Sector Overview – Travel

The demise of Thomas Cook has shone a light on the health of the UK travel industry. The CEO, Peter Fankhauser, painted a picture of an entire sector that was under pressure, with digital disruption and negative investor sentiment (as well as those old favourites Brexit and the weather) blighting the entire industry.

In the litany of excuses, an honourable mention must surely be extended to the travel agent’s elephantine £1.7 billion debt balance, but is the UK travel industry as ‘up against it’ as he claims from a consumer and investor perspective?

What can the M&A market tell us about industry health?

We might expect to see signals in the M&A markets that can inform us of the health of the sector. Key signs of an out of favour market would be a decline in both deal volumes and deal values. Another signal might be the emergence of a digital movement, undermining the business models of the traditional operators. We analyse this below to understand whether the industry is under pressure or if it is just Thomas Cook that is suffering from the post-holiday blues.

Deal volumes remain strong

The analysis of deal volumes suggests robust, and growing, interest in the sector since 2015 – activity has strengthened over the past 5 years and 2019 will be broadly in line with 2018 if year to date activity is maintained.

But deal multiples have been declining

However, deal multiples paid have trended down since 2015, suggesting that the industry is losing some shine with investors (both corporate and financial). Excluding outliers, average EBITDA multiples declined from 9.1x in 2016 to 6.7x in 2018, a 26% fall. Whilst deal multiples have contracted over the last 5 years there is some important context – in 2016, when the mean multiple was greatest over our sample period, two of the largest deals in the sector since 2015 were completed – the £221m acquisition of Big Bus Tours by Exponent and the £242m 3i-backed buyout of Audely Travel.

Has digital impacted market values?

Digital disruption is a traditional scapegoat for the death of traditional businesses that have failed to keep pace with their marketplace. For every Thomas Cook, there is a Loveholidays. Founded just 7 years ago, Loveholidays was acquired in 2018 by Livingbridge for 30x EBITDA, a huge multiple.

Without the legacy assets and infrastructure of the traditional agents, emerging disrupters like Loveholidays are where the market is increasingly parking its capital and this is reflected in the superior multiples being paid in the digital travel sector.

Don’t Thomas Cook It

Unlike the public markets where Thomas Cook operates, the private markets provide us with multiple data points to assess sector health. Whilst sector multiples have declined, volume has remained strong, suggesting that consolidation is a theme. This makes sense – if deal multiples are shrinking, cash-rich acquirers can take advantage and buy assets at lower multiples; the extra scale these acquisitions bring help to expand the acquirer’s multiple.

It is a classic buy and build strategy. If the consolidators can also convince the market that they are becoming ‘digital’ businesses, this provides an additional ‘whammy’ to the business multiple.

Unfortunately for a business with such a long and illustrious history, Thomas Cook’s debt ensured it could not be a consolidator, and its business model prohibited it from making the transition to digital to compete with the rising online powerhouses. The travel industry is clearly not dead but the landscape has shifted. Unfortunately for Thomas Cook, this shift has left their business, much like their customers, stranded in the wrong place with too much baggage.

The full article can be found in AAB’s Deals+ Q3 Issue.