Travel sector assets: Seeking solutions to long-lasting woes

The travel sector has been particularly hard-hit by the coronavirus outbreak. While some European governments are in the process of considering lifting or easing certain lockdown measures, the travel sector looks likely to remain afflicted for some time. Official advice in place across much of Europe is to remain at home unless absolutely essential, while gatherings of more than two people from outside the same household have been banned, impacting travel businesses on a domestic level since March. On the public market, airline shares plummeted amid the uncertainty and many airlines and other transport operators are calling on national governments to assist them.

Martin Luen, managing director at Baird, explains some of the key problems that travel operators have been facing and the challenging dynamics between international operators and airlines: "Firstly, operators have customers who have booked their holidays and are asking for refunds as they don't know if the provider they booked with will still be there in 12 months' time. Secondly, the operators have already taken the cash and used it to buy flights and make deposits for hotels, but the airlines are not offering cashback for agents and operators. So the agents and operators are being squeezed, they are being offered credit notes from airlines and having to give out refunds, meaning they are even less likely to have the cash they need for wages and expenses for the next few months. There is a furore targeted at certain airlines for not doing what others are doing, which is to give the cash back."

Prior to the crisis, the travel and tourism sector had seen significant interest from European GPs in recent years – 2015 in particular was a highlight year for investments in the sector, with 18 buyouts totalling €6.64bn, according to Unquote Data. 2018 was also a strong year for travel and tourism buyouts, with 21 buyouts adding up to almost €5.3bn.

Notable assets in portfolios

Deal name	Deal date	Country	Deal value (€m)	Equity lead	Fund invested from
Autobahn Tank & Rast	2015-08-01	Germany	3,500	Allianz Capital Partners	n/d
Kuoni Travel Holding	2016-02-01	Switzerland	1,298	EQT Partners	EQT VII
Hotelbeds Group	2016-04-01	Spain	1,200	Cinven	n/d
Wyndham Vacation Rentals	2018-02-01	UK	1,046	Platinum Equity	Platinum Equity Capital Partners IV
Club Méditerranée	2015-03-01	France	939	Silverfern Co-Investment Partners, Fosun International	n/d
Zenith Vehicle Contracts	2017-01-01	UK	880	Bridgepoint Capital	Bridgepoint Europe V
La Compagnie du Ponant	2015-07-01	France	562	Artémis	n/d
Etraveli	2017-06-01	Sweden	508	CVC Capital Partners	CVC Capital Partners VI
Alpitour	2018-05-01	Italy	470	Tamburi Investment Partners	n/d
Park Holidays UK	2016-12-01	UK	425	Intermediate Capital Group	n/d
Sykes Holiday Cottages	2019-10-01	UK	423	Vitruvian Partners	Vitruvian Investment Partnership III
Siblu Holdings	2019-09-01	France	400	Naxicap Partners	n/d
Travelopia	2017-02-01	UK	381	KKR	n/d
Big Bus Tours	2015-02-01	UK	294	Exponent Private Equity	Exponent Private Equity Partners III
Travel Counsellors	2018-06-01	UK	285	Vitruvian Partners	Vitruvian Investment Partnership III

Source: Unquote Data

The sector is also a popular choice for small-cap and mid-market GPs. Around a third of buyouts in the sector completed since 2008 were for companies with a turnover of less than €50m, while 43% of deals in the sector were for companies with a turnover of €50-250m.

Against this backdrop, GPs have been seeking to stabilise their portfolio companies and address their liquidity needs. Lone Star's UK-based coach tour operator Shearings is currently seeking a sale to avoid administration, following reports in March 2019 that the GP was seeking to sell the company within the next year.

A question almost every investor or owner is going through right now is whether to double or quit" – Martin Luen, Baird

In April 2020, in the wake of the crisis, Cinven, EQT and CPPI undertook a €430m capital injection for HotelBeds as a term loan to support the business. As reported by Unquote sister publication Debtwire, the loan ranks pari passu with the existing debt and has the same maturity, meaning that the sponsors expect the business to be able to support repayment.

Driving digitalisation
Nevertheless, sponsors are facing difficult choices. "A question almost every investor or owner is going through right now is whether to double or quit," says Luen. "If you have conviction and you have the stomach to ride out what will be a volatile and bumpy patch, you will need to put in more money and double down, making an assessment about whether this will generate a return over the longer term."

Simon Fischer, a partner at Telescope Advisory Partners, says travel operators have already undergone significant technological change and can continue to do so to tackle the crisis: "In the past, leisure and travel business models were really based on paper catalogues, then online platforms came about." Companies such as Booking.com and GetYourGuide have profited from this change.

Peter Cookson, a partner at Armstrong Transaction Services, highlights the importance of technology and data in the travel sector: "Travel can be a data-rich sector – you can capture a lot of data about what customers want to do or say they want to do. It is also well-suited to online delivery. If people can't travel, that does not necessarily stop them from looking at places they would like to go to. It's about using the data to understand customer behaviour, and behaviour by different groups of customers, to make sure lifetime value is maximised. Companies that understand their data, capture it, analyse it and take action on it, should be well positioned."

Alternative ways of delivering even a part of the experience are very important" – Simon Fischer, Telescope Advisory Partners

Fischer highlights another way that travel companies might be able to use technology and digitalisation to their advantage to continue to reach customers: "Right now, nobody is looking to book their next travel. But what can be done with VR applications to create a new appetite? How can a business create voucher-based travel pre-payment with discounts? How can they create additional revenue streams next to booking hotels and flights? There is so much more out there to create experiences: people want to go on holiday, they can't, so the question is what can we give them instead? What is the minimum thing that can be done? Alternative ways of delivering even a part of the experience are very important."

