Increase in leisure sector takeover activity as post-pandemic dust settles

Increase in leisure sector takeover activity as post-pandemic dust settles

Budget hostel operator Safestay plc (Safestay) announced on 17 September 2021 that it would begin a strategic review after receiving a very early stage and highly conditional approach from an unnamed party in relation to a possible offer. Safestay, which operates 20 hostels across 10 European countries, cited maximising value for existing shareholders and better positioning the company for further growth as the motivation behind its decision. 

The outcome of a strategic review may include, but is not limited to, publicly putting the company up for sale under the framework of a formal sale process (FSP) in accordance with the Takeover Code. A FSP can result in the target company having several bidders to choose from. The process tends to be used by companies that are in financial distress and Safestay is no exception. As revealed in its annual report, the pandemic inflicted significant financial damage to the group, with its revenue slumping by 74% in 2020 and its pre-tax loss widening to £10.1m. The company was hit particularly hard by the government restrictions in response to the coronavirus pandemic, which forced the company to close its hostels between November 2020 and May 2021. The aftereffects of the pandemic restrictions have had a continued impact on Safetay. Its hostels stood at only 38% occupancy once they were permitted open, a stark contrast to the 77% occupancy in 2019.

To deal with the financial damage, the firm cut operational costs associated with running the individual sites and head office and negotiated the suspension of rents or rent reductions with landlords, which reduced rental cash charges by £1.4m in 2020. In addition, Safestay took part in government support schemes with the majority of hostel staff being furloughed and reduced director and management salaries by 40%. As a combined result of these measures, the company reported that its monthly fixed cost base was significantly lowered from £1m to approximately £0.35m since November 2020.

More recently, the hostel operator completed the sale of the leasehold in the Barcelona Sea hostel for £0.8m and the 150-year lease interest in the Edinburgh hostel for £16m. Safestay Chair, Larry Lipman, commented that the firm had shifted its focus from protecting the business to securing the capital to enable the company to re-emerge strongly as the market recovers and new opportunities arise. With individual and group bookings coming in for the winter and 2022, Lipman is confident in Safestay’s return to pre-Covid levels of trading and recognises this as a natural point, as the business is relaunched post-covid, to conduct a strategic review to maximise value for shareholders.

Adam Cain, Legal Director at Pinsent Masons, commented in Market Tracker’s Public M&A H1 2021 Trend Report that the impact of COVID-19 on the UK economy means we can expect the FSP to become a more prominent feature of the UK public M&A landscape in the coming year. Although 2021 has seen an overall decline in the number of FSPs announced, with 14 announced in 2020 and 4 announced this year, with furlough expected to come to an end 30 September 2021, more companies may pursue FSPs. In particular, Cain noted ‘A number of listed companies have been able to access significant levels of monetary support from both the government and the Bank of England over the course of the last year to address the operational issues arising from the COVID-19 pandemic but once this support ends, it may well lead to a requirement to implement restructuring of a group’s balance sheet, which could lead to further announcements of FSPs as companies seek to explore an array of options.’

The impact of the COVID-19 pandemic has been felt industry-wide across the travel and leisure sector, with firms now seeking to create synergies in a hope to remerge strongly from the pandemic. 

On 21 September 2021, Stagecoach Group plc (Stagecoach), the UK’s largest bus operator, confirmed that it is in talks with National Express Group plc (National Express) about a possible combination that will create a business with a fleet of 36,000 coaches. As part of the deal, Stagecoach shareholders would receive 0.36 new National Express shares for each Stagecoach share they own, meaning they would hold 25% of the combined group. The bid would represent a 23.2% premium on the company’s three-month average share price, valuing Stagecoach at about £442m. At close of business on announcement of the potential merger, shares in Stagecoach increased by 27% to £0.86 and shares in National Express increased by 8% to £2.40. 

The potential merger comes after Stagecoach and National Express experienced significantly depleted customer numbers due to government restrictions and remote working. 

The boards of both companies believe that the potential merger would be a ‘strategically compelling proposition with the potential to realise significant growth and cost synergies, as well as delivering strong value creation for both sets of shareholders’. Both companies expect that the merger would deliver significant operational efficiencies across the combined networks and bring ‘the best of both’ in terms of the combined operation capabilities of both businesses. 

The travel and tourism sector has been severely affected by the impact of the coronavirus pandemic, with companies focused on their survival and strengthening their balance sheets. A total of £4.6bn was raised in 2020 by companies in the travel and tourism sector with nine companies tapping shareholders for new investment. Secondary offerings in the sector have continued in 2021, albeit at a slower rate, with three companies raising a total of £2.1bn to date. The public M&A market was active in 2020 with 42 firm offers announced for Main Market and AIM companies. This year, there have been two firm offers in the travel and tourism sector and with the travel and tourism sector being hardest hit by the pandemic we may expect to see more firm offers being announced in this sector.



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