Transaction activity in the travel sector is heating up as trade buyers and private equity firms see the industry returning to pre-COVID-19 levels and get back to the business of doing deals. Nicholas Neveling reports.
According to Grant Thornton’s Spring 2024 Travel Sector M&A Review, travel sector deal volumes climbed 60% in Q1 2024 as a flurry of attractive assets came to market looking for buyers. Private equity’s (PE) return to the sector has been particularly noticeable, with PE involvement in travel deals up 250% year on year.
The contrast with the dire market suffered by travel companies and investors in 2020 (when COVID-19 brought the industry to a halt and no transactions progressed for nine months) could not be starker, and while cost-of-living pressures, inflation and geopolitical tensions continue to present headwinds, the travel sector’s recovery is heading in the right direction.
“COVID-19 was very challenging for the travel industry, but from 2022 onwards, as lockdown restrictions eased, there was this big bounce back and that activity has been sustained, with bookings holding up in 2023 and 2024,” says Nicola Sartori, partner and head of consumer and travel, Grant Thornton.
Dunn deal
The source of the travel sector rebound can be traced back to the beginning of 2023, when Inflexion Private Equity secured the exit of luxury tour operator Scott Dunn to Flight Centre Travel Group in a deal worth around £120m.
A deal of this size, involving an exit to a strategic buyer, represented a landmark event that firmly drew a line in the sand and saw investors and travel company management teams put the period of pandemic disruption behind them.
A cluster of deals have followed since, with recent transactions in the space including Mobeus’s investment in Distant Journeys (see Going the distance, below); ECI Partners backing TAG; and Risk Capital buying Simpson Travel.
“We started to see travel deals rally in 2023 and that momentum has carried into 2024,” says Sartori. “We would like to see more completions, but there is positive momentum with several deal processes going on. Private equity interest in travel is particularly robust.”
Steady earnings
Buyers and vendors returning to dealmaking have drawn confidence from the sustained period of strong trading by travel businesses in the years following the pandemic.
Even though the ‘revenge travel’ trend immediately following lockdowns drove strong earnings growth across the industry, dealmakers demurred from transactions as many assets were still valued off COVID-adjusted EBITDA figures. Investors also wanted to build more comfort around whether the post-pandemic surge was just a blip, or whether the earnings would continue to rally over the long term.
Four years on from the first lockdowns, businesses can now show a sustained period of unadjusted earnings growth, which has made it much easier for buyers to price risk and build confidence around valuation. “Post-COVID, now with a few years track record of earnings visible, travel businesses are able to start to think again about M&A. Vendors can set out the story of what they have achieved and buyers can look back at trends over time, look at how the business is performing and take a view as to whether to invest,” says George Moss, a partner at ECI.
Mobeus managing partner Ashley Broomberg adds: “Travel companies have performed extremely well in recent years. Clearly, the industry was materially impacted by COVID-19, and it rebounded very strongly after lockdowns eased.
“Importantly, what we have seen is that the recovery has been sustained – it wasn’t just a one-off bump. We have seen very strong performance for three seasons now and forward bookings show continued growth, notwithstanding the macroeconomic backdrop.”
Buyers also recognise that only the highest quality travel businesses managed to survive the COVID-19 fallout. Most companies that came out on the other side also used the hiatus to tighten focus on their best-performing assets, invest in their online capabilities and, in some cases, buy up vulnerable rivals at bargain-basement prices. Companies that made these behind-the-scenes operational improvements are now reaping the benefits, with the investment driving revenue and margin growth.
Going the distance
Mobeus’s investment in travel company Distant Journeys is illustrative of the high premium dealmakers are placing on travel companies serving distinctive markets.
Founded in 2014 by Richard Hanson, Andrew Laycock and Simon Whittle, Distant Journeys has focused its strategy on serving the older traveller with immersive travel experiences backed up with exceptional customer service and award-winning attention to detail.
Having expanded its core offering from Australia and New Zealand to new destinations including Sri Lanka and Japan, the company has established a market-leading position in its targeted demographic.
In addition to the high quality of the management team and value creation opportunities, including investment in sales and customer engagement systems, the focus on older travellers made the company particularly sought after.
“Certain traveller demographics are particularly attractive,” says Mobeus managing partner Ashley Broomberg. “Companies targeting the retired traveller market, for example, have found the segment very strong across the cycle, as most customers are relatively affluent, often mortgage-free and with secured pension income, and so are less vulnerable to increases in interest rates.”
Move to non-discretionary
The strong performance of travel companies in the face of inflationary and cost-of-living pressures has been a particularly attractive feature of the industry for prospective buyers.
Even though travel companies are consumer-facing, with potential exposure to tighter consumer spending, Grant Thornton’s Sartori says travel has “moved in the opposite direction to the rest of the consumer sector”.
According to ECI’s Moss, “holidays remain a key piece of expenditure and customers will still budget for travel. Consumers are managing household budgets carefully, but demand remains strong and pricing is resilient.”
Sartori agrees that travel has become less discretionary: “Despite cost-of-living pressures, consumers will still prioritise travel. People may look at different destinations to help manage budgets, but travel is not something that people are cutting out.”
As strong as the sector’s performance has been since COVID-19, not all sponsors are piling in. Some would have been burned by previous investments in travel, not only through the pandemic, but also as a result of wider global events, such as terrorist attacks. Labour shortages and supply chain management have proved challenging. Sustainability is a challenge, and for some operators an opportunity. Sponsors with expertise in the sector are identifying opportunities.
“Looking at private equity specifically, the market is bifurcated. We have seen some managers, who are experienced in the travel space, really leaning into the sector, while others are stepping back completely,” Mobeus’s Broomberg says. “COVID-19 has left some scar tissue, but that provides an opportunity for other investors to get back into a sector that has traditionally provided great returns to private equity.”
Managers that are ready to invest are taking a thoughtful approach to deal selection and only backing high-quality businesses with differentiated product offerings. Vanilla ‘fly-and-flop’ operators, or businesses providing generic holiday packages, are less likely to gain traction with potential investors.
Broomberg notes that buyers will also step back from deal targets with a high operational cost base or committed spend, or that service limited geographies where there is large binary risk.
Sartori adds that deals have pivoted decisively towards companies with distinctive products and specialist service offerings. “Private equity firms are leaning into specialist providers that have a distinctive angle or have expertise serving a particular segment of the market. Companies that hold market-leading positions in defensible, niche parts of the market are receiving significant interest.” The travel sector may be on the up, but only the best companies are riding the momentum.
Taking on TAG
The unique product offering of travel management company TAG made it an appealing deal target for ECI Partners, which acquired the business from Apiary Capital in a secondary buyout earlier this year.
Founded in 1988, TAG is a market leader in the provision of bespoke, specialist travel services to the music, film and television production industries, as well as C-suite and corporate executives.
The complexity and high customer demands that come with transporting large crews and equipment on global music tours and to film sites make the TAG service offering difficult to replicate, providing the business with resilient, defensible revenues and a sticky customer base.
“We liked the business because it has a very distinctive proposition and is a global leader in its market,” says George Moss, a partner at ECI. “TAG will be looking after clients who have tours across, for example, 20 locations globally, with several hundred people travelling at different times and with different requirements.
“It is a complex market that demands really high-quality service capabilities, with market leaders like TAG that excel at this able to develop strong and loyal client relationships.”