Cookson adds that such approaches can use data and digitalisation to minimise the cost of customer acquisition and direct marketing spending towards the right channels: "Once a company has won that customer, it's about understanding how they interact with them. There are different cohorts of customers who behave in different ways, for example, in how often they book – it's then about trying to move people to the most profitable or beneficial cohort."

Snapping back
There is widespread agreement among the market sources with whom Unquote spoke that, while the current crisis has parallels to the downturn experienced by the travel sector in the wake of 9/11, companies are currently facing additional unprecedented challenges. No buyout deals have been completed in the sector since February 2020, according to Unquote Data, and only three buyouts were done in January, showing the caution that GPs are currently exercising.

Nevertheless, Armstrong Transaction Services has created a model to assess the damage to companies affected by the coronavirus outbreak and to seek alternative revenue lines for companies in specific industries. For the travel and tourism sector, the commercial due diligence adviser suggests a number of "snap-back sectors" that struggling companies can pivot their business models towards during the crisis and once it is over. For the travel sectors, these may include domestic coach services, autumn short breaks and self-contained accommodation such as lodge parks.

Travel companies can emphasise convenience, security and certainty compared with independent booking" – Peter Cookson, Armstrong Transaction Services

Cookson says his firm's model takes into account the commercial differences between the sub-sectors within travel and tourism: "Sub-sectors will behave differently, but we have a framework for looking at this. A sub-sector or a company can be considered across a range of metrics: customer demand; verticals served; customer base; revenue profile; what the front line capability is; what its supply chain looks like; what its cost base is; and how its operations are structured. We use this framework to categorise either sub-sectors or companies as pressured, resilient or snap-back opportunities. We can then dive deeper to drive out recommendations to maximise opportunities and minimise risks."

Cookson also highlights the fact that travel and tourism booking operators can seek to make themselves stand out amid consumer uncertainty: "Travel companies can emphasise that when compared with independent travel, everything is arranged, stressing that any issues will be something they deal with: they can emphasise convenience, security and certainty compared with independent booking."

Silver linings
The so-called "silver pound" is also likely to sustain the industry in the longer term, according to Luen and Cookson. "There are a few sectors where we see long-term structural growth," says Luen, "where we think there is a clear investment opportunity, as they are long-term structurally growing. One is luxury travel, which typically caters to the older demographic – offering cruises and rail journeys, all of which have been specifically affected – and that demographic has been hit the hardest. But people will always travel, people are looking for experiences, and that sector in particular has the disposable income. They also value a high degree of customer service."

Although M&A opportunities in the travel sector might be few and far between for the time being, Luen says mergers and consolidation plays could shore up the sector for the future: "It may make sense for some operators to consolidate and form a single, combined sales and marketing force, customer service team and call centre, to rationalise the cost base, becoming more profitable and resilient, in order to get through the downturn."

"We are hearing more and more questions about the longer-term options," saus Luen. "For example, some companies may be thinking about a nil-cash merger, where two operators combine together, creating a larger-scale operator, perhaps focused on the silver pound demographic, in which two owners take a split equity stake so they both can benefit from the higher value platform in future and see a way through to generating that value."

Luen says it may well be easier for two PE-backed companies to undertake such a merger as they may already have the structures and precedents needed in place, although this is not a guarantee of success. "The companies do need to have a cultural fit and there must be an ownership fit across the two PE firms, as they need a similar timeline for their investment, and they need similar strategies. But that is not uncommon. With corporates, it's more one-off or bespoke, as they don't have so much experience of structuring deals creatively."

Most active GPs in the space since 2015

GP	Number of deals done	Total value of deals done (€m)	GP country
Bridgepoint	3	1,053	UK
Livingbridge	3	337	UK
LDC	3	179	UK
Sixth AP Fund	2	2,179	Sweden
Vitruvian Partners	2	707	UK
Exponent Private Equity	2	441	UK
BPI France	2	290	France
Inflexion Private Equity	2	175	UK
Phoenix Equity Partners	2	84	UK
Kings Park Capital	2	14	UK

Source: Unquote Data

A new destination
Cookson says PE-backed assets might also be in a better position within the market to take advantage of technology and data-driven approaches: "I think PE understands the value of data and digitalisation strategies in the travel sector. What is important is not necessarily that a travel company has finished that journey, but that it recognises the value in going down that journey. Not everything needs to have been done, but it's that recognition that there are opportunities that can be realised if that journey is taken."

Although travel companies were not as severely affected during the global financial crisis as they have been during the coronavirus pandemic, innovation and opportunities may come out of calamity. Luen cites the example of the approach taken by Booking.com during and after the 2008 crash. "Booking.com used the opportunity to consolidate through a buy-and-build strategy in the online travel agency space for flight and hotel booking. They focused on buying sub-scale online businesses; they could pay affordable prices and integrated them into their platform. There are a number of sectors like that today where there is real opportunity."

Our snap-back analysis picks up on the fact that spending is often only partially discretionary – demand is pent up or stored up during an economic crisis" – Peter Cookson, Armstrong Transaction Services

While GPs attempt to find liquidity solutions for their travel sector companies and plan ahead, Cookson highlights the importance of staying in touch with customers. "Anything that can enhance customer engagement is important: you want your customers not to feel like they have been forgotten. It's about the right kind of engagement with customers: they want to know you are still there and intending to do the things that you have done, even if in a slightly different way."

In the medium term, Cookson expects domestic travel will still see significant customer demand. "Our snap-back analysis picks up on the fact that spending is often only partially discretionary – demand is pent up or stored up during an economic crisis. People are still likely to want to go on holiday as and when they can, but their horizons may be narrower in the short term as they want to minimise their risks. Staycations are likely to be an initial outlet for that: short breaks in the autumn to closer European destinations are likely to be an option too. People want to go away, but want to feel like they are in control if adverse events happen in the short term."

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