What You Need to Know About Expedia’s Acquisition of Travelocity

And so the consolidation continues. In the latest notable deal in the online travel sector, Expedia (NASDAQ:EXPE) has purchased Sabre‘s (NASDAQ:SABR) travelocity. The price is $280 million in cash, which isn’t a small amount of money. Here’s a closer look at the important points of this transaction between the two veteran frequent flyers.

Buying a favored partner
Expedia and Travelocity were already close collaborators before the acquisition. In the summer of 2013, the two inked what they characterized as a long-term strategic marketing agreement.

This made Expedia the technology platform underlying Travelocity’s US and Canada websites, relieving the latter firm of having to support and maintain such operations. Under the terms of the deal, Travelocity focused on promoting its brand — chiefly with its memorably offbeat Roaming Gnome ad spots — in return for performance-based marketing fees. Essentially, this made Travelocity another channel for the sprawling Expedia.

This had distinct advantages for both firms. It helped Saber cut selling, general, and administrative expenses by nearly $40 million in Q3 2014 compared to the same period one year previously. This arrangement boosted operating income by roughly that amount, more than offsetting a $20 million drop in revenue and helping to lift the company well in the black on the bottom line.

For Expedia, it led to a jump in business. Across the same stretch of time, the company’s gross bookings grew by 31% to $12.2 billion, which it attributed at least partially to Travelocity.

Owning Travelocity instead of being its partner now allows Expedia to control and, if desired, shape its new asset’s approach to advertising and marketing. It brings the company entirely under its wing, rather than maintaining a somewhat clunky relationship with it as a fee-sucking source of revenue with an independent marketing arm.

Back to the back end
For Sabre, the Travelocity deal wasn’t the only asset sell-off in recent times. In December it unloaded its Lastminute.com to Swiss company Bravofly Rumbo Group in a deal worth roughly $120 million.

This is paring Saber down to its roots as an operator of back end solutions underpinning travel bookings. The firm was originally a spinoff of the airline reservations technology unit held by the predecessor of today’s American Airlines Group. These days Saber’s back end solutions cover not only airline tickets, but car rentals and other travel-related booking needs.

The divestment narrows its focus and distances it from the e-travel agency space. On the other side of the transaction, owning Travelocity outright helps bulk up Expedia (which already operates the well-trafficked travel sites Hotels.com, Hotwire.com, and CarRentals.com, among others).

That sort of expansion is helpful because the competition has been collecting assets too. Priceline Group (NASDAQ:BKNG)for one, owns not only its popular namesake site but also high-profile travel properties Booking.com, and Kayak. Orbitz Worldwide‘s (NYSE: OWW) holdings include CheapTickets.com, and ebookers.com. Meanwhile, upstart operators like Hipmunk and HotelTonight are hungry to carve out slices of the market.

feeling flush
The acquisition comes after a good period for Expedia. In the first three quarters of 2014 — thanks, again, at least partially to Travelocity — the company saw a nice 22% year-over-year boost in revenue to $4.4 billion. Attributable net income soared even higher, rising by 140% to $332 million.

That puts significantly more money in Expedia’s coffers, more than enough to part with the $280 million it spent to buy its new asset.

So the acquisition wasn’t a painful sacrifice for the company, and it strengthens its portfolio in the face of tough competition. As such, it seems like a smart, sensible, and opportunistic move. Perhaps it’ll continue its ascent with Travelocity fully along for the ride.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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