Suddenly the takeover of pioneering internet site, Wotif (WTF) by US travel giant Expedia, is no longer a rolled gold certainty after the competition regulator, the ACCC, revealed yesterday it had concerns with parts of the near $700 million deal.
The ACCC’s surprise statement emerged before trading started and the shares on Wotif spent the rest of the day on a downward slide. They fell 7% at one stage before closing down 4.3% at $3.012.
The ACCC hasn’t come out and opposed the proposed deal and its $3.40 cash offer for Wotif shares, ($3.06 cash and a 24 cents ‘special’ final dividend), but it has revealed signs that others in the sector are concerned about the size and clout of the combined company.
Instead the ACCC yesterday released a "statement of issues" outlining competition issues that have arisen to date.
The key concern seems to be the belief that a merged company could see a rise in commission rates charged to hotels listed on the Wotif accommodation site.
The ACCC said that after making enquiries, it was of the view that bricks and mortar travel agents such as Flight Centre, Helloworld and STA Travel were unlikely to be a strong constraint on the operations of online travel agencies like Wotif, Expedia and Priceline’s Booking.com and therefore do not form part of the relevant market.
"Commission rates charged by Expedia and Booking.com in Australia are lower than the rates charged by those companies in other parts of the world," ACCC chairman Rod Sims said. "The presence of Wotif may be a contributing factor to this difference".
"Market participants have expressed concern that the removal of Wotif as an independent competitor will allow Expedia to increase its commission rate," the Commission said.
WTF 2Y – Wotif takeover questioned
The ACCC said Expedia would continue to face competition from Priceline if the Wotif deal was completed, but there could be limited incentive for the US-based groups to compete by offering lower commission rates to accommodation providers.
Mr Sims said the recent expansion of Booking.com and some smaller online travel agents like Hooroo might suggest that barriers to entry and expansion were not significant, but market participants had identified barriers in the form of the high cost of advertising needed to capture a critical mass of consumer "eyeballs" and bookings and sunk costs associated with developing an online platform.
“The ACCC has, however, also observed significant changes in the way that accommodation is offered to consumers in recent years. A key issue for the ACCC will be whether the dynamic nature of the industry is likely to facilitate the development of new business models and discipline Expedia’s competitive conduct post-acquisition,” Mr Sims said.
Wotif has said it agreed to the offer from Expedia in part because it faced rising competition from overseas groups like Expedia and Priceline, which have increased their advertising spending in the Australian market in the last 18 months.
Mr Sims said the ACCC’s preliminary view was the Expedia offer for Wotif was unlikely to raise competition concerns in the market for the online distribution of air travel and other travel products such as holiday packages, car hire and cruises.
But, market participants expressed concerns that, with the removal of Wotif as an independent competitor, a significant competitive constraint on Expedia will be removed and Expedia will increase commission rates.
Mr Sims said the ACCC will finish its market inquiries around September 19 and make a final decision on October 2.
The Commission says it is now asking market participants "whether potential competition effects on the distribution of accommodation should be considered separately from effects on the distribution of other types of travel products (e.g. flights, car rentals); the importance of online distribution channels to Australian accommodation providers, compared to bricks and mortar agents, corporate travel services and other channels; and to what extent could accommodation providers reduce their reliance on online channels (e.g. by selling more of their inventory through bricks and mortar agents) in response to an increase in online distribution costs?”.
The New Zealand competition regulator is also examining Expedia’s proposed offer.
In a statement issued yesterday, Wotif acknowledged the ACCC statement and said it would work closely with the regulator to resolve any issues identified as a result of market enquiries.
The company said a scheme booklet with an updated timetable, including shareholder scheme meeting details, is due to be released shortly.
The usual solution in this area is for Expedia to offer enforceable undertakings to the ACCC for a period of time on the question of commissions.
