Benefits and pitfalls in Flight Centre USD 220m luxury deal with Scott Dunn

Flight Centre’s USD220 million buyout of luxury travel agency Scott Dunn has prompted analysts to forecast strategic benefits while warning of potential pitfalls, such as a post-COVID-19 sugar rush for top-end trips diminishing.

The acquisition has also cast a light on Brisbane-based Flight Centre’s mixed buyout track record. Accounts examined by The Australian Financial Review indicate Flight Centre has dusted more than USD150 million on takeovers in the past 15 years.

Flight Centre last week unveiled plans to push deeper into the high-margin luxury market, primarily in Britain and the US, by purchasing London-based Scott Dunn. Its tailor-made products include staying in a hotel made of ice in Swedish Lapland, where guests can “experience sleeping in temperatures of minus 5 degrees”, or a 12-night honeymoon in Sri Lanka, decamping in luxury yurts and with a private tour guide, starting at USD7800 a person.

The acquisition costs USD210 million and deal expenses another USD10 million, with Flight Centre issuing up to USD220 million in new shares. Flight Centre said its co-founder and chief executive Graham Turner, who directly owns about 8 per cent of the company, would acquire his full allocation in a share purchase plan.

QValue analyst Daniel Seeney said the Scott Dunn buyout was an “unusually large acquisition in Flight Centre’s historical capital allocation”. The last comparable level of spending in the past decade was 2019, and this was when the company acquired a string of businesses, the largest being USD112 million for corporate travel management network 3mundi.

“Flight’s acquisitions have generally focused on adding capability, particularly technology and corporate travel businesses,” he said. This latest buyout was a “notable pivot”. “The business looks like a sensible bolt-on with reasonable acquisition metrics, however we highlight the potential for the transaction to be a distraction against the backdrop of ongoing rapid recovery in Flight Centre’s core business,” he said.

Flight Centre already has one premium brand called Travel Associates, operating in Australia. Credit Suisse analyst Abraham Akra said moving deeper into luxury markets aimed to pivot Flight Centre’s leisure division away from a mass-market base, whose earnings and margins had been under pressure for several years from falling airline commissions and a shift to online bookings.

The luxury sector’s higher margins, based on service and commission-based pricing, were “more resilient to structural changes” squeezing the mass market brands, he said. Still, Akra said the buyout seemed fully priced, with Scott Dunn’s trailing annual bookings seeming to have stalled from August last year.

“We question the resiliency of the luxury travel segment to challenging macroeconomic conditions once travel normalises post the COVID-19 demand bubble,” he said. “Further, we believe Scott Dunn has benefited from elevated air travel disruptions and complex cross border rules post COVID-19, which is due to reverse over the medium term.”

Citigroup analyst Samuel Seow said that Flight Centre allocating more capital to its leisure division indicated a “potentially more optimistic longer-term outlook for this business segment”. He said although Flight Centre’s update for its own performance indicated strength in its separate corporate travel division, he was “cautious that the trend has slowed”. Flight Centre anticipated that underlying earnings before interest, tax, depreciation, amortisation for the six months to December would come to USD95 million for the group.

Flight Centre said its acquisition successes included the 2017 buyout of Travel Partners, an independent network of Australian travel agents, and Ignite, which offers holiday packages. This had been successful even during the pandemic, a spokesman said. Other acquisitions such as BYOjet allowed Flight Centre to have a “bigger presence in leisure sectors that we felt we were under-represented in”, he said.

Still, accounts show that Flight Centre paid about USD149 million to break into the US leisure market by acquiring Liberty Travel in 2007. But it had wiped off almost USD76 million in goodwill and brand names from Liberty by 2014, arguing the global financial crisis and US recession had hurt, and the profit contributions were not large enough to justify carrying values.

Flight Centre’s spokesman said other parts of the Liberty acquisition were quite successful, including offering access to US products and helping fast track the company’s corporate growth. The company had also written down USD29.7 million in 2019 from the goodwill of Mexico-based Olympus Tours, which it acquired in 2017, and whose services included selling tours, transfers and day trips. Flight Centre’s spokesman said this business was doing well now.

Another USD46 million writedown in December 2019 struck Flight Centre’s tour operating brands Top Deck Tours and Backroads. It flagged a customer decline in Top Deck, in which Flight Centre had invested in 2014.

Latest accounts for Scott Dunn entities filed in the UK indicate that in the 12 months to 2021, it earned almost £10.1 million (USDA17.5 million) in travel agent revenue. It said earnings before interest, tax, depreciation, amortisation and exceptional items were £3.3 million, which included almost six months’ of COVID-19 lockdowns.

It posted an “operating loss” of £8.1 million, which had included almost £7.5 million in amortisation of intangible assets. Flight Centre’s presentation said in the 12 months to October last year, Scott Dunn’s revenue had jumped to USD48 million and its EBITDA was USD18 million. The Brisbane-based company said ongoing depreciation and amortisation from it would run at between USD1 million and USD2 million a year.

Source: Financial Review