XII Simposio Turismo y Ocio de ESADE Investment Opportunities in Tourism and Leisure Barcelona, April 4th 2003
Índice I. Introduction to Private Equity II. Private Equity in the tourism industry I. Historical operations II. Key issues III. Future trends 2
Riva y García Riva y García Group Corporate Finance Private Banking Private Equity Equity Capital Markets COMPANIES MARKETS INVESTORS 3
What is Private Equity? DEFINITION Financing of unquoted companies via equity participation or mezzanine financing Limited amount of time (1-12 years). This time range is considered sufficient for projects to reach maturity. Partner who adds value to the company. Focus on growth sectors. OBJECTIVES Obtain maximum return for investors (via dividends and capital gains) Help investee companies to grow and to generate value 4
How does Private Equity work? Financial Investments Financing, Advice & Follow up INVESTORS PRIVATE EQUITY INVESTEE COMPANIES Returns Returns DIVESTMENT 5
Types of Private Equity Funds Seed Fund Financing companies in an initial phase often without product Start up Expansion Young companies having not yet reached break-even Consolidated companies with strong financing needs for growth Buy-out Acquisitions financed by equity and a large amount of debt MBO, MBI, BIMBO Replacement Capital Replacement of existing shareholders 6
Investment decision drivers Human Resources: We consider management team excellence to be the main success factor of any project. Market experience and knowledge. Market opportunity Clear differentiation to competitors Clear vision, strategy and business plan Definition of financial needs Preference for high growth companies with sufficient critical mass, active in expansion markets. Optimal combination between risk and return of the project 7
Investment cycle The private equity investor aligns its interests with other shareholders with the objective to maximize the value of its investment supporting the growth and the profitability of the investee companies Spotting investment opportunity Investment in company Generating competitive advantage Improve profitability Grow the business Exit 8
Spain. Private Equity Evolution PE in Spain 1997 1998 1999 2000 2001 2.002 s1 Funds under management (*) 1.377 2.067 2.473 4.736 6.031 6.290 Investments (*) 262 365 718 1.216 1.212 221 Nº of PE Entities 48 51 54 64 80 82 (*) in millions. Source: Web Capital Riesgo & Riva y Garcia Private Equity Spain: Private Equity Evolution ( 000 ) 1.400.000 1.200.000 1.000.000 800.000 600.000 400.000 200.000 0 1997 1998 1999 2000 2001 Source: Asociación Española de Capital Riesgo Private Equity assumes an increasing importance as a financing alternative for all types of companies 9
Private Equity Worldwide 1,6 1,4 1,2 1 0,8 0,6 0,4 0,2 0 Private Equity Investment as a Percentage of GDP in 2001 % of GDP 0,18 0,18 0,22 0,23 0,25 0,65 0,84 Italy Spain Germany France Europe UK Sweden US 1,50 The US is the most developed country with regards to PE Spain remains underdeveloped compared to other EU members In 2001, PE investments in Spain represented 0.2% of total Spanish GDP while they achieved 0.65% in the UK Source: European Venture Capital Association, 2002 Yearbook 10
Private Equity Today Spectacular returns during Internet boom years Important losses in the years thereafter Public opinion often associates private equity with Internet boom Many funds raised in late 90s and early 2000s Too much money chasing too few projects Years of economic downturn often provide good investment opportunities 11
Índice I. Introduction to Private Equity II. Private Equity in the tourism industry I. Historical operations II. Key issues III. Future trends 12
Sectors with Private Equity investments in Spain Theme parks Lodging / Hotels Local projects Internet Food services 13
Some Private Equity operations in the tourism industry Parques Reunidos Mercapital / Apax./ Vista Capital / Schroder Ventures (1994) Theme park Occidental Hoteles Mercapital (1997) Hotel chain Edreams Apax Parners & 3i (1999) Internet Travel Agency AC Hoteles 3i & SCH (2000) Hotel chain Mundo Aventura Webcapital (2001) Internet Travel Agency Grupo Zena Restauración CVC (2001) Food services Dinópolis Going Investment (2001) Theme park Operations made by regional funds Cetursa Sierra Nevada - Instituto de Fomento de Andalucía Ski resort Hospedería del Maestrazgo - Instituto Aragonés de Fomento Hotel Hotel & Golf Antequera M- Capital Hotel & Golf Resort Parque biológico de Madrid.- Capital Riesgo Comunidad de Madrid)- Theme Park (1999) 14
