Travel sector investments taking off

Alice Murray
14 August 2014

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As the holiday season sets in, Alice Murray takes a look at private equity opportunities in the travel sector as it continues to shift into the digital age.

The travel operator sector has undergone huge structural changes thanks to advances in digital technology and consumers' acceptance of online bookings. This significant shift has of course created a wealth of opportunities for private equity, with more potential transactions on the horizon.

From venture to large-cap deals, travel operators are fast-becoming private equity's sweetheart. Skyscanner has notably attracted significant amounts of venture investment over the past 12 months. In October last year, Sequoia injected the largest sum it has ever invested in one company, in a deal that valued Skyscanner at $800m.

Moving to the mid-market, Inflexion Private Equity acquired online booking operator On the Beach in October from previous backers Isis Equity Partners for £73m. And at the larger end of the market, Permira and Ardian have been building up European online flight booking service eDreams Odigeo since 2011, which now owns brands including Go Voyages, eDreams and Opodo, and counts an impressive 14 million users across 42 countries.

Based on this recent activity, it would appear the asset class favours the online booking side of the sector over budget airlines. Adrian Balcombe, managing director at Alvarez & Marsal, who has worked in the space for more than 20 years, believes budget sector tour operators remain a tough segment in which to find success: "The budget sector remains more difficult, whereas short breaks and premium or more bespoke offerings always gives rise to opportunities."

Digital revolution
A quick glance at recent corporate activity in the travel space clearly highlights the deep structural change currently underway. "The business model has changed more significantly than in other sectors; these businesses can be run entirely online. While traditional players including Thomas Cook have 800-900 physical stores, newer entities including On the beach and Travel Republic have none," says Balcombe.

The ability to aggregate flight and hotel bookings for online consumer use has transformed the space. Where traditional players would book up seats and rooms one year in advance and sell them to holiday-goers through glossy brochures, today, consumers are able to select the exact trip they want from the comfort of their own home. "This creates a different risk profile," says Balcombe, "one that private equity can more easily understand. The previous model had a different risk profile requiring pre-booking seats and rooms, with related foreign exchange exposure and other risks."

As the asset class has been investing in the sector for several years in order to take advantage of technological changes, one might assume the opportunity to transact in the sector is over. However, this does not appear to be the case. Flight comparison website Cheapflights has recently received a wave of private equity interest, with six firms having reportedly made offers, valuing the company at around £150m. Another potential deal is airline operator Monarch – the Mantegazza family is looking to offload a stake in the company to private equity.

Beyond these headline deals, Balcombe believes we are only halfway through revolutionising the travel sector: "We're still in the middle of a period of change. There are new players coming in with different models and it is difficult to predict what new technology will do."

Furthermore, we are starting to see signs that, much like the retail sector, the travel space is becoming more polarised between value and luxury. "You've got to be at the cutting edge of technological change or in the premium market," says Balcombe. Indeed, outside of the online booking services space, there has been an uptick of deal activity at the premium end of the market.

Blissful breaks
Towards the end of 2012, Index Ventures pumped £8m into luxury travel club Secret Escapes, joining existing investors Octopus and Atlas Venture, which backed the company's launch in 2011. While there is a value element to Secret Escape's offering, through offering flash sales, as a members-only site and one that only offers four- or five-star accommodation, Secret Escapes has cleverly positioned itself at the premium end of the market.

Another notable deal is Equistone's purchase of Audley Travel, a travel agency that offers tailor-made tours. Audley employs a raft of 'specialists', with detailed knowledge of various destinations to plan bespoke accommodation, guides and excursions.

Furthermore, Vitruvian's recent £80m acquisition of JacTravel from former backer Bowmark Capital shows that beyond the "Primark to Prada" polarisation, more specialised offerings can be found. JacTravel focuses on B2B wholesale hotel accommodation, offering competitive rates for business users. This market niche appears impressively defensive when considering Bowmark's successful exit – the GP invested at the peak of the market in 2007 and despite the financial downturn, JacTravel's sales increased by a compound annual growth rate of 16% and profits of 22% during the investment period.

While there have been an impressive number of deals in the travel sector, from start-ups through to major corporates, opportunities evidently still abound. Furthermore, as Europe's economy continues to stabilise, holidays to overseas locations will only be in higher demand as the popularity of "staycations" begins to wane, leaving many observers bullish about a further uptick.