The coronavirus crisis has caused demand for travel to nosedive and sent airlines into freefall, but holiday retailer On The Beach is keeping its eyes peeled for deals.
Britain’s biggest online travel agent has built up a £50m war chest in a bid to increase its market share by scooping up struggling rivals struck by the pandemic.
On The Beach has not been shielded from the havoc in the sector, however. On Tuesday it slumped to a £34.1m loss for the six months to April, in contrast to a profit of £11.9m a year earlier.
Sales plunged by two-thirds during the period to £21.4m, while costs related to Covid-19 and the cancellation of bookings set the business back close to £35m in the period.
During the crisis, any dealmaking within the beleaguered travel sector has been largely put on hold. But On The Beach, which also has access to a £75m undrawn overdraft facility, has been using the time in lockdown to bulk up its balance sheet.
The company, which has seen its valuation drop by more than half to £463m by the crisis, is well placed to win market share, according to analysts at Peel Hunt.
“Pre-lockdown [On The Beach] had boosted brand awareness to unprecedented levels, and has spent lockdown progressing with key investments in technology. Now with plentiful liquidity it can invest in organic growth or M&A (or both) as opportunities arise,” they say.
“Any competitors that make it through Covid-19 will not be so well-resourced.”
On The Beach has been exploring ways to expand its international business after launching websites in Sweden, Norway and Denmark.
Katie Cousins, a travel analyst at Shore Capital, says any further acquisitions are likely to take place overseas in countries such as Holland, Belgium and Poland.
However, the prized goal is to gain a presence in Germany. “Previously the businesses in Germany have been quite highly valued and been a barrier for On The Beach to get into that market,” she says.
“What the last few months has done is reset the whole European package holiday landscape. The travel platform market is so fragmented that there will naturally be some companies that are distressed with low valuations. That means Germany is now more in reach if they found the right opportunity.”
Simon Cooper, chief executive of On The Beach, is realistic about the devastating impact of the pandemic on the travel sector. The 47-year-old, who founded the business in 2004, expects outbound travel to at least halve this year – inevitably hindering some companies’ ability to continue trading.
“If you think back to 2009 where dozens of travel companies collapsed, that was under the pressure of the global recession, which led to a shrinking of the economy of about 10pc and travel shrank by 30pc,” Cooper told industry title TTG.
He believes more collapses will happen. “That then leads to opportunities to acquire distressed or brand assets or what have you and take market share forward, whether that’s in the UK or internationally.”
Some observers are less optimistic about the company’s M&A prospects, though.
“We have concerns that the business model does not fare well in distressed travel environments, with difficulties gaining market share reflected in ailing historical earnings,” say analysts at Jefferies.
Any dealmaking is unlikely to be imminent, says Cousins, as On The Beach prioritises getting customer bookings in the bag.
“A lot of companies are just preserving themselves for now and getting their balance sheets ready for if and when,” she adds. “Ultimately, it will depend on who survives and I think we’ll see a lot of smaller and medium players just fall out.”