Parques Reunidos: a Private Equity story In 1994, Parque de Atracciones de Madrid was a theme park which had started its operations in 1969. Only activities: Owned and operated Casa de Campo de Madrid and also operates Teleférico Rosales wich links the city downtown with Casa de Campo. Spanish Market leader in numer of visitors > 2 million per year At the time of the investment, the company s revenues were 15.3 million and was losing money A group of investors bought Parque de Atracciones de la Comunidad de Madrid for 19M in 1994 (investors: 35% Mercapital, 31% Vista Capital, 16% Schroder Ventures, 13% Apax, 2% Granville, 3% Management Team), with the aim to take advantage of: Growing consumer demand for theme parks Expected M&A activity to consolidate a leading theme park operator in Spain Opportunity to improve the company s margins (*) Source: Parques Reunidos 15
Parques Reunidos: a Private Equity story Alongside with the investor group, the management team designed a 5 year business plan with the 3 following objectives 1. Adaptation to the European theme parks standards New attractions Better accesses and parking lots Increase the time spent by consumers in the parks Increase in the number of restaurants and merchandising locations 25M investments in Capex, during 4 years, to renew Parque de Atracciones 2. Improvements in the profit & loss account Cost rationalization: application of identical management principles for all parks, centralized IT systems for results monitoring, a leader for each theme park Improved expending per cap inside the theme parks (*) Source: Parques Reunidos 16
Parques Reunidos: a Private Equity story 3. Merger & Acquisition plan: 52 million in new acquisitions!! A Build-up plan to become the major theme park company in Spain Diversified theme park portfolio in geographical and product offer terms Take advantages of the synergies created by the management team Year of acqu. Target Company Location 1995 Aquópolis de Madrid Madrid 1995 Aquópolis de Torrevieja Torrevieja 1995 Guadalpark Sevilla 1996 Aquópolis de Salou Vila Seca 1997 Zoo - Aquarium Madrid Madrid 1998 Selwo Estepona 1998 Valwo Valladolid All company numbers improved with the roll out of the 5 year Business Plan Millions 4 3,5 3 2,5 2 1,5 1 0,5 0 Number of Visitors 94 95 96 97 98 Millions 50 45 40 35 30 25 20 15 10 5 0 Revenues EBITDA 94 95 96 97 98 (*) Source: Parques Reunidos 17
Parques Reunidos: a Private Equity story With the implementation of this operational plan, Parques Reunidos became the market leader in Spain with 7 million visitors (1998) By 1998, the company was generating revenues of 47 million with a net profit of 4.81 million In 1999, the company accounted for 9 parks The company was listed in the Spanish stock market in 1999: Group enterprise value of 202 million Investors sold 90% of the company (*) Source: Parques Reunidos 18
Índice I. Introduction to Private Equity II. Private Equity in the tourism industry I. Historical operations II. Key issues III. Future trends 19
Key financial issues Investment Needs Product mix International exposure High capital expenditures for the acquisition of properties High financial leverage (covenants and price inflation) Different types of asset utilization: rental of assets, management contracts, franchising Resilience levels for EBIT Volume oriented or value oriented Exposure to geographical regions with political and economical risks Asset mobility (cruises & aircrafts vs real estate assets) Currency hedging (natural or financial) Visibility of sales Vertical integration Competition Sales are often unpredictable (number of lates customers) Consumer discretionary product: cyclical (negative) Guarantees supply and product similarity (positive) Increases fixed costs and reduces flexibility (negative) Highly competitive markets (tour operating) vs. oligopolistic markets (cruises) 20
