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23 Nov 2018

BY Rob Gill

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TRFBLI

Private equity’s race to buy before Brexit

Accountancy and business advisory firm BDO released its annual Travel Diaries this month. Rob Gill talks to report author Harry Stoakes about why now might be a good time to sell your business.

Harry Stoakes, BDO analyst
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“Loveholidays was acquired by private equity this year but I wouldn’t be surprised if there was an IPO in the next three to five years if they keep growing at the same rate.”

Travel company owners are benefiting from a “buoyant” mergers and acquisitions (M&A) market despite the approach of Brexit.


Harry Stoakes, partner, M&A, at BDO, said there had been a “flurry” of deals in the UK’s leisure travel sector this year, including On the Beach acquiring upmarket operator Classic Collection and Scottish agency Barrhead Travel being snapped up by US-based Travel Leaders Group.


“Because of what’s happening with the Brexit negotiations, people have been looking to do deals before the end of March 2019,” explained Stoakes.


“There might be a quiet couple of months until March but then there could be a surge of activity in the second half of next year after things settle down.”


Stoakes said the private equity industry was awash with cash for acquisitions, and travel was now viewed as being more attractive than other industries, such as general retail and restaurants.


“Private equity is not going to disappear – they have plenty of money, as they have done a lot of successful fundraising in the last two years, and they have to spend that money,” added Stoakes.


“With more money chasing travel companies, it’s a good time to be selling your business. Travel is more insulated than other sectors – online travel businesses can be very nimble with not so many fixed costs.


“It’s possible for travel businesses to produce a 20-30% gross margin, and for good businesses to make a 10% ebitda (earnings before interest, tax, depreciation and amortisation) margin.”


Stoakes predicted a mixture of trade and private equity acquisitions in 2019, including some deals between private equity firms, who typically look to sell investments every three to four years.


He also foresaw increased interest in UK domestic operators with more Britons taking “staycations”.


“We’ve already seen some of this activity with Forest Holidays [acquired by Phoenix Equity Partners] and more businesses like that will be changing hands,” said Stoakes.


“We had an amazing hot summer and exchange rates are not so great for people going overseas. Domestic holiday operators are doing very well and that triggers more M&A.”

Stoakes also predicted a strong market for trade acquisitions, particularly for the tier of operators below the likes of Tui and Thomas Cook in terms of size.


“Tui and Thomas Cook have not done a lot of M&A in the last five years,” he said.


“It’s the next layer of companies such as On the Beach that have been making acquisitions and that will continue.


“I can’t see Cook buying anything. Tui has been going down a one-brand strategy but they might make a B2B acquisition.”


As for travel companies potentially listing on the stock exchange, known as an IPO (initial public offering), Stoakes identified a couple of companies to watch.


“Loveholidays was acquired by private equity this year but I wouldn’t be surprised if there was an IPO in the next three to five years if they keep growing at the same rate,” he said.


Stoakes added an IPO could also be an option for Audley Travel – which former Tui UK managing director Nick Longman has recently joined – in the next couple of years.


But Brexit could still cast a considerable shadow over this rosy outlook for the M&A market.


“I think a no-deal Brexit would give the industry big problems,” said Stoakes.


“The uncertainty doesn’t help, as consumers are less inclined to book a holiday in 12 months if the country is in chaos, and it doesn’t help exchange rates either.”

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