NEW YORK (CNN/Money) -
Online travel stocks enjoyed a nice takeoff Wednesday after news that Cendant agreed to buy Orbitz for about $1.2 billion.
Sabre Holdings, which owns Travelocity, jumped about 2 percent, IAC/InterActive, the parent company of Expedia, Hotels.com and Hotwire, rallied 6 percent, and Priceline.com shares shot up nearly 10 percent.
Why this reaction, especially when a Cendant-Orbitz combination presumably would be a tougher competitor for all these companies?
Cendant is a franchisor for the Super 8, Days Inn, and Ramada hotel brands. It also owns the Avis and Budget car rental services and the online travel site Cheap Tickets. That's a high-profile portfolio of travel-related companies.
And given the aggressive price wars that the airline industry is known for, the airfare part of the online travel business is likely to become less profitable for companies like Expedia, Travelocity and Priceline.
"The real focus with this deal is that airline travel is going to be a tougher business for the online guys. The focus is on hotels and cars and Cendant has those properties," said Brian Bolan, an analyst with Marquis Investment Research.
Wall Street likes the sky-high price for Orbitz
But investors appear to be overlooking longer-term competitive concerns and instead focusing on the lavish premium that Cendant agreed to pay to snag Orbitz.
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The $27.50-a-share price tag is 32 percent higher than the closing price for Orbitz Tuesday. And it values the company at about 33 times 2005 earnings estimates.
By way of comparison, Sabre (TSG: Research, Estimates), IAC/InterActive (IACI: Research, Estimates) and Priceline (PCLN: Research, Estimates) were trading at 15 to 19 times 2005 earnings estimates, based on Tuesday's closing prices.
"The other online travel stocks are trading at a much deeper discount," said Ashish Thadhani, an analyst with Brean Murray. "That's why you're getting a lift in the sector."
The Cendant-Orbitz deal is also reigniting takeover talk in this rapidly consolidating industry.
Priceline, long thought to be a target of IAC/InterActive before it decided to buy Hotwire last year, once again looks ripe for the picking.
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Peter Mirsky, an analyst with Oppenheimer, said Priceline could be a good fit for Sabre since Cendant's purchase of Orbitz will vault it ahead of Sabre's Travelocity as the second largest online travel site, in terms of gross bookings. InterActive's Expedia is the number one site.
Thadhani agreed that Sabre would be a good fit with Priceline but thinks that Cendant could eventually be interested in it as well.
He added that another possible takeover candidate is Britain's ebookers, which said earlier this month that it was considering a sale. Shares of ebookers (EBKR: Research, Estimates) gained nearly 4 percent Wednesday.
Brian Barth, chief executive officer of privately held SideStep, an online travel search engine, said that he also expects more consolidation among the online travel agencies since search companies like his are becoming bigger players in the online travel market. SideStep partners with all the major travel firms but does not actually book airfare or hotels for consumers.
In addition to SideStep, a company called Travelzoo (TZOO: Research, Estimates), which publishes a travel e-mail newsletter, has become a Wall Street darling. And Yahoo! (YHOO: Research, Estimates) recently unveiled a beta version of a travel search site called FareChase in order to tap into the lucrative online travel market. That more, than anything else, could really change the dynamics of the online travel business.
"The wild card in online travel is Yahoo!'s move," Barth said.
As for the impact on consumers, Bolan said he didn't expect the Cendant-Orbitz deal to cause many major changes from a pricing standpoint, but that it was likely Orbitz users would see more offerings for Cendant franchised-hotels on the site once the deal closes in November.
Oppenheimer's Mirsky owns shares of Cendant and IAC/InterActive but his firm has no investment banking relationships with companies mentioned in this piece. Other analysts quoted do not own shares of the companies mentioned and their firms have no banking relationships with them.
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