As the effects of the pandemic continue to impact the sector, what is the ongoing impact on M&A (mergers and acquisitions)? Stewart Lambert, Co-Founder of the Firebird Partnership, looks at recent activity from an insider perspective.
It’s been an unusual time for M&A recently, with some interesting trends emerging in travel and leisure.
“Trading patterns are still difficult to predict, yet interest in purchases remains high”
As covered in an article by Firebird Director Matt Purser a few weeks ago, there is plenty of conversation going on around M&A in the sector right now – and there is certainly a lot of interest from private equity firms (PE) and other parties.
Many potential buyers are still a little wary, and waiting to see what the true trading picture is after the past few years of disruption. Business in 2022 was impacted by the deferred bookings of 2020 and 2021 eventually being taken in 2022, which potentially create a misleading trading picture.
In 2023, we still have pent-up demand in the system – what some have termed “revenge tourism” – coupled with very high prices caused by constraints within the supply chain. At the same time, high demand is driving increases in average selling price, which will ultimately drive increases in EBITDA (the profit measure most commonly used when valuing businesses).
However, the flipside also exists in 2023; and it will be interesting to see the impact the rising cost of living has on demand, particularly in the more mass-market sectors.
In the meantime, who exactly is purchasing?
“Since the pandemic, we’ve seen many more new market entrants recognising the opportunities in travel”
This year, so far, few transactions have been announced. I speculate that the time for more transaction trade might be early 2024, or perhaps this will start at the back end of 2023. Once there is more visibility over what is really happening in the market, and as operators get in to the 2024 booking cycle, we’re likely to see more deals being concluded.
At this point, it’s worth reflecting back to M&A in pre-covid days. What we saw then was a majority of acquisitions being undertaken by PE or PE-backed groups, with a smallish number being completed by trade.
In today’s market, few deals of note have actually been completed by formal PE investors. Within the past twelve months or so, a small family office – Blandford Capital LLP – invested in the Asia-specialist Inside Travel Group. A private individual invested in walking specialist Macs Adventure. And Piper PE invested in the cultural adventures brand Rabbies.
Elsewhere, trade acquirers in the UK, Europe and worldwide are currently expressing their interest in acquisitions – as a small number were doing in the years prior to lockdown – and at Firebird, we are discussing their acquisition criteria with them regularly. There has already been one notable transaction in this area in 2023, with FCM acquiring luxury tour operator Scott Dunn.
Another observation worth noting is that, since the pandemic, we’ve seen many more new market entrants recognising the opportunities in the sector – including groups of high-net-worth individuals, as happened with Savile Row Travel and Eton Travel Group; likewise The Embrace Group’s acquisition of Prestige Holidays.
These investors could all see that the sector was being severely impacted by covid, and would bounce back quickly. Could they be the primary purchasers of smaller tour operators in future?
Another interesting transaction outlined in the press last week was the merger of Experience Travel Group and Holiday Architects to form Inquisitive Traveller. Could this be a transaction replicated by other businesses as they seek to scale and share best practice across a larger group?
“Sellers generally will not need to change their positioning; only to be aware that the buyer population is changing”
Looking at M&A from the seller’s perspective, Firebird is holding many active mandates across various parts of the sector. Our advice to clients is to note the still-changing market and its buyers. They generally will not need to change their positioning; only to be aware that the buyer population is changing.
For the majority of businesses (there will always be exceptional businesses that buck the trend, of course!), multiples have also changed from the highs of 2019, going down by roughly 20-30%. In practical terms, where big businesses might previously have sold for a multiple of 9-10x, we’re now talking more like 7 to 8x. Similarly, smaller business multiples have gone from 6 to 7x to around 4 to 5x. This somewhat reflects today’s uncertain trading position, but may also be a general reflection that multiples pre-covid did not factor in the inherent risks in the travel sector.
Either way, given that valuation = profit x multiple, this means we need to accept that value is not going to be as high as it might have been four years ago.
Another M&A feature becoming more prevalent, especially with smaller transactions, is the use of deferred consideration/loan notes and earn-outs: future payments that depend on the ultimate profitability of the company. Clients opting for this should not expect to get all their money at completion, and must make sure they take good advice from advisers or lawyers to ensure any possible future obstacles to receiving payments are known and can be managed.
Overall, quality businesses continue to be an attractive prospect for investors, and I’m sure a number of transactions will occur in the coming months. As the situation stabilises, and perhaps offers new surprises, Firebird will be keeping a close eye on the market.
Stewart Lambert is co-founder of the Firebird Partnership, with nearly 25 years’ experience in corporate finance, advising owner managers on selling their businesses, raising finance and making acquisitions.
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