Internet-based discount travel service Priceline.com has struck a deal to sell airline tickets for the three major US airlines it hadn’t served until now, bringing American, United and US Air into its stable. The move, which is expected to pay handsome dividends for the company, comes with a hefty price, as Priceline will take a $1.1bn non-cash charge in the fourth quarter related to the deal. In keeping with the structure of its past deals, Priceline will give each one of its new partners warrants to take an equity stake in the company and the charge will be taken to cover the costs of the warrants.
This latest deal, and the related restructuring of deals with existing partners, will see Stamford, Connecticut-based Priceline issue roughly 20.5 million shares, with each company receiving equity ownership roughly in proportion to their market share. Still, the addition of United, American and US Air – the number one, two and six US airlines, respectively – will nearly double the number of seats Priceline can offer customers and add 192 destination cities. The deal was enough to give investors renewed confidence in the company and Priceline shares jumped $8.125, or nearly 12%, Wednesday to close at $76.875.
Analysts at Warburg Dillon Read cheered the deal, describing it as a very strong validation of the Priceline model, and adding that the dilution from the share issue will be more than offset by the increase in revenues and operating profits going forward. Merrill Lynch touted the 94% increase in potential seat inventory and the fact that all eight major US carriers are now with the company. The bank did, however, characterize the price paid as significant and Merrill analyst Henry Blodget said Although the deal should create more value for shareholders than they are giving up, it extends an equity-for-inventory trend that reduces this value over the long term. á
