Analysis: What makes travel attractive to investors?

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Yesterday’s acquisition of Audley Travel by 3i was merely the latest in a series of private equity deals. Nigel Bland and Alistair Pritchard of Deloitte spoke to Ian Taylor

The healthy state of the travel market and rapid growth of some players has placed the sector firmly in the sights of private equity investors, leading to a spate of merger and acquisition (M&A) deals.

This is in contrast both to the period immediately after the financial crisis of 2008 when investment activity understandably tailed off and to the years immediately before the crisis when the major travel groups dominated M&A.

The scale of activity reflects wider interest in M&A deals across the economy, with a Deloitte M&A Trends Report early this year concluding: “The environment could not be more conducive.

“There is ample cash on corporate balance sheets, easy access to debt and equity markets, and the economy is stable and growing at a steady pace.”

Tom Salmon is director of private equity firm 3i which yesterday completed the acquisition of Audley Travel.
He told a Travel Weekly event in September: “M&A activity involving UK companies is at its highest level since 2007.

“There is a huge amount of capital out there, with 40% more cash on corporate balance sheets than before the crisis and about 20% more in the hands of PE firms than in 2007. It means there is huge competition for deals that come to market.”

Nigel Bland, who leads the corporate finance advisory leisure team at Deloitte, explained: “Ten years ago there was limited private equity interest in travel.

“Today there is greater clarity in the sector, for example around what the CAA expects from businesses and what it will accept. There is also greater clarity regarding the banks.”

Looking back, he noted: “2007 was the happiest year for trade deals. There were 80 transactions in leisure – double the number in 2008 – some big, some relatively small. But these were deals within the sector. There was little PE activity.”

Nowadays, PE deals dominate, often with travel companies passing from one PE owner to another as happened with Audley.

The investment appetite is particularly strong in the UK. Bland said: “The UK M&A market is arguably the most liquid in the world. There is more capital than ever in PE and there is a virtuous circle in travel at the moment.”

His colleague Alistair Pritchard, Deloitte lead partner for travel, added: “There were a few early PE deals that worked well, so interest spiralled. A lot of people think, ‘If we could get the right deal there is a good opportunity’.”

Bland said: “Travel and restaurants are the biggest area of leisure investment for private equity. It’s a benign market. The euro exchange rate means you can get attractive growth rates and cash flow is positive. What appeals are businesses with [annual] growth in profits of 20%.”

The scale of disruption in the sector is also an attraction. Bland said: “The changing distribution chain is both a risk and an opportunity.

“Look at the hotel bed aggregation sector – for five years growth has been faster than in the overall travel market because aggregation is disrupting the traditional distribution chain.”

Asked what private equity can bring to businesses, Bland explained: “PE has absolute clarity of purpose and is very good at bringing financial rationale to a business. It wants a return over two to three years through enabling a business to grow.”

PE companies are charged with making 20%-25% returns on investment each year. But Bland insisted the balance is tilted away from restructuring and cost-cutting towards growth.

“There is a disproportionate number of media reports about PE firms cutting costs when most PE investment is about growth. PE is good for the sector. It brings liquidity.”

Of course, the sector is not without risks for investors. Bland said: “There is always risk in destinations and there remains risk in travel more generally. Remember the Costa Concordia and the Icelandic volcano [in 2010].

“Airlines see limited PE investment because of the volatility in their sector. PE cannot stand volatility. A PE

investor is working to a fixed time horizon and the fuel price going up would be no use to it.”
Pritchard added: “Private equity likes something differentiating [about a business], but investors don’t want to put all their eggs in one basket, say to one destination.”

Regulation of the sector can also produce a more cautious approach among investors. Bland said: “All investors have to deal with licensing and it’s more difficult and costly to get bonds.”

He warned that the relative attractiveness of any sector “can go into reverse”. “It happened in the gaming sector where a lot of PE companies suffered following the introduction of new regulation and the ban on smoking.”

The City of London’s view of travel is somewhat different. “Travel is not one of the most-popular sectors in the City,” said Bland.

“It’s not one of the high-growth sectors, although the markets love Priceline [which includes] and Expedia.”

Pritchard agreed, saying: “Generally, the PLCs [listed companies] are more traditional businesses, with lower growth but diverse interests and less volatility because they have diversity in their divisions or in destinations and a range of product, and that is something the market can live with.”

Overall, Bland insists, the outlook for travel investment is bright. He said: “Travel is a sector with a long-term future – it’s cyclical, but there is a lot of growth.

“There is a lot of change and disruptive technology, and that is attractive. Businesses can grow a lot faster.

“The pace of change in distribution is increasing. Businesses are growing very fast. If you pick the right business, the scale of growth can be spectacular. It’s an exciting market to invest in.”

This is an extract from the Travel Weekly Insight Annual Report 2015

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