Imagine a German financial strategist based at Tui AG, staring at a blank sheet of paper. He’s been tasked with coming up with some creative ways of realising value after a takeover of the remaining stake in Tui Travel PLC.
He scans through the three main sectors – mainstream, accommodation/destinations and specialist/activity. It’s a solid bunch of business that largely work seamlessly as a whole.
But then our analyst focuses his attention on the Education division with its portfolio of four main brands. He might allow himself a smile and admit to himself that he didn’t realise just how extensive the range of businesses really is. Then he’d check the EBITDA numbers, which tell a remarkable story of consistent minimum 40% per annum (or much more) compound annual growth, with the current divisional profit topping £27m. The margin would make our analyst smile even more – it’s well over 12% for most of the divisions.
No doubt he’d also be excited by the sheer diversity of businesses and geographical locations plus the (relative) lack of correlation between wider macroeconomic, geopolitical and meteorological events and the solid cash flow derived largely from servicing the educational market. All that sold cash flow with revenues booked at least 12 months in advance – a joy to behold in a new world dominated by late bookings and cheap skates looking for a bargain holiday.
Surely our analyst concludes that this division is the jewel in the crown of the Tui Travel empire with a set of competitive moats that would stop any new business from entering the market and slashing those lucrative specialist travel margins. Admittedly Tui Education doesn’t always have the number one slot in every market that it competes in – dare we mention Holidaybreak and PGL at this point – but it is nearly always a strong second or third place even in its weakest markets.
Yet our analyst keeps being drawn back to those EBITDA growth numbers. They show compound annual growth rates between 2006 and 2009 for education at 63% (including acquisitions) and 92% for UK leisure. But the strongest growth numbers for 2010 come from an entirely new division called Language, i.e language schools built around recently acquired brands such as the Manchester Academy of English and the Hampstead School of English plus EAC.
Nearly all of the 2010 revenue CAGR of 497% in this business unit has come via acquisitions yet it has already generating just under £5.5m of profit, with 2011 set to be an even bigger and better year. And the division is only just beginning to flex its might – as Tui drives in buying efficiencies, selling synergies and new products, there’s no reason to believe that Language couldn’t be making at least twice as much as it is now within a year or two. Imagine all those Tui Travel worldwide offices selling in language courses during the UK off-peak season to places like China or virtually any country in the southern hemisphere.
And clearly this isn’t the only big story bubbling underneath the surface of Tui’s most profitable division. Flash forward a few weeks to Friday May 13th and the grand opening of Condover Hall, a brand new residential complex in leafy Shropshire. This is the first major assault by Tui Travel on an idea that PGL has popularised amongst the financial community – why not turn the school adventure trip into a business closer in form to the ‘all inclusive’ resort model.
In this new capex-heavy concept the operator owns the large residential complex and invests in new facilities. The ‘resort’ operator then starts aggressively marketing this infrastructure through a variety of channels, targeting first the mainstream schools market, then niche markets such as family adventure or foreign language students.
Obviously this model is a much more capital-intensive business. In the case of Condover Hall it has meant spending not just £5m on the hall itself but at least as much again on new facilities and a full refurb. The pressure is now on Tui Education to start sweating this big asset, but the payoff could be huge as it cross-sells through the divisions under its group banner. And if the model works, it will be only the first of many such projects, all of which will require sizeable investments (there’s already a chateau in France).
It’s at this point that our German analyst begins to entertain a terrible thought. Strong margins, strong cash flows driven by early bookings, heavy capex spend on new infrastructure assets plus the potential for rapid growth in a language teaching business – this doesn’t quite feel like the mainstream travel business, does it? It’s clearly a profitable business and it absolutely justifies extra expenditure on new properties and the internet side of the language schools business – what strategist wouldn’t OK such a decision?
But it’s also completely obvious that this business is a classic private equity play, where money is on tap to carry on consolidating the wide array of businesses within its niches (especially language schools) as well as investing in new residential centres. In a sense this is a collection of businesses beginning to edge away from the capital-light travel model to an alternative that is part travel, part hotels, part education.
There’s nothing wrong with that, but it doesn’t feel like a big global brand with a mainstream business focused on summer dreams. It feels like the private-equity owned business it once was and could be in the future. And the price that one could ask would be equally substantial – it isn’t impossible to imagine EBITDA cruising past £40m within the next few years, with an eight-to-nine times multiple for the right buyer with deep pockets. £300m to £400m cash in the bank for a great collection of businesses run by an entrepeneurial and lean management team – wouldn’t it help pay for the big acqusition?
Of course plenty could go wrong in the meantime, which could completely spoil my flight of imagination. In particular, education spending cutbacks must begin to have some effect in the UK and even the US, and it’s also clear that other countries are ramping up their English language teaching capability – the UK is after all a hugely expensive place to learn to speak English if you’re Chinese. Be that as it may, it remains increasingly clear to anyone with a strategic head that Tui’s specialist travel business is one to watch.