Expedia Still Trying to Book a Deal With Preview Travel

The Microsoft unit continues to discuss a deal with Preview, which has agreed to link up with Sabre's Travelocity.
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SAN FRANCISCO -- Visitors to Preview Travel's (PTVL) office are greeted by two flat-screen monitors, one sporting Preview's logo, the other Travelocity's logo. The company might consider a third with the logo of Microsoft's (MSFT) - Get ReportExpedia site.

Although Preview Travel announced Monday a planned merger with

Sabre Group's

(TSG) - Get Report

Travelocity travel site, Expedia is also in hot pursuit of Preview Travel, according to a person close to Preview.

This person, along with a Wall Street analyst who also asked not to be identified, says Preview had been in talks with both companies last week. Preview ultimately settled on Sabre's offer despite showing an early preference for a merger with Expedia, the people say. But Expedia is still quietly pushing to buy Preview.

Microsoft declined to comment. But Preview's chairman and founder, James Hornthal, conceded that there "could be" another offer in the works. The board unanimously approved the merger with Travelocity, he says, "but nothing is guaranteed. We're not soliciting or shopping ourselves. This is not a bidding war."

Expedia already plays second banana to



travel channel, where Preview Travel is the premier partner. With Preview Travel in its fold, Travelocity would have more than 17 million members and 8 million unique monthly visitors -- 50% more visitors than the next biggest travel site, Expedia. The stakes are high: The online travel market should grow more than fourfold to $30 billion by 2004, according to Preview Travel.

In announcing the merger Monday, Sabre said it would spin off the combined travel sites into a publicly traded company called


. That move echoes Microsoft's plan, disclosed 10 days eariler, for an Expedia IPO.

Wall Street's positive reaction to the deal only adds insult to Expedia's injury. Preview is up 88% since the deal was announced, even though it's unclear who's doing all the

buying. Sabre Group, a unit of



, is up 17%.

Still, analysts are not counting out Expedia.

Merrill Lynch

analyst Henry Blodget says a move by Expedia is possible, but added that "it would be extraordinarily expensive to take it out at a premium." At its current price, Preview Travel has a market cap of $470 million. Blodget has no rating on Preview Travel, and Merrill has no underwriting relationship with the company.

"I could see it happening," agrees Derek Brown, an analyst at

Volpe Brown Whelan

, which has no underwriting relationship with Preview. Expedia, he says, "would be the most likely candidate."

Preview's agreement with Sabre allows it to consider, but not solicit, other proposals. The company may "engage in negotiations and discussions with respect to an unsolicited superior proposal made to Preview," according to a Preview filing to the

Securities and Exchange Commission

. But jilting Sabre wouldn't be painless: Preview would have to pay $10 million to back out of the agreement.

The longer Expedia or any rival suitor waits, however, the harder the battle will be. Preview and Travelocity "are very much down the path together," says

BancBoston Robertson Stephens

analyst Lauren Cooks Levitan, who upgraded Preview to buy from long-term attractive Tuesday. (BancBoston has an underwriting relationship with Preview Travel.)

The mix of the two companies will create a "definitive leader" in the market, Levitan says. And that's what Expedia won't be if it fails to land Preview Travel.