Welcome to Duff & Phelps' inaugural European Travel Update—launched at a time when the industry has never faced greater challenges, so many good people have been made redundant and M&A volumes are lower than ever.
In addition to providing an overview of the M&A landscape, each quarterly update will include a guest feature from one of Duff & Phelps' other service lines. In this update, we evaluate current trends in the travel sector including European M&A volumes and valuation observations, and analyze current activity in the European debt mid-market.
Our key insights are detailed below:
Unsurprisingly, M&A activity in the travel sector has almost stalled since the COVID-19 pandemic. Six months into an unprecedented lockdown and post-lockdown, significant uncertainty remains over how the industry will look and what the new “normal” will be. The knock-on impact on M&A has been to significantly reduce activity.
We anticipate that deal volumes will increase over the next six to nine months, driven by a combination of offensive and defensive plays.
The ever-changing quarantine landscape makes it hard for customers to make plans and the threat of a second wave only adds to the uncertainty. With uncertainty comes opportunity, and we expect to see M&A activity increase as the economy and the sector restarts, with a mix of companies facing short-term liquidity issues and others looking to acquire strategically important businesses that may not have been available to them previously.
In line with the wider financial markets, COVID-19 created a sudden shutdown in the European debt mid-market in H1 2020, and this was further evidenced by yields in the secondary market for large cap names spiking to 600-700bps, compared to a typical trading yield of 200-300bps (throughout 2019). The appetite from alternative lenders, especially in the travel sector, has been low.
Whilst the market has shown some solid signs of increased activity for new deals, the risk appetite is certainly less than it was pre-pandemic. This is further evidenced when looking across the market, where we are seeing higher pricing of roughly 50-200bps and reduced leverage in the region of 0.5-1.0x EBITDA.