It has been a busy couple of months for M&A (mergers and acquisitions) in the world of travel management companies (TMCs) in the UK.
In early November, Mawasem Travel & Tourism, a subsidiary of Saudi Arabia's Al Tayyar Group, announced it was acquiring Portman Travel and merging the TMC with Clarity Travel Management, which it already owns.
At the time, Pat McDonagh, chief executive of Clarity, said: "Portman Travel and Clarity are similar sized organisations, with combined gross annual sales of over £400m...The merger brings together the best talent and experience from both businesses to create a new travel management company with increased buying power, international reach and expertise through a significant shareholding in Radius Travel, a broader base, market leading technology and best in class service."
The terms of the Portman deal were not disclosed. But looking back to Mawasem's acquisition of Clarity, previously known as Co-operative Travel Management, from former owner Thomas Cook Group gives us some idea of how acquiring companies value TMCs.
Back in 2014, Mawasem paid a consideration of £13.5 million to acquire Co-operative Travel Management. For the year ended 30 September 2013, earnings before interest and taxes (EBIT) were £2 million, valuing the company at 6.75 x EBIT.
When buying companies, acquirers typically use one of two methods for valuing their purchase — a multiple of earnings (either EBIT or EBITDA) or cashflow or a percentage of total sales. There are various rules of thumb on what these multiples and percentages should be but they vary according to industry sector. Why this should be the case may not be immediately obvious but some companies are capital intensive while others are not. The multiples used can also reflect confidence in the market about the sectors ongoing profitability.
This week, Australia's Corporate Travel Management has announced it is to buy Bradford-based Redfern Travel, as well as Tasmania's Andrew Jones Travel.
As CTM is listed on the Australian Securities Exchange, we have some information on how Redfern and Andrew Jones have been valued. The Redfern deal is shown in the chart below.
The company says that it expects the purchase prices to be 4.5 times forecast EBITDA for the year ended March 2017. However, if Redfern meets certain profit targets, the purchase price may rise to £50 million, which is four times forecast EBITDA for the 2018 full year. Meanwhile, the Tasmanian business is also being valued at 4.5 times EBITDA.
These acquisitions follow the recent purchase by Gray Dawes Travel of both Travel Management Group and Cambridge Business Travel. Details of the deal were not disclosed.
As TMC profitability has been squeezed in recent years, notwithstanding the healthy incentives they now get from the GDS companies, multiples have come down. The rule of thumb is now generally between three and five times EBITDA for a good sized TMC; for EBIT (the measure used in the Clarity chart), this multiple is typically smaller.
For anyone trying to buy or sell a TMC — or indeed for buyer's wanting to gauge the profitability of TMCs — these are very useful indicators.