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Priceline.com: Can Captain Kirk Beam It Up?

It has Captain James Kirk (aka William Shatner) as its spokesman, generated $35 million in sales in 1998 and is set to offer shares to the public this week anytime now. Priceline.com wants to raise a reported $115 million, but it has not yet announced what its debut price will be.

Having done private and public company valuation work for five years now, let's run through one scenario: If I back into this that implies perhaps selling 5.75 million shares at $20 a pop. Further, if this represents 25% of the company I believe Priceline.com could seek an initial public value of about $460 million. We'll see.

More important than science fiction stars and imputed valuation is the underlying question: does Priceline.com have a sustainable business and business model?

Its claim to fame is selling unsold seats on airlines and unsold rooms at hotels, driven by the travel industry need to sell seats and beds daily. Transitory commerce.

Priceline.com is known mostly for allowing bargain hunters/potential customers to bid on seats and beds and try and save money by doing so. It also has efforts aimed at auto buying and mortgages.

From its April, 1997 launch through December 31, 1998 more than 1.9 million airline ticket offers came in, or what Priceline.com says was about $400 million in total consumer demand. After all that wiggling actual sales were 134,878 airline tickets or about $30.4 million in revenue or 86% of Priceline.com's entire revenue last year. The rest essentially came from its credit card marketing program.

That means simply Priceline.com has made a name in the cheap seat air game but not other areas, in my opinion, despite attempts at hotels, cars and mortgages.

With so much riding on airfares, the key drawback to that is simply this: how many travelers want to plan a trip based on speculative last-minute seating?

Another weak point: Priceline.com has agreements with 18 airlines but, according to Priceline.com itself --

* do not require the airlines to make tickets available for any particular routes;
* do not require the airlines to provide any specific quantity of airline tickets;
* do not require the airlines to provide particular prices or levels of discount;
* do not require the airlines to deal exclusively with us in the public sale of discounted airline tickets; and
* generally, can be terminated upon relatively short notice.

That's a lot of "do nots."

In spite of the drawbacks, Priceline generated $30 million from airline ticket sales with such loose agreements that favor the airline calling all the shots. But that's how hungry airlines are to fill the seats.

Let's look at the numbers closer, because $91 million loss last year is an eye-opener.

You could almost finance another Star Trek film on that amount, Shatner and Spock, and maybe even Picard.

Priceline's equity distribution in the form of warrants to the airlines accounts for about half the losses accounted for, or some $48.2 million. Delta is the leading warrant holder with a fair value of $38.1 million as of December 31, 1998. The non-exclusive agreement does not require Delta to make any performance commitments to Priceline (which is just as well since having just flown on Delta it'd have trouble making performance commitments of any kind to its passengers even).

Risks of course are many: implementation, ability to match offers, creating more brand awareness, year 2000 what ifs, dependence on one segment too much (air travel), volatility in Internet stocks in general, if Shatner beams up to another promo deal, and the competition for airfare, cars, mortgages, hotel.

Microsoft, Preview Travel, BizTravel.com, Travelocity, are just a few of the better-known travel services. Prior to the IPO founder Jay Walker owns 47% while chairman owns 10.8%. General Atlantic Partners holds 19.9% and Paul Allen's Vulcan Ventures, 7.1%.

Signs I like:

Revenue growth more than doubled fourth quarter vs. third quarter last year, $18.9 million vs. $9.2 million, respectively. And perhaps Priceline.com has its warrant to the airline carpet-bombing distribution behind it. Plus, $115 million proceeds we think could be enough to start making a dent in new offerings.

Signs I don't like: will probably have a boatload of shares outstanding; its core business is filling empty slots at the low-end, not dependable; too much dependence on the whims of the airline industry, which may probably move into auction pricing itself someday.

Overall I think Priceline.com has a chance to make a pop on debut like so many Internet issues. Anyone trying to ride the take off should take these words to heart: never place an order at the open, always set your price limit on any IPO (this or any other).

The irony is now investors will get the chance to name their price on Priceline.com itself. Let's see some diversified revenue streams before debating on what its price should be long term.

Underwriting led by Morgan Stanley.

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