On the eve of Christmas, a relatively unknown travel technology company caught the attention of U.Sstock markets as its share price surged dramaticallyThe catalyst for this sharp rise was linked to an announcement revealing a significant connection with Tencent, the Chinese tech giant.

A Surprising Deal: Tencent’s Stake in a Latin American Travel Tech Company

On December 23, the stock of Despegar (DESP.US), a Latin American travel tech company listed on the New York Stock Exchange, soared by 32.83%, reaching a price of $19.46 per share, bringing its market value to $1.63 billionThis sudden surge came after Despegar announced it had entered into a final merger agreement with Prosus, a global consumer internet group controlled by Tencent’s largest shareholder, South Africa’s NaspersUnder the terms of the agreement, Prosus will acquire Despegar in an all-cash deal at a price of $19.50 per share, which represents a 33% premium over Despegar’s closing price of $14.65 the previous day.

The deal, valued at $1.7 billion, is expected to close in the second quarter of 2025, at which point Despegar will be delisted from the New York Stock Exchange

The transaction has sparked curiosity in the markets, especially considering that Prosus, in recent years, had significantly reduced its stake in Tencent, citing concerns about financial health and shareholder returnsNow, Prosus is willing to pay over a 30% premium to privatize a travel agencyThis raises the question: why such a move now?

Despegar: A Snapshot of the Business

Founded in Argentina in 1999 and listed on the NYSE in 2017, Despegar has made significant strides in the Latin American market over the past two decadesThe company operates in 19 Latin American markets, with its largest market being BrazilIt serves customers through two key business models: a comprehensive B2C platform offering both online and mobile app services, supported by its AI assistant, Sofia, and a rapidly growing B2B channelThe latter allows banks, airlines, and retailers to offer customized packages and solutions under their own brands.

Despegar processed more than 9.5 million transactions annually and reported total orders worth $5.3 billion in 2023. The company’s revenue for that year reached $706 million, and it recorded an adjusted EBITDA of approximately $116 million.

Prosus has emphasized that the acquisition of Despegar aligns with its broader strategic vision of building a high-quality consumer services ecosystem

• China Curbs Exports of Key Metals
• What Are the Reasons Behind the Yen's Weakness?
• Amazon FBA Policy Updates Spark Seller Discontent
• Economy in the Depths of Falling Oil Prices
• Money Supply: A Key Indicator of Economic Health

By acquiring Despegar, Prosus gains an opportunity to expand its footprint in the Latin American market, benefiting from synergies with its existing local operationsThis includes iFood, a food delivery platform with 60 million users, and Sympla, a major events platform.

Notably, Despegar has made a significant recovery from the pandemic downturnIn Q3 of 2024, the company achieved a record conversion rate of 14.6% and reported a new high in adjusted EBITDA, with a profit margin of around 24.77%. With the increasing potential of Latin America’s travel market, the low local currency rates, and a return of international tourists, Despegar is expected to continue its strong growth trajectoryThis likely played a significant role in Prosus’s decision to make this acquisition.

Prosus’ Investment Strategy: A Changing Focus

Prosus, despite its recent sell-offs in Tencent stock, still has Tencent as the cornerstone of its portfolio

As of December 23, 2024, Tencent’s holding was valued at $120.3 billion, representing 77.71% of Prosus's total asset value of $154.8 billionThis underlines that despite the strategic shift in its holdings, Tencent remains a critical asset for Prosus, and the fluctuations in Tencent’s market cap continue to play a significant role in determining the value of Prosus's overall portfolio.

A closer look at Prosus's investments shows a heavy emphasis on consumer-facing sectors, especially food delivery platformsFor example, Prosus has stakes in Meituan (03690.HK), India’s Swiggy, Germany’s Delivery Hero, and the U.S.’s DoorDash (DASH.US), with a total investment in publicly listed food delivery platforms valued at $11.7 billionAdditionally, its portfolio includes private food delivery platforms worth another $5.7 billion, bringing the total exposure to food delivery to $17.4 billion, or 11.24% of Prosus’s total assets.

Beyond food delivery, Prosus’s portfolio also includes investments in educational platforms, fintech, and online advertising, sectors that cater to high-frequency consumer needs.

While Prosus’s reduction in its Tencent holdings dates back to 2018, the continued reliance on Tencent as its major value driver is evident

Even with multiple rounds of divestment, Tencent’s valuation still significantly impacts Prosus’s net asset valueThis suggests that Prosus’s other investments have yet to generate enough value to offset the volatility in Tencent’s stock price.

The Future of Despegar: Can It Replace Tencent?

As Prosus continues its efforts to reduce its reliance on Tencent, the acquisition of Despegar appears to be part of a broader strategy to diversify its portfolioHowever, the big question remains: can Despegar become the next Tencent for Prosus? The short answer seems to be noWhile Despegar’s growth potential is substantial, especially given the revival of the Latin American travel market, it is unlikely to replicate the scale and influence that Tencent holds globally.

Despegar’s market is regional, whereas Tencent has a massive presence in China and significant international influence

The business model of a travel agency, while growing, does not offer the same level of technological diversification and market leadership that Tencent has across a wide range of sectors, from gaming to social media, and from fintech to cloud servicesTherefore, while Despegar may prove to be a valuable asset within Prosus’s portfolio, it is unlikely to emerge as a new cornerstone in the same way that Tencent has been.

Conclusion

The acquisition of Despegar by Prosus is an intriguing move, especially given the company's history of divesting from TencentThe deal reflects Prosus’s continued interest in expanding its presence in Latin America and strengthening its consumer services ecosystemHowever, the larger question remains whether Despegar can fill the shoes of Tencent, an asset that has been a major driver of Prosus’s valuation for yearsWhile Despegar may hold substantial potential, it seems unlikely that it will replicate Tencent’s immense global impact.

As the acquisition proceeds and Despegar transitions to private ownership, all eyes will be on how the company evolves under Prosus's umbrella and whether it can achieve the kind of growth that justifies the significant premium paid for its shares