The Strategic Value of eDreams

Did Uber Kick Off an OTA Arms Race?

The Financial Times released a story(1) stating that Uber explored a possible bid for Expedia.  Even Amadeus caught a bid as a possible Uber target after the story was released.  The same week as the Expedia story, the Financial Times released a video(2) interview with Uber CEO Dara Khosrowshahi in which the concept of Uber becoming a super-app was brought up.  The concept of Uber becoming a super-app recalls the Chinese super-app, WeChat, which is the Chinese app for everything.  Below is a link to an old video on WeChat, which shows how essential the app is to daily life in China(5).  Trying to become a super-app in the US, or better yet the West in general, would put Uber in competition with Amazon, Google, Booking.com, and Tesla (if they ever launch their taxi service).  If Uber is going to start chipping away at the businesses of those mega companies, then it is likely to start in a place that has some overlap with its existing business.  Uber is a mobility company, the extension into travel is a good first step.  Expedia makes some sense, particularly given how well Dara knows it, having been its CEO.  I would argue that one company, eDreams, makes more sense for Uber, but it also makes strategic sense for a variety of other players.  If Uber does go after Expedia, that could kick off an arms race as other companies vie to create a super-app.

eDreams

eDreams is an online travel agency (“OTA”) based in Spain that is in 44 markets but is particularly strong in Europe where it is the leading OTA for flights.  While flights is its legacy product, it has expanded to be a one-stop shop for several travel offering.  Its recent (2017) innovation is creating a subscription program, called Prime, where subscribers get immediate cost savings on travel bookings.  Essentially, eDreams gives back to customers the booking fees earned from airline and hotel partners.  Instead of profiting from booking fees, eDreams makes its money on the subscription fee for its Prime program.  More on this can be found in my Substack article from December 15, 2023(3).  Since eDreams gives back its take rate to its Prime customers, it can offer flights and hotels at a lower price than OTAs who need these booking fees to survive.  Prime also creates a direct relationship with eDreams’ customers, which cuts out intermediaries such as google. 

Potential Strategic Acquirers

Uber: If Uber wants to build the super-app for the West, travel is a logical place to start.  As mentioned, Uber makes some sense given its capabilities and Dara’s history with it.  That said, Expedia currently has a $22B enterprise value; a transaction would likely be over $25B.  If Uber pursued a transaction with eDreams, it would likely have to pay a significant premium over the current trading price of €6.31 per share – investors have strong blocking rights in Spain.  That said, from a cash accretion/dilution standpoint, Uber could pay €25.00 per share and have it cash accretion/dilution neutral on 2026 numbers.  At a near 300% premium to today’s current price, the transaction value would be a highly digestible €3.6B, as compared to ~€25B for Expedia.  For that, Uber can pick up the largest and fastest subscription program in travel, and a global OTA.  Prime can be a nice addition to Uber’s current membership program and the smaller purchase price lowers the risk of dipping their toes into an adjacent business line. 

AirBnb: AirBnb is a remarkable company, but it is also a one-trick pony.  AirBnb may have created the short-term rental model, but other OTAs are beginning to offer short-term rentals via their platforms.  Also, customers are being savvy and finding alternative ways to book houses offered on AirBnb, thus cutting AirBnb out of the transaction.  I can see AirBnb use eDreams to first offer flights to its current AirBnb customers.  Adding flights to AirBnb’s platform has been on the minds of AirBnb’s management in the past.  AirBnb even went so far as to hire Fred Reid, the Founding CEO of Virgin America, to lead a transportation division within AirBnb.  These plans were thwarted when COVID hit, and the company went into survival mode.  By acquiring eDreams, AirBnb not only can realize its vision in flights, but can also add hotels (and other offerings) to their platform.  As mentioned, other OTAs cannot compete with eDreams on price if one is a Prime customer, as the company gives back the take rate.  AirBnb’s massive resources could use eDreams’ advantaged business model to create a serious competitor to booking.com.

Amazon.com: If any company is well positioned to create the super-app of the West, it is Amazon.com.  The everything store could become the everything app.  As far as the app is concerned, Amazon has retailing covered and is making inroads into entertainment.  Travel is a logical next step and why not do it with a company that has a subscription program that is also named Prime?  Amazon can create a Prime+ type membership program.  In Prime+, Amazon’s Prime customers would pay a higher subscription fee, but also get discounted travel.  Alternatively, Amazon could give eDreams’ Prime discounts to current Amazon Prime customers at no additional cost to reduce churn of its Prime program.  Again, eDreams structural advantage via its subscription program can be fully exploited in Europe via Amazon’s resources and a significant competitor to booking.com can emerge.  Not that the acquired travel capabilities are limited to Europe, but going after hotels there via eDreams is just low-hanging fruit. 

Given that the above strategics are not in the same lines of travel as eDreams, or not in travel at all, I do not think it would be an issue to get an eDreams deal through European regulators.  That said, I don’t think European regulators would allow booking.com or Expedia to make acquisitions that would allow them to expand their current flight offerings, as seen with the push back booking.com is receiving from regulators on its proposed acquisition of eTraveli.  Hence, the regulatory environment in Europe has increased the strategic value of eDreams.

In an article on eDreams that I posted earlier this year(4), I estimated that eDreams can compound its free cash flow at an ~31% CAGR over the next five years.  I still think this to be true, but we may get management’s view on this at the company’s Investor Day in January 2025.  Given this growth rate, I would much rather eDreams remain public, so I can benefit from this growth as a shareholder.  That said, I realize the strategic value of the company and a combination with anyone of the above companies makes a lot of sense.

1.    https://www.ft.com/content/94a25bf7-e62b-462a-a4f0-e4feb6e244f7

2.    https://www.ft.com/video/e547da2f-f8a4-4e36-9cd1-cb1572b6c28c

3.    https://310value.substack.com/p/applying-nick-sleeps-and-qais-zakarias

4.    https://310value.substack.com/p/edreams-q4-update-who-likes-free

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Disclaimer: For entertainment purposes only. Not a solicatation to buy or sell any security. Due your own due diligence.