Take-Outs and the Illusory IRR

Would you rather a 5x in 4 years (IRR 50%) or would you rather a 40% quick pop on a takeout (IRR 284% if in 3 months). We are not surprised the vast of majority of our peers choose the latter. Even though we have a robust pipeline and stand ready to reallocate capital, if needed, we’d always prefer a lower IRR with significantly higher absolute appreciation potential.

While our Whole Foods Market (WFM) IRR looks terrific (325% vs 44% absolute return), we would have preferred the company to triple by 2020, as we expected in a base case. Similarly, although TripAdvisor is a potential take-out candidate, we would much prefer to own the company for the next decade. The decade-long performance of competitor and customer Priceline Group (PCLN) should make us all try and find the next >70x.

In an odd way, the lower TripAdvisor trades, the higher the chance we could see a buyout. The reason is simple: Liberty TripAdvisor (LTRPA), which holds a controlling stake in the company, has debt at the holding company, and its debt carries a margin call at certain levels.

A few things that have happened in the past week have led us to believe that TripAdvisor got quite close to a sale. First of all, the exhausted share repurchase program was not renewed– a possible sign that the board had material non-public information that prevented a program renewal.

Second, Priceline, despite a very aggressive marketing push in the United States, has pulled back in spending on the TripAdvisor platform in June and July. Were the group trying to take the company over, this would be an obvious way to get investors to sell the stock and allow for a cheaper acquisition.

And third, Liberty TripAdvisor had very odd timing of its quarterly results call. It held its conference call before TripAdvisor itself had reported its own results. This allowed them to prevent any questions on TripAdvisor.

While some may love to see a buyout, we would not like that. And so, we are doing our part. Our 31-page research report (available free on our Public Research page) has been shortened and published by Barron’s. You can see the article here. Quite hilariously Bloomberg actually attributed  yesterday’s +6% performance to our article… We’re not so sure. But if it had the effect that it makes a margin call, and therefore sale of the group less likely, we are quite happy.

More likely the move is attributed to analyst updating models in the wake of the second quarter results. We believe the second quarter report had some very important accelerations in two of the biggest potential business drivers for TripAdvisor, despite a Priceline–induced lowering of the hotel revenue guidance for the rest of the year.

Exhibit 1: Mobile Hotel Monetization Gap Narrowing

We discussed our thoughts on these key driver accelerations in a flash note, and have now posted it on our public research page if you care to read it. In short, mobile usage is accelerating, which in this case is a great thing because desktop online hotel shopping is a dead opportunity, Google has already captured nearly all of the economics.

Exhibit 2: Google’s Monopoly has Already Captured Nearly All of Desktop Profitability

While we would not like to see a near term sale, TripAdvisor does have a very asymmetric risk-reward, because the lower the stock goes, the more likely it will be sold to a competitor. Not only is Priceline eager to increase its traffic in the US, but all OTA competitors are highly motivated to not see TripAdvisor sold to Ctrip.com, or another Chinese media company.

The most attractive route for the company is to just execute on the very significant opportunity it has ahead of itself in tours, attractions, European restaurants, and capturing all of the mobile hotel shoppers that regularly rely on the advice found on its app and site. Most users visit TripAdvisor before Expedia or Priceline, and so with mobile growth accelerating, it’s time to fix the glitch. It’s also time to bring in a COO to help drive this execution – execution that could yet generate the >10X performance enjoyed by some lucky OTA investors over the last decade.

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This article has been distributed for informational purposes only. Neither the information nor any opinions expressed constitute a recommendation to buy or sell the securities or assets mentioned, or to invest in any investment product or strategy related to such securities or assets. It is not intended to provide personal investment advice, and it does not take into account the specific investment objectives, financial situation or particular needs of any person or entity that may receive this article. Persons reading this article should seek professional financial advice regarding the appropriateness of investing in any securities or assets discussed in this article. The author’s opinions are subject to change without notice. Forecasts, estimates, and certain information contained herein are based upon proprietary research, and the information used in such process was obtained from publicly available sources. Information contained herein has been obtained from sources believed to be reliable, but such reliability is not guaranteed. Investment accounts managed by GreenWood Investors LLC and its affiliates may have a position in the securities or assets discussed in this article. GreenWood Investors LLC may re-evaluate its holdings in such positions and sell or cover certain positions without notice. No part of this article may be reproduced in any form, or referred to in any other publication, without express written permission of GreenWood Investors LLC.

Past performance is no guarantee of future results.

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