Hospitality/Leisure M&A finds flourishing niches in 2020

Hospitality and dining have been buffeted by the pandemic, weighing on deal activity. But Q4 has brought welcome refinancing support and investor confidence

The effect of the COVID-19 pandemic on the hospitality industry has been especially severe, the face-to-face nature of commercial activity in the space making it especially susceptible to social distancing and lockdown measures.

Deal volume in the broader leisure sector, which encompasses dining, hotels and hospitality, gyms and gaming groups, fell 49% while value dropped by 46% to 292 transactions worth US$39.8 billion in the first three quarters of the year. A rebound is due in the fourth quarter, however, with a number of large deals announced in October and November as investors respond positively to vaccine development news and gain confidence in a recovery.

The largest of these was the US$11.2 billion acquisition of Dunkin' Brands Group by private equity-backed Inspire Brands, owner of Arby’s, Buffalo Wild Wings and Jimmy John’s among others.

Not all segments of the broader leisure sector have been equally affected by the pandemic. Indeed, after its share price nearly halved in March, Dunkin' Brands rallied by 125% to an all-time high prior to the deal becoming public knowledge. Two years ago, the business purposefully pivoted away from its core donut products, rebranding and moving into beverages in the face of an increasingly health-conscious consumer.

Travel restrictions

Restrictions on movement have severely affected airliners and other travel providers too.

Flybe, Avianca Airlines, Virgin Australia and Norwegian Airlines are just a sample of the carriers forced into bankruptcy or administration during the year. The grounding of planes and border closures has had a knock-on effect on the leisure sector, with hotel occupancy rates falling precipitously. In March and April, the US hotel occupancy rate bottomed out at just 22%, according to industry data provider STR. This recovered to between 48% and 50% between July and October, before falling again to 43.2% by mid-November as a second wave of the pandemic swept many areas of the globe.

Pure hotel deals have been few and far between. Colony Capital divested six legacy hospitality portfolios comprising 197 hotels to Highgate Hotels for US$2.8 billion, with almost all of the proceeds being used to pay down debt. And Blackstone Group acquired iQ Student Accommodation in the UK from Goldman Sachs and Wellcome Trust for US$6 billion.

However, the Blackstone deal—the second-largest in the leisure sector in 2020—is unique in that iQ benefits from demand for student accommodation far outstripping supply. This comes as university admissions in the UK reached record levels in 2020 in spite of the pandemic, buoyed by overseas students continuing to seek higher education in Britain.

Gaming sector

The main theme for M&A in the leisure sector this year has been gaming and sports, with deals coming in various forms. The largest of these saw US-based casino firm Caesars take over UK gaming and bookmaking firm William Hill for US$4.2 billion. Together with the iQ transaction, this made the UK the biggest leisure M&A market in the first nine months of 2020—although the Dunkin' deal in the fourth quarter has since pushed the US into the lead.

The second-largest leisure transaction in the first three quarters in the US involved hedge fund billionaire Steve Cohen acquiring an 87% controlling stake in Sterling Mets, the holding company of the New York Mets baseball team, for US$2.4 billion. Notably, Major League Baseball powered on through the pandemic with crowd distancing and frequent player screening.

The third-largest US leisure transaction also involved sports. A US$1