Watch CBS News

Why Priceline paid so much for Open Table

Priceline Group (PCLN) is paying dearly for the chance to make restaurant reservations for customers.

The company announced on Friday that it's spending $2.6 billion in cash for OpenTable (OPEN), a fast-rising Internet company that handles online reservations for some 31,000 restaurants. It reserves tables for more than 15 million diners a month.

Despite the price tag, the acquisition makes a lot of sense. Priceline already handles flight and hotel reservations, so why not add restaurants to the mix? "Travelers are diners," CEO Darren Huston said on a conference call last week. "It's the same customers. There's opportunity to cross-promote brands."

Analyst Mark Mahaney at RBC Capital Markets called the deal "a no-brainer" in a research note, according to Bloomberg. "We see this deal as likely part of Priceline's move into offering a much broader range of local e-commerce services to what is a very attractive customer set," he added.

Another reason behind the deal: There just aren't many places left for the online travel business to expand into. Priceline and rivals that include Expedia (EXPE) and TripAdvisor (TRIP) have already mopped up nearly everything in hotels and flights.

As the sector looks to expand into dining, analysts think even Google (GOOG) and Microsoft (MSFT) might be itching for a place at that table.

TripAdvisor already jumped into the restaurant-reservations business last month with its purchase of LaFourchette, a European booking platform known as the OpenTable of France. Amazon (AMZN) is also creeping into the business, allowing customers to publish reviews for local restaurants and companies. That's Yelp's (YELP) territory, but one could easily imagine both companies moving into online reservations next.

OpenTable gets $1 from a restaurant when a diner reserves a table through its website or mobile app, Reuters reports. It had $33.4 million in profit last year on $190 million in revenue. That's small change for Priceline, which pulled in $1.9 billion in profit last year on sales of $6.8 billion. But Priceline has big expansion plans in mind for OpenTable.

Priceline has a sales presence in most of the world's major cities, for example, while OpenTable doesn't. It will be fairly easy to bring OpenTable into the business in those cities.

Still, there's that pricetag -- did Priceline pay too much for OpenTable? Its offer equals $103 in cash per share, which was some 46 percent higher than what OpenTable traded at before the deal was announced. Before news of the deal hit, OpenTable was already valued at 45 times next year's expected per-profit share, writes Alex Dumortier on The Motley Fool. "Tack on the premium and you get a valuation that looks very hard to digest, even for a company as well run as Priceline," he added.

But some investors seemed to think the price might, in fact, be too low. OpenTable's shares roared 48 percent to close at $104.48 Friday, which was above Priceline's bid. That's a signal some investors expect the purchase price to rise even higher, perhaps if a competing bid comes in. Priceline shares dropped 3 percent to close at $1,189.30.

Google could easily afford such a rich bid, if it were so inclined. It bought restaurant review publisher Zagat in 2011 for $151 million, which now seems like a steal as Internet company valuations have soared. Google hasn't commented on the Priceline-OpenTable deal.

Even if Google doesn't jump in, the takeaway from the deal is clear: The business of reserving tables online will no longer survive on its own. It will be rolled into the ever-expanding online travel sector as the industry looks for more ways to grow.

View CBS News In
CBS News App Open
Chrome Safari Continue
Be the first to know
Get browser notifications for breaking news, live events, and exclusive reporting.