Christopher Jones is a managing director at international investment bank Altium Capital and leads the firm’s focus on the travel sector
In a recent article I touched on the one dimensional nature of the mergers and acquisitions (M&A) market in travel over recent years.
While M&A volumes have proved remarkably robust throughout the downturn and recovery, the large majority of buyers have been private equity (PE) funds, and trade buyers have been conspicuous by their absence.
There has been some corporate M&A in emerging markets, but when it comes to the UK and Europe, the travel corporates have been heavy net sellers (as witnessed by Thomas Cook’s series of disposals).
Earlier this year Bowmark Capital put JAC Travel on the block and it was no surprise to see Vitruvian Partners come through a hotly contested auction process to complete an £80 million acquisition of the business last week.
Despite rumoured interest from international trade buyers, once again the large bulk of Vitruvian’s competition came from fellow private equity investors and it is not difficult to see why they were attracted to the bed bank and inbound tour operator led by Terry Williamson.
JAC marks Williamson’s second successful private equity exit, having previously led School Travel Group through its merger with Kingswood and subsequent sale to DLJ Private Equity, yet another sale from one PE owner to another (known as a ‘secondary buyout’).
This week’s announcement from Tui (the agreement in principle to merge Tui Travel with its majority shareholder Tui AG) has long been mooted but is unlikely to have much impact on the business in the short term (the deal is not expected to go through until Spring 2015).
Over the medium term the merger is expected by many city analysts to result in further disposals, with the Online Accommodation and Specialist & Activity businesses being “operated separately and opportunities to maximise their value for the Group being actively pursued.”
As and when Tui do consider non-core disposals they can be sure that there will be no shortage of PE buyers waiting in the wings.
While it has maintained M&A volumes at decent levels, the preponderance of private equity buyers in the travel sector is unbalanced and does not represent a sustainable state of affairs.
To return to a truly healthy M&A market the game of private equity pass-the-parcel must come to an end through the return of travel sector IPOs and/or the return of trade buyers.
Travel is a notoriously ‘late’ cycle sector for corporate M&A (as demonstrated by the rush of travel deals in both the late 1990s and 2007/08); in the early stage of the economic cycle travel companies tend to focus their attention on organic growth opportunities.
When the economic cycle becomes more mature, opportunities for growth can be harder to find, which often drives corporates to look at acquisitions to maintain their momentum.
On this basis, with the recovery seemingly well established, one could reasonably argue that we should expect trade buyers to return in the next couple of years.
It is also worth noting that the UK IPO market is very much open for business, and May saw the long awaited floatation of over 50s holidays and insurance group Saga, marking the end of a seven year ‘marriage’ with the AA (the two businesses were bolted together in yet another PE-backed deal in 2007).
The IPO valued Saga at £2 billion (raising £550 million of cash to pay down debt), making it one of the largest listed European players in the travel sector even if the bulk of the group’s profits come from insurance.
Other private equity backed business have been mooted as potential IPO candidates, including Equistone’s luxury tour operator, Audley Travel and Inflexion’s recently acquired OTA, On The Beach.
More IPO activity would be very welcome in the travel sector as it’s still difficult to see where more UK trade buyers will come from.
Both Tui and Thomas Cook are considered more likely to sell assets than buy them for the time being, and it is not obvious where other sector consolidators will emerge from.
Now it is a stand-alone listed business with a healthier balance sheet it would be no surprise to see Saga look to accelerate the growth of its travel business.
In common with other trade buyers, Saga could outbid PE buyers if they need to, as they can bring synergistic benefits which financial buyers cannot compete with.
It will be interesting to see how the travel M&A landscape evolves over the next year or so.
The return of the trade buyer maybe be long overdue but I wouldn’t bet against the dominance of private equity ending any time soon.