Following a recent panel on M&A activity in the travel sector at the 2022 Travel Tech Show – titled ‘The post-covid M&A avalanche’ – George Moss shares his views on investing in the travel sector.
Post-covid M&A volumes have grown strongly with 2021 seeing a 25% increase globally in transactions across the board. While that might have come off in 2022, M&A activity in the first half of 2022 was still at pre-pandemic levels, indicating a return to M&A business as usual in many ways.
Initially, a lot of this activity was focused on sectors such as tech and healthcare, where there was a busy-catch up period, but that were also seen as less impacted by the pandemic. Consumer businesses and especially travel businesses saw much more limited M&A activity. Many travel businesses were heavily impacted by domestic or global lockdowns and some of those that did transact did so more due to being distressed and needing to refinance their balance sheet.
However, over the first half of 2022, M&A in the travel sector is slowly returning. For trade buyers there is a fantastic opportunity to add products, services, or technology to their platforms as, following a tough two years for business owners, there are often buying opportunities at attractive valuations.
For private equity buyers, there is still interest in travel, however, this remains slightly muted for now as investors assess the outlook for international travel, calibrate what the new normal really is for travel patterns post-covid, and assess how consumer spending is going to hold up in the face of recessionary clouds.
At ECI, we’ve been investing in travel for several decades and that means we’ve seen multiple recessions, foot and mouth disease, Icelandic ash clouds, the impact of different wars, and more recently the pandemic. We understand how to take a long-term view and the importance of a resilient business model and, despite those disruptions, we have generated aggregate returns of over 4x from our investments in travel businesses over the years. This includes notable successes such as CarTrawler and Great Rail Journeys as well as more recently, Travel Chapter.
So, what’s next for the travel sector? The pandemic disruption hasn’t ended, but high-quality businesses have found ways to respond effectively and have focused on a customer-first approach that means consumers can book with confidence. This is likely to lead to a flight to quality, as stronger businesses take market share in a post-pandemic world.
We’d also expect to see tighter regulation, higher costs, and less predictable volumes. These will drive innovation and consolidation in the sector, so we’d anticipate more corporate M&A. We have already seen some of that in the business travel market given the fundamental changes in that sector post-covid as well as in flight and accommodation, where booking.com bought Etraveli and Getaroom for c $3bn in a spending spree at the end of 2021.
There has also been a devaluation of public market travel and leisure stocks, with FTSE All share travel and leisure stocks down over 30% since this time last year. If that trend continues, we’d potentially expect to see more take-privates occur.
Valuations remain tricky as booking volumes build and stabilise to a ‘new normal’ post-Covid, with the backdrop of the Ukraine war and the cost of living crisis creating new pressures. However high-quality businesses could still command premium EBITDA multiples, but that means having a clear growth story, good revenue visibility, and data that can back it up. Anyone who has been on vacation in recent months will be able to testify that travel is back up and running, the question is which businesses will be best placed to thrive in the new environment.