We Bought a Travelzoo?

Travelzoo (NAS: TZOO) is putting itself up for sale, three sources are telling Reuters. But Matt Damon probably won't be buying this zoo.

A bumpy bandwagon
Though the past few quarters have been rough, it's not necessarily Travelzoo's fault. The stock went wild two summers ago when everyone wanted to hop on the Groupon (NAS: GRPN) bandwagon. Travelzoo was a natural hopper. Its business consists of smoking out sponsored travel bargains and passing on the best ones to its growing mailing list. There were 21.5 million opt-in recipients of its weekly Travelzoo Top 20 email as of the end of last year.

Travelzoo has a Rolodex of travel service providers -- and millions of deal-seeking fans who love to travel at the right price. Breaking into the flash-sale model for incremental business was a no-brainer.

Everything was going along smoothly until Groupon eventually filed to go public, exposing its model as a money-losing disappointment. Investors recoiled, and many popular Internet companies backed off their "daily deals" initiatives.

Travelzoo stuck to its itinerary.

"We remain positive about our Local Deals business, in which we differentiate from others by focusing on higher quality deals, as well as our ability to run and grow this business profitably," CEO Chris Loughlin notes in this morning's report.

Travel light
The growth is there. Revenue climbed 23% to $35.2 million in its holiday quarter. Profitability soared 70%, but that was largely the byproduct of a lower effective tax rate. Operating income still managed to climb 22% higher.

After proving its recession-bucking mettle -- particularly in the otherwise ravaged Europe, where it's growing even faster than in its more established North American stronghold -- Travelzoo proved that it was more than just a Groupon wannabe.

The market didn't care, dismissing the stock to the point where it closed yesterday at less than 14 times this year's projected earnings and 12 times next year's bottom-line target.

The Travelzoo model is simple and lean, but copycats have faltered. Even the mighty priceline.com (NAS: PCLN) has had trouble duplicating Travelzoo's success with its PriceBreakers missives.

Given its recession-resilient and battle-tested model -- along with its compelling valuation -- it's no surprise that sources are telling Reuters that Travelzoo was drawing buyout interest even before deciding to seek out a financial advisor to make it official.

Now it's just a matter of who is willing to pay a rich enough premium to justify a sale.

Shopping for bargains
The Reuters article that broke the news this morning singles out Google (NAS: GOOG) as a potential buyer. It makes sense in theory. Travelzoo's chunky profit margins will get even better if the world's leading online company can take this model to a higher level. Google knows that travel service providers are some of the highest bidders for vetted leads.

However, after regulators took their sweet time approving Google's $700 million purchase of ITA Software, Travelzoo may want a deal with a partner that will be able to close sooner.

This brings us to Priceline. The darling among travel portals would feast on the leading travel deals publisher in a niche that it hasn't been able to master. We also can't dismiss Groupon itself. It teamed up with Expedia (NAS: EXPE) -- the largest conventional travel portal and another potential buyer -- to roll out Groupon Getaways last summer. Two months ago Groupon acquired social travel research specialist Uptake.com.

Google, Priceline, Expedia, and Groupon may be the most logical buyers, but we also can't dismiss private equity firms. Travelzoo is the perfect candidate to be taken private, dusted off, and returned to the exchanges at a higher valuation when market sentiment returns.

Travelzoo's stock opened sharply higher on the report, and rightfully so. As long the buoyant market reaction today doesn't shoo away too many of the logical buyers, this zoo is about to attract more than a few cagey animals with bidding cards.

Feed the bears
Travelzoo has been a disappointment since I recommended it to Rule Breakers newsletter subscribers until this morning's pop, so now may be a good time to discover the next Rule-Breaking multibagger. It's a free report. Want it? Get it.

At the time thisarticle was published Longtime Fool contributor Rick Munarriz calls them as he sees them. He does not own shares in any of the stocks in this story, except for Travelzoo. Rick is also part of theRule Breakersnewsletter research team, seeking out tomorrow's ultimate growth stocks a day early.The Motley Fool owns shares of Google.Motley Fool newsletter serviceshave recommended buying shares of Google, priceline.com, and Travelzoo. The Motley Fool has adisclosure policy. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.

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