Post-Brexit, mergers and acquisitions in travel were set to take-off. But then came Covid. Jennifer Morris hears from the experts about which travel businesses will be seen as more – or less – desirable post-pandemic
It wasn’t too long ago that news of big-ticket travel private equity deals was commonplace – think Love Holidays, Riviera Travel, Travel Counsellors. But then Brexit threw a spanner in the works, with experts predicting a post-B-word boom in deals towards the latter part of 2020. And then along came coronavirus to launch everything up into the air once more. While there may yet be a surge in private equity deals later this year once the dust starts to settle on the current crisis, in the shorter-term deals will be reserved primarily for those companies in distress, and those looking to merge.
“Right now anything still going ahead is being done out of desperation or distress, confirms Martin Alcock, director at the Travel Trade Consultancy, explaining that trying to calculate a valuation in the current climate is “impossible”, with no visibility on future trading.
And while some potential sellers – “not many in travel” – may have done well out of the coronavirus crisis, it would be difficult for them to prove their results aren’t entirely due to the pandemic, and therefore not repeatable. “Due diligence will be so full of Covid-19 caveats as to be virtually meaningless,” says Alcock.
Bobby Fletcher, director, corporate finance at Alantra, agrees: “I don’t think the board of Tesco are sat there expecting their fantastic trading to continue forever. For M&A activity to continue for going concern businesses, there will need to be a demonstration of a continued period of normality,” he explains.
Harry Stoakes, corporate finance partner, BDO, believes while buyers usually want to see 12 months of sales, in these unprecedented times three months of normal trading may suffice.
And sellers will still strive for a good deal, the experts believe. “They will understandably be reluctant to accept deep discounts to valuation if they are not forced sellers, and will therefore want the opportunity to demonstrate a return to profitability,” explains Fletcher, adding: “I think any investors who are expecting a one-off downward correction in valuations that will sustain may be disappointed in a world where there is a wall of capital readily available to deploy.”
Indeed Alcock points out that globally private equity funds are still “sitting on” around $2 trillion of un-invested capital, which could yet lead to a bounce back towards the end of the year.
“These funds usually have a finite lifespan, and in order for them to make any money, they need to invest in a portfolio of businesses, grow them and then sell them within, say, a 10-year period,” he explains. “So the clock is ticking.”
“The still incredibly high levels of dry powder in private equity funds will drive a surge in activity in 2021 and 2022,” agrees Fletcher.
Stoakes caveats though: “Lots of private equity deals are financed partly by bank debt and in six months time the money from the bank is probably not going to be available.”
He further warns: “Before a coronavirus vaccine is available it’s going to be difficult to sell businesses.
“Everyone’s talking about waves two and three… You might get your revenue back and then get thrown back into lockdown.”
Stoakes believes initially the focus will be on mergers.
“Big businesses might use it as an opportunity to buy smaller ones,” he predicts. “Acquisitions will become cheaper, and some will get done this year. We had some engagement going into the crisis.
“What usually happens in a crisis is mergers increase – there will be fewer operators and less competition for the big boys. There will be far fewer Atol holders in the long run, too.”
Stoakes is confident firms will invest in a strong business if it is profitable and growing.
However the domestic market will rebound quicker and stronger than outbound, he predicts.
Fletcher agrees: “Restrictions on travel abroad are likely to endure for some time.
“Heavily asset-backed, UK staycation-focused companies with activity and wellbeing at the core of their offering will be super attractive,” he predicts.
“There has been a love affair in this space for private equity for some time, owing to the multiple revenue sources, predictable, recurring revenue, and real estate underpinning it, which is so attractive in uncertain times. In fact, scarcity value for well-run assets of this nature may well drive values in excess of pre-Covid levels.”
Stoakes adds companies with a variable cost base – and less dependent on heavy costs like staff and premises – will be seen as more desirable post-pandemic, citing Love Holidays and On the Beach as examples.
And BDO and Fletcher agree online travel sellers may gain market share, too.
Tom Urquhart, BDO corporate finance senior manager, explains: “With everyone forced into lockdown there will be an acceleration towards online booking as people gain confidence doing things online.”
Fletcher adds: “Distribution channels such as reader offers and tour brochures do have a place in the travel market, but a digital led, omni-channel offering that satisfies the customers’ requirements before, during and after a trip, is the only direction of travel for this market.”
This may coincide, the experts predict, with a decline in confidence of the grey market.
“Older travellers have driven most of the private equity investment into the travel industry over the last five years. However, you would imagine this segment being hardest hit, and taking the longest to recover, particularly if additional travel restrictions are placed on them,” predicts Alcock.
So what’s the advice then for travel businesses that were looking to sell or seek investment before the coronavirus crisis hit? The experts advise focusing on improving your business.
“It might not be until this time next year that you are in a healthy position, and at that point you can sell or build you business back to a position to sell it,” advises Stoakes.
Fletcher adds: “Continue to demonstrate an ability to innovate… find a reason to exist that is exclusively yours.
“If seeking a minority investment, don’t always be obsessed with headline value offered to the investor.”
Alcock asserts: “Unless you are in a distressed situation, I wouldn't advise starting a sales process now. It would be better to use this time to focus on your business and build your strategy for getting back to pre-Covid levels.
“I would also suggest spending time identifying and fixing weaknesses, reviewing your team and your internal processes.”
By all accounts, it sounds like those businesses that figure out how to speak to a changed, more cautious consumer will thrive in the long run.