Henry Wells, managing director, M&A Advisory, and Phil Dakin, managing director, Corporate Advisory at Duff & Phelps, outline what practical steps travel firms can take to stay afloat during the pandemic
The travel industry is going through unprecedented times and the global reaction to the coronavirus (COVID-19) is having an untold impact on the industry.
Travel is at the apex of this storm and is hurting the most now, but it should hopefully recover more quickly than other sectors.
Sector valuations
The perfect storm that has been COVID-19—the collapse of the oil price and the re-pricing of stock markets at the end of an 11-year bull run—has seen company values re-priced globally.
Since February 24, the FTSE All-Share Index has fallen by 26% in value, while a travel company index and cruise line index have fallen by 33% and 66%, respectively.
This volatility makes valuations very difficult. Commentators are predicting a variety of future outcomes, but over the last 10 years, the various travel indices have all significantly outperformed the FTSE All-Share.
What happens now?
The reality is that a number of travel businesses close down or go into administration during the next six months, but there are things that can be done to avoid this.
There are a number of cash conservation techniques that companies can and should use and many companies are currently going through extensive scenario planning. A number of these scenarios will make grim reading and the only certainty about these scenarios is that they will be wrong. The question is: by how much?
Working capital management and planning while communicating with customers and suppliers will be a critical part of this process. For companies whose scenarios predict that the business will run out of cash at a certain point over the next few months, despite exhausting a number of the cash saving and conserving mechanisms, there are a number of things to consider.
What happens next?
Three potential choices or outcomes:
- Find fresh cash/ capital injection
- Find a buyer/strategic alliance partner
- Financial or operational restructuring
All these choices have one common theme: business leaders should be contingency planning early. This planning should be driven around detailed cash-flow, profit and loss and balance sheet planning and this will be important in any discussions with third parties.
Find fresh cash/ capital injection
Borrowing money from traditional sources at times such as these may not be practical or possible. However, there are several available sources of alternative capital, but companies will need to be guided through this maze.
While capital can sometimes be hard to source, providers of alternative capital can be flexible in their approach, flexible on the terms of investment and flexible on how returns are shared. Whether a business needs a short-term bridging loan, working capital/supplier management or more permanent capital, these can generally be found in the alternative capital pool.
In reflecting the risks being taken, the capital may not be cheap, but it could be very good value and the earlier that these options are considered, and appropriate planning put in place, the better.
Find a buyer/strategic alliance partner
With the current uncertainties, the M&A market for travel business is largely on “pause.” However, where companies need to sell or to find a partner to avoid restructuring or insolvency, or to find the support during this crisis, there are plenty of buyers looking to invest in opportunities.
Key to this will be creative structuring, where both parties share the upside as well as bear the risk, and this is something that an experienced corporate finance advisor can assist you with.
Financial or operational restructuring
If all other options have been exhausted, then director’s fiduciary duties will need to focus on all stakeholders. Directors should engage with an independent and experienced restructuring advisor who will ensure that the trust of all stakeholders is secured early on. A good advisor will make sure any process is well managed and that all stakeholders are treated fairly.
Trading is currently exceptionally tough with companies’ year-on-year trading down anything from 20% to over 150%. There is little consolation in knowing that there will be a travel business in a worse place than you are—so you are not alone, but moving early and decisively may be the key to implementing the best option for survival.
About Duff & Phelps
Duff & Phelps is the global advisor that protects, restores and maximizes value for clients in the areas of valuation, corporate finance, disputes and investigations, cyber security, claims administration and regulatory issues. We work with clients across diverse sectors on matters of good governance and transparency. With Kroll, the leading global provider of risk solutions, and Prime Clerk, the leader in complex business services and claims administration, our firm has nearly 4,000 professionals in 25 countries around the world.
For more information, visit www.duffandphelps.co.uk. call on: +44 (0)20 7089 4700 or email: henry.wells@duffandphelps.com or philip.dakin@duffandphelps.com