The travel industry is a hotly touted one and investors have been keeping a close eye on the recent developments. A major player to watch out for in this new boost to the travel industry is Expedia (EXPE, Financial). Since the beginning of this year, the company has been on a buying spree, taking over other smaller firms, leading to a fear of monopolization. After spending a lot of cash on these buy-outs, and incurring a major loss in the recent quarter, Expedia announced its divestment of a major loss-incurring arm in China, eLong, most shares of which was bought by its rival travel group Ctrip (CTRP, Financial).
Reasons why Expedia dropped its Chinese partner
To understand this sudden development, which created excitement worldwide, one must take into account the burden of eLong that Expedia had been bearing for almost four years. The US travel giant, in a bid to enter one of the biggest consumer base in Asia, had invested in eLong in 2011, a move which seemed like a good decision then to make a name in the new-region market. That same year in May, Expedia signed a joint deal worth $126 million with Tencent (TCTZF, Financial).
But then recession reached its peak and eLong failed to deliver on its promise, year after year, costing the Expedia large amounts of money. Expedia, having the majority shares, took the brunt of the financial bruising, which left quite a mark on its overall balance sheet. Already trying to manage scenario at home, the Chinese venture was soon becoming a liability. Now that things are looking up at home, and eLong continues to be a cash drain, Expedia decided to wrap up from China.
Expedia owned 62.4% shares of the company. When it opened to the market for a buy-out, a number of Chinese travel firms were in the fray to grab a piece of the pie. Ctrip, a major player in the travel industry in China, paid almost $400 for 37.6% share holdings. Other companies which bought stakes were hospitality brands Keystone Lodging and Platen Group, and investment firm Luxuriant Holdings resulting into Expedia standing richer by $671 million.
Divestment to plug cash out-flow
To begin with, eLong has been a major embarrassment financially; in the most recent quarter of 2015 it reported a loss of $33 million. Turning the venture into a profitable one had failed over the years and didn’t seem likely in the near future. Divesting of the loss-making partner will help Expedia to concentrate on better prospects and also lower the loss margin quite a bit since the company otherwise is reshaping itself to emerge as a market leader.
Moreover, Expedia has invested heavily already this year, making it unable to bear further losses. In February of this year, the company bought over Travelocity for $280 million and then spent another $1.6 billion to bring Orbitz within its umbrella. After the recent takeovers and merging of the consumer base, and a running loss in its ledger, Expedia took the smart way out – selling of its Chinese white elephant. This is a prudent move which should have come earlier, but it is always better late than never. The market seemed to welcome the news, as Expedia shares jumped 7% after the announcement. Investors are looking forward to a better performance by the company now.
