds that could ultimately help it to reach the 15 percent ownership stake. Both the 2014 deal and the latest one also include Ctrip’s permission for Priceline to buy shares on the open market that would help it to reach the targeted stake amounts.
No conversion price was given for the bonds, but presumably it would be near Ctrip’s current price of about $82. That price has nearly doubled since mid March, meaning Priceline would probably being paying a big premium for this latest stake buy if it exercises its right to convert its bonds. The final price for the 15 percent stake would likely be around $1 billion, which actually doesn’t look too bad based on Ctrip’s latest market value of about $11.7 billion.
This latest deal comes as Ctrip embarks on its own purchasing spree of similar-sized strategic stakes in many of its smaller domestic rivals. The most recent of those came less than a week ago, when Ctrip paid $400 million for 36.7 percent of rival eLong (Nasdaq: LONG), whose longtime global partner Expedia dumped its entire 62.4 percent stake in the company. (previous post) Ctrip has also bought strategic stakes in smaller rivals Tongcheng and Tuniu (Nasdaq: TOUR) over the last year.
Priceline and Ctrip have a relationship that dates back to 2012, though it was mostly a marketing partnership until last year’s equity deal. This latest deal would indicate that both sides are satisfied with the partnership’s development, which probably means that Priceline is letting its Chinese partner run its own operation. Such a strategy looks smart, as previous attempts by global names like Yahoo (Nasdaq: YHOO) and eBay (NYSE: EBAY) to impose their ideas on Chinese acquisitions ultimately led to the failure of those endeavors.
Japanese e-commerce giant Rakuten (Tokyo: 4755) previously purchased 20 percent of Ctrip in 2004, but ultimately ended up dumping the stake a few years later after it failed to find any synergies. More recently Ctrip also reportedly considered merging last year with Qunar, its largest local rival that is controlled by leading search engine Baidu (Nasdaq: BIDU). But those talks ultimately collapsed, most likely over issues of who would control the merged company.
All of this deal-making shows that Ctrip is becoming keenly aware that it may need some outside help to maintain its market-leading position, and that it’s most concerned about the threat from Qunar. This latest deal looks mildly positive for both Ctrip and Priceline, though I expect the latter may ultimately be disappointed if and when the investment fails to bring much in terms of new revenue. But at least the partnership is off to a positive start, which is often the case when western companies decide to take a try at the difficult Chinese Internet market.
(NOT FOR REPUBLICATION)