Example on how to measure the subsectors Hotels Cruise lines Tour operators Food Service Capex L L K K Internationa l Exposure L K L K Error predicting sales K J L L Vertical integration J J L J Competition L J L L Average K J L K J Positive K Neutral L Negative Cruise operators have the strongest business model in a downturn scenario Stock picking in Hotels and Food service sector Tour operators are in a weak position 21
Asset class financing Real estate assets (less risk, less profit) Leverages the company Less flexible P&L account Riskier in downturn scenarios Banks demand covenants Inflation & asset appreciation However, acquisition is not the only way Other assets (riskier but bigger profit) Difficult to leverage Low working capital needs Venture side of the project Financing Mortgage financing (guaranteed by the real estate asset) Small investment from the company Real estate investment funds (mainly Germans, US, UK) Financing Entrepreneurs capital / Friends & Family Private Financing Private Equity / Venture financing Each asset has a different risk and profit profile 22
An example of balanced Asset Allocation Global Equity Private Equity 5% 20% Higher return in the long-term Higher Risk Euro Equity 20% Real Estate Assets 25% Fixed Income Money Market 30% Lower risk Lower return in the long-term 23
Business case for acquisition and subsequent lease-back operation Private Equity Fund Investment in a Hotel chain Hotel management Company Expansion plan Acquisition of a new hotel New Hotel Acquisition of the real estate asset to the management company Real estate investment fund Long term rental contract of the real estate asset to the Hotel chain 24
Índice I. Introduction to Private Equity II. Private Equity in the tourism industry I. Historical operations II. Key issues III. Future trends 25
Future trends 1. Tendency to consolidation: Hotels, travel agencies, restaurants, sports resorts... A great number of little business operated by independent or family owners Even-out seasonality 2. Support for companies growth plans and their international expansion 3. Management teams prepared to take over companies (leveraged buy outs) 4. Consolidation as the prior step to the companies listing Though Tourism is relevant for the Spanish economy (accounting for 12% of GDP). There are only a reduced number of quoted companies in the Spanish Stock market: Iberia, Sol Melia, NH Hoteles, Parques Reunidos and Amadeus There exist a certain number of companies in private hands which have the conditions to be listed in the stock market 26
Life cycle of a company + Cash flow Start-up Expansion Build-up Buy Out Cash flow Risk - Cash flow Private Equity provides: Funding Management support Private Equity provides : Funding Management support Private Equity provides : Additional Funding Consolidation to create a leader company Private Equity provides: Funding Support for the Time banking financing Private Equity can invest in every moment of the company s life cycle 27
Listed companies United Kingdom Hotels; Six Continents, Hilton Group, Thisle Hotels Travel services: MyTravel, First Choice, British Airways, Easyjet Cruises: P&O Princess Other: JD Wetherspoon, Enterprise Inn, Punch Taverns, Compass France Hotels: Accor, Société du Louvre Travel Services: Club Med, Air France, Pierre et Vancances Other: Sodexho, Elior, EuroDisney Nº Company Name 000 Last year available 1 IBERIA LINEAS AEREAS DE ESPANA SA 4.738.248 31/12/01 2 RENFE 2.703.090 31/12/00 3 AMADEUS 1.870.658 31/12/01 4 CIRSA BUSINESS CORPORATION S.A. 1.317.124 31/12/01 5 IBEROSTAR HOTELES Y APARTAMENTOS SA 1.292.119 31/12/00 6 VIAJES EL CORTE INGLES SA 1.028.687 28/02/01 7 SOL MELIA S.A. 1.016.069 31/12/01 8 NH HOTELES S.A. 764.761 31/12/01 9 AIR EUROPA LINEAS AEREAS SA 762.648 31/10/01 10 SPANAIR SA 716.608 31/10/00 11 ACESA INFRAESTRUCTURAS SA 709.872 31/12/01 12 VIAJES HALCON SA 706.455 31/10/01 13 VIAJES MARSANS SA 489.643 30/06/01 14 CWT VIAJES DE EMPRESA S.A. 414.661 31/12/01 15 METRO DE MADRID SA 395.008 31/12/01 16 RIUSA II SA 392.238 31/10/00 (*) Source: SABI (Sistema de Balances Ibéricos) Database 2003 Limited number of quoted companies compared to other EU members 28