Skift Take

As well as the devastating short-term effects, we're now starting to see how coronavirus can equally have longer lasting impacts on the corporate travel sector.

Bad news travels fast, and online agency Yatra’s decision to terminate its merger with Ebix may end up unnerving investors and deter larger firms from buying in an already jittery corporate travel sector.

Yatra, the second biggest online travel agency in India, behind MakeMyTrip,
was valued at $337.8 million when the all-stock transaction deal was announced last summer. The Yatra Business Travel division is the biggest online corporate travel agency in the country.

But last week Yatra said it was terminating the merger, and is now filing a litigation seeking “substantial damages” over alleged breach of deal terms by software firm Ebix,

It’s one of several large-scale acquisitions to fall by the wayside in recent months. Last month, private equity firm Carlyle Group and GIC pulled out of a deal to invest in American Express Global Business Travel, while Travelport and Wex are also disputing a sale.

The Yatra-Ebix falling out will now likely impact further deals, according to one consultant.

“When the deal was announced last year there was a lot of fanfare,” said Gaurav Sundaram, president of India-based ProKonsul Consulting.

“If this had gone through, other people who may have had businesses to sell, or were to be acquired by someone else, would have felt better equipped in their own deal, because such a big deal went through. There’s a sense of disappointment for people who would want to be acquired; they might be thinking their prospects are less now.”

Meanwhile, India could see even fewer investments due to ongoing geopolitical tensions with China, he added. “India has historically been a hub for start-ups, there’s been a lot of deal flows,” said Sundaram. “But our government has said any investment by Chinese companies will have to go through additional scrutiny. That’s dampened spirits because Chinese venture capital firms have been quite aggressive. The government has not yet announced a policy, but has stated an intent.”

Internal Affairs

The global merger and acquisition landscape remains subdued, as cash that once was earmarked for acquisitions is diverted to keeping companies running.

“The area of focus right now isn’t on acquisitions, because there’s not enough resource or productivity to go round,” said one executive at an investment bank, who wished to remain anonymous.

The focus now is on offloading unprofitable divisions.

“There will be consolidation within firms that have a ‘house of brands’. For those that have a complicated organizational structure, you will see cost efficiencies being looked at. They’ll simplify the organizational structure,” they said. “Companies will sell off some of brands that are less profitable, and focus on the core market. It’s a standard tactic for any large organization.”

That consolidation trend already seems to be happening, with the likes of Egencia moving into Expedia’s new Business Services division in March.

Meanwhile, one corporate travel management company CEO agrees conserving cash is the right strategy in the current climate.

“We were looking at acquisitions (before the crisis), we had quite a bit of money that was ready to buy some businesses,” Reed & Mackay‘s Fred Stratford told Skift. “We didn’t, fortunately, if I’m being brutally honest. So that’s left us in a strong position to weather the storm.”

The UK traditionally sees a lot of mergers and acquisitions activity across its fragmented — but lucrative — corporate travel agency landscape. Many international corporates with offices in the UK often run their European travel programs from there too.

In a recent rundown of the UK’s top 50 travel management companies (based on turnover), a total of $14.6 billion was transacted in 2019.

Reed & Mackay itself had been on a buying spree prior to the pandemic, tapping into the deep pockets of private equity owner Inflexion. It acquired Sydney-based Concierge Travel as well as UK firms Business Travel Direct and Hillgate Travel over the last couple of years.

Broken Businesses

One consequence of the crisis has been extreme financial pressures on agencies, and the longer than expected downturn threatens to put some out of business.

“It’s going to be a tough time,” said Stratford. “From a Reed & Mackay point of view, we’re confident we’re going to be on the other side of this. We’ve got a supportive backer with Inflexion. We were going great guns before this, we were one of their top performers in their portfolio of companies, and through no direct result have been massively impacted.

“Inflexion’s view, and our view, is there will be fewer travel management companies on the other side. Part of that will be they just don’t have the cash to manage through the cycle. Also there’ll be a lot of change in requirements from clients, that perhaps aren’t their skillset.”

To survive, some may go out of business, or forced to sell — but are distressed businesses attractive targets?

As a shortcut to winning new clients, it’s a yes. “Larger agencies may now seek to capitalize on their scale via acquisitions,” said Arthur Callaghan, director at investment bank GCA Altium. “The European corporate travel agency market has a long tail of agents beyond a small number of larger operations. The better funded agencies are quite likely to consider roll-up opportunities.

“Agencies have to operate a critical mass of central infrastructure cost in order to serve even a small number of accounts. If their customers’ travel demand falls, total transaction value and income fall. Many agencies will be unable to rightsize their cost base in order to adjust for the new normal that we’re heading into, which is a likely driver for consolidation.

“Bigger operators will try and benefit from this operational leverage in reverse; taking on additional volume without adding cost on a pound-for-pound basis. This plays into the hands of serial consolidators such as Gray Dawes Group and Reed & Mackay.”

“If the right businesses are out there for sale, we’ll look at them,” Reed & Mackay’s Stratford added. “What we won’t buy is broken businesses, we can’t bring any value to that. But strong businesses, that are suffering in this misfortune, then absolutely. We’re always looking out for business, and if we can find some that are up for sale at good prices, but also it means we can save jobs and retain the clients, then we’d be interested.”

Inflexion took over Reed & Mackay four years ago, and some industry observers note private equity firms tend to look for an exit after about five years. Is this the case for Reed & Mackay?

“Being private equity backed, we’re always up for sale, that’s just the way of the world,” Stratford said. “While this virus continues, we want to do a lot more to add value. We have nobody talking to us, and honestly, we’ve got enough to be working through rather than thinking about that.”

History Lessons

To predict the future, the investment bank executive said European companies should cast their minds back to Brexit, which impacted the merger and acquisition playing field.

“There was so much cash in the economy, sitting on company balance sheets, up until a year or two ago because no one was investing,” they said. “Then lots of companies made acquisitions in the run-up to the Brexit referendum and afterwards, due to all the uncertainty, acquisitions stopped.

“We’ll now see the same pattern as the Brexit referendum, where there’s so much uncertainty in the market, nobody does anything. You’ll have to wait three or six months before investors feel confident reinvesting the money they’ve got on their balance sheet.”

Reed & Mackay’s Stratford also believes there’s some light appearing at the end of the tunnel. While virtual meetings will impact business travel, he believes corporates will lean heavily on their agencies during the initial recovery phase.

“There’s pent up demand,” he said, “and one trend we didn’t necessarily expect is clients telling us they’ll want a high-touch service in the first six months to make sure staff aren’t booking online, and are well informed, rather than looking at information in the booking tool. That’s been an interesting angle for us. That’s good news for us.”

A healthy corporate travel sector is, ultimately, in everyone’s interests — for travelers and dealmakers alike. Many will be hoping the Yatra-Ebix breakdown will be the last piece of bad news for a while.

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Tags: consolidation, ebix, yatra

Photo credit: Ebix chairman and CEO Robin Raina talks at Ebix Presents TV18 India Rising Summit 2019, a pan-India thought leadership effort sponsored by Raina's U.S.-based software company. Ebix

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