Unless you’ve been in a dark room you will not have been able to escape UK business news with consistent messages of headwinds around the cost of living crisis, rising inflation, geopolitical instability and much more which has, for many industries, made trading difficult.
So why is the travel sector bucking the trend? And for privately owned travel businesses what can you do to attract debt or equity investment as well as being exit ready should you be considering a sale?
Floating the boat of trade buyers and investors
Understandably, the pandemic brought the travel industry to an almost standstill in 2020 and into 2021, and so it has been wonderful to see that the travel sector has bounced back strongly in the last couple of years and has proven to be an attractive sector for investment in 2024.
The sector has shown somewhat surprising resilience in the face of cost of living pressures with consumers clearly prioritising discretionary spend on travel and experiences over ‘stuff’ to give a much needed escape for time away.
Consumers are emboldened to make forward bookings with travel companies and see the benefit of locking in today’s prices in a world where inflation continues to be a factor.
On the deals the corporate finance team has worked on in the travel sector we have found the following factors are making travel companies particularly attractive to trade buyers and investors:
- The length of time businesses secure forward bookings gives long visibility on the next 12-18 months of revenues, sometimes with visibility up to 2 years.
- The sector has favourable working capital dynamics as customers are paying deposits before businesses need to pay suppliers. Well-managed travel businesses hold significant cash balances, with opportunities to generate interest income on deposits due to the current environment of interest rates of 4-5%. This interest income can even be considered part of underlying earnings where the sustainability of this income can be demonstrated.
- During covid there were a couple of years where businesses were not collecting customer data but with good, consistent trading for the last couple of years they can now demonstrate data on how sticky revenues are, the number and percentage of repeat bookings etc.
Overseas acquirers are seeing UK travel companies as an attractive proposition. Most recent evidence of this is the deal we led with Flight Centre based in Australia who have acquired UK-based Cruise Club UK. This is Flight Centre’s second acquisition in the UK as they see the UK as a good market for travel to support their growth ambitions with the regulatory environment consistent to Australia with the likes of ATOL and the Civil Aviation Authority (CAA) etc. which gives global industry regulation, meaning there are less barriers to cross border deals. During the course of a deal for any regulated travel operator we would liaise with the CAA to gain signoff as their role is to ensure consumers are protected and that you are selling your business to a credible acquirer.
For Private Equity, the working capital dynamics outlined above mean that travel businesses often don’t need further follow on funding to drive further growth in the business. Travel businesses are typically not capex intensive once they have a good booking platform and tech in place.
The forward visibility of revenue is also attractive to Private Equity with examples such as Foresight investing £1.3 million in Caerphilly-based hard adventure business EverTrek (Bucket List Adventure Travel Ltd).
Charting the course to travel business value
For a business considering investment or an exit then valuation is always important. We have seen that valuation structures for deals can vary in this sector and so as part of a valuation we may need to look at surplus cash and working capital to arrive at an answer that works for all parties. There is also variation depending on the travel specialism e.g. Direct to Consumer (D2C) there is more cash upfront in the business, whereas with corporate travel this is often on 30 or 60 days credit.
Each business brings different dynamics and different pricing models which will affect the valuation but any travel business which can demonstrate customer loyalty can attract a premium.
Shareholders should focus on key KPI’s alongside demonstrating good cash management and how they manage FX risk. It is important to have a good customer database to demonstrate repeat bookings and customer loyalty. If you have exposure to certain countries which have geopolitical tensions then it is key to demonstrate that you have a diversified offering to mitigate those risk factors.
Navigating success with travel KPIs
Whilst this is a very broad area, some key KPI’s being considered by acquirers in the run up to a deal are:
- Rich data on customers and bookings including:
- ABV – average booking values
- Number of PAX (passenger numbers) and average PAX per booking, per period
- Year on Year comparisons of PAX and how they are trending
- Profitability of tours with data at a very granular level
On the run up to completion on a transaction it is then key to share how much of current revenues are secured and how this is tracking compared to prior year experience.
Stepping it up a gear
We have seen that the most attractive travel companies are those that demonstrate:
- Showing you are experts in your field with genuine expertise alongside a distinctive product offering, this will differentiate them from their competitors.
- Having a specialisation within a particular sector of the market (location, experiences or customer demographic), supported by long-standing relationships with specialist destination management companies.
- Demonstrating a strong reputation for commitment to customer service e.g. Trust Pilot reviews.
- Consistent and sustainable margins, supported by skillful systems and processes for yield and FX risk management.
- Increasing ABVs and passenger numbers.
- Knowing your customer and having the data to demonstrate brand loyalty and repeat bookings.
- Investment in your website and tech platform to support reservations and customer data.
- Investors like businesses where they can see margin consistency regardless of headwinds and that the business is well managed financially.
- Targeting a resilient customer e.g. on the Newmarket Holidays transaction, their demographic was consumers over 50 who had likely paid off their mortgage with disposable income and so are more resilient to what is going on in economy making the business an attractive proposition from a deal perspective.
Travel’s next destination
While geopolitical tensions and UK economic turmoil extended the hiatus on deals in the travel sector, with the economy improving and travel bookings on the up, the outlook is bright. Transactions that were paused (or never got off the ground) are coming to market. Our sense is that consolidation is happening in the sector which in turn is giving a knock-on effect in terms of the regulator. We are likely to see that social media will hold a stronger influence on the sector which historically has had a lot of traditional routes to market such as newspapers, brochures etc.
Are you a travel company considering your strategic options from debt or equity investment, growth through acquisition or your exit options? Now could be the right time for us to be a sounding board on your options for the medium term.
Case Studies
MHA Corporate Finance delivered specialist financial and tax due diligence services to Wayte Travel Management to facilitate the acquisition of Quintessentially Corporate Travel Management’s parent company CJ Leigh Travel by Wayte. This deal cements Wayte’s presence in the travel management sector and puts their ranking in the top 25 of business travel agencies in the UK.
MHA Corporate Finance provided vendor due diligence services to First Class Holidays on their acquisition of The Knavesmire Travel Group, trading as African Pride and Knighton Reeve. PHD Industrial Holdings operates a “Corporate Compounder” model, and they originally acquired First Class Holidays in 2015 and invested in invested in its staff and operations, putting them in a position where they could they look to make acquisitions to support their continued growth.
MHA Corporate Finance completed vendor due diligence services to Newmarket Holidays, which has grown to become one of the UK's largest, independently owned, specialist escorted tour operators. MHA ‘s work prepared the business for a competitive private equity transaction to support cash out for shareholders and funds for growth resulting in secured investment from Soho Square Capital LLP.
"I recently worked with MHA where they provided excellent vendor finance due diligence services to Newmarket Promotions Ltd and its subsidiaries (Newmarket Holidays and Newmarket Transport).
"As Chief Finance Officer, I found MHA a pleasure to work with throughout the process. They were quick to understand the business, focused on the material areas and delivered a quality report that provided great insight into the business for potential buyers.
"MHA were agile in their approach, offering consistency with their dedicated team and were highly productive when on site and in face to face was meetings, which enabled deeper business understanding and quality trading updates that enabled the buyers to easily understand how the business was performing and where EBITDA growth was being driven.
"All the above led to a great deal being achieved for the Newmarket Promotions Ltd shareholders."
Marc Vincent, Chief Finance Officer – Newmarket Holidays
MHA Corporate Finance worked with the shareholders of Cruise Club UK, a direct to consumer travel business to prepare them for sale. MHA supported them to explore various exit options, preparing the business for sale to Flight Centre Travel Group, headquartered in Australia who saw the acquisition as key to expanding its footprint in the European cruise market."
MHA Corporate Finance provided financial and tax due diligence to InteleTravel to assist their majority stake in leading trade-only brand, Major Travel. The investment will enable InteleTravel to become an integrated powerhouse in the UK travel industry, and enables Major Travel to grow significantly, and negotiate exclusive rates with airlines and hotels globally.
The deals above were completed by
To find out more about the services MHA can offer, please contact our Corporate Finance team.
