By Christopher Jones, managing director, Altium Capital
Kuoni surprised many in the travel sector last week with the announcement that it will sell off its remaining tour operating businesses across the world.
In hindsight this decision shouldn’t be surprising given that only two years ago the group exited its tour operating divisions in Spain, Italy and Russia.
The Kuoni disposals will only add to what is an incredibly buoyant M&A environment in travel, coming hot on the heels of several private equity transactions in late 2014, including Travel Counsellors (Equistone), Riviera Travel (Phoenix) and Scott Dunn (Inflexion).
These recent transactions have maintained the dominance of private equity acquirers, as trade buyers – dnata aside – continue to sit on the sidelines.
Altium’s involvement in several of the recent transactions has shown us that private equity’s interest in travel is driven by a combination of factors.
These include both attractive demographic shifts (as baby boomers retire they are taking more frequent and adventurous holidays) and structural changes in the travel sector (the move from offline to online distribution and from generalist to specialist tour operators), added to exceptional levels of liquidity in both debt and equity markets.
The last two years has seen a dramatic strengthening in debt markets, with more banks and credit funds prepared to lend to the travel sector and at much higher leverage multiples.
Given that the large majority of private equity deals involve bank debt, the increased availability of leverage has given private equity investors more buying power, pushing valuation multiples higher (in the same way a strong mortgage market supports house prices).
Trade buyers for Kuoni’s UK tour operating division are again expected to be thin on the ground and few would bet against the division falling into the hands of one of the larger private equity groups, whose appetite for travel assets remains unsated as the bulk of transactions in recent years have been lower mid-market deals (valued below £150m).
Until now there has been little to excite the next tier of larger consumer-focused buyout houses such as Lion Capital (whose investment include Jimmy Choo, Wagamama and GHD), Advent International (DFS and Fatface) and TPG (Victoria Plumb and Prezzo).
2015 may witness a long overdue changing of the landscape. Most of the recent travel deals have seen private equity investors acquiring single, specialist entities, whereas 2015 is likely to see two large, diverse and multi-brand groups change hands.
Speculation has been rife over recent months as to Tui’s intentions for its Specialist & Activity division, with a sale of the group to private equity (whether as a whole or in smaller pieces) the bookies’ short priced favourite.
Later this year we can expect to see Kuoni and Tui’s Specialist & Activity business in new ownership and, in all likelihood, private equity backed.
These two businesses will be mid-tier players in their own right, and, with their new investors eager to drive growth, we should expect to see the return of the trade acquirer (albeit private equity backed) in the UK travel sector. Watch this space.