Even as investors see a glimmer of returning economic confidence, UK insolvencies refuse to return to pre-recessionary levels. But there is one sector that, despite showing one of the highest increases in insolvencies, is increasingly looking like the market of choice for investors keen to instigate a profitable turnaround operation.
Confidence in the economic recovery may still be wavering, but successful investors are pushing past the headlines and digging out the hidden opportunities. This approach has uncovered an unexpected gem for those seeking a profitable turnaround opportunity, with a perfect mix of distressed assets and forecast growth. This sector is travel.
When economic confidence remains fickle, there is still a temptation to discount the leisure industries as too uncertain for investment. But while it's true that - unlike economic behemoths such as manufacturing or finance - travel is not deemed an 'essential' by most people, the current market conditions are conspiring to offer enormous potential for growth in travel with a much lower barrier to entry than some of the 'safer' sectors out there.
Market conditions make now the perfect time to buy but finding these opportunities requires some careful planning and research; if you just take the headlines for granted, it looks like travel is nose diving. In fact, in the year to March 31st, there was a massive 45 per cent increase in travel company insolvencies, according to accountancy firm Wilkins Kennedy.
The sizeable increase in insolvencies (substantially above the average UK rate) was driven by a number of factors, but primarily by the seismic shift in the market and the ongoing reluctance among consumers to spend, as Anthony Cork, partner with Wilkins Kennedy explained: “Travel agents on the high street were once the first and only port of call for booking holidays, but the tide has turned and we are now seeing booking services and price comparison sites taking over.”
These services not only offer more flexibility and convenience than pre-determined packages, they also allow consumers to keep their costs to a minimum by cutting out the middleman. Indeed, the uncertainty that remains in the years following the recession cannot be underestimated and financial insecurity among consumers has left its mark on all industries, not least travel. This is not just reflected in the change in the types of travel businesses with a move away from agencies, but also in a drop in long haul destinations as people look to create their own itinerary closer to home.
Intrepid investors are working with these trends, exploring the changes carefully and carving out niche operations in the wake of their competitors. Successful operators are discovering that people are still spending in the travel industry, they've simply changed the conditions with which they are willing to part with their money.
The latest figures from the UNWTO World Tourism Barometer confirmed this, noting that there is sunshine on the horizon as the industry adapts and gets back on its feet. According to the June 2014 survey, receipts in destinations worldwide from expenditure by international visitors on food and drink, accommodation, shopping, entertainment and other services and goods reached an estimated $1159 billion. Taking into account exchange rate fluctuations and inflation, this figure represented real term growth of five per cent, a figure that exceeds the long-term trend in the sector; something the UNWTO secretary general, Taleb Rifai, welcomed: “Such results confirm the increasingly important role of the tourism sector in stimulating economic growth and contributing to international trade.”
Back in Britain specifically, investors are already taking action on a forecast bounce-back within the travel sector. Natural Retreats is one such company to have carefully positioned itself to capitalise on the swing towards independent booking behaviour and more localised travel plans.
The specialist leisure and travel company officially took over operations at Cairngorm Mountain from Highlands & Islands Enterprise in Scotland in June of this year for a 25-year lease term. Elaborating on plans for Natural Retreats' £6.2 million five-year investment plan, announced in April, the business declared its intention to develop the snowsports on offer at Cairngorm, while also declaring its intentions to diversify the business in to a year-round attraction.
Matthew Spence, Natural Retreats’ chief executive, remarked: “We have a highly ambitious vision for the next 25 years, and want to elevate this incredible destination.
“It’s the most remarkable natural landscape, located in one of the world’s most beautiful countries, and provides the ultimate playground for mountain bikers, triathletes, skiers, hikers, and snowboarders.”
Solvent business operators, such as Natural Retreats, certainly look poised to benefit from the travel sector's improving health. But the real profit potential in the travel sector lies in the distressed assets that we are seeing emerge as a result of the high levels of insolvency among outdated competitors.
Investors that are prepared to act ahead of the crowd are already benefiting from buying distressed opportunities in the industry as the broader market continues to hedge its bets and approach with caution.
Aldenham Canada was one such company to jump on board early with its acquisition of two of Travelzest's businesses, itravel2000 and The Cruise Professionals in the final quarter of 2013 for just C$8.76 million – a figure deemed to be well below the market value the firm could have achieved it had remained solvent and almost half the C$15 million that it has since emerged was offered for itravel2000 by Shane Carroll, a former executive of the target company.
The low price came about due to Aldenham's connection with Elleway Acquisitions, the main lender behind Travelzest and Aldenham's backer. In September of last year, Elleway acquired Travelzest's £15 million debt burden from Barclays for an undisclosed price; just weeks later, the firm had effectively pushed Travelzest into administration after demanding immediate repayment of the loan, leaving administrators Grant Thornton seeking a quick disposal and willing to accept a lower price for Travelzest's assets.
Great opportunities don't stay secret for long and as the travel sector's new path becomes clearer, competition for distressed assets such as these, offering turnaround opportunities with handsome profits, will become increasingly fierce. Smart investors are investigating new ways in which they could capitalise on the change in course in the travel sector and searching for the perfect assets at a below-market price to help them deliver on their business plan.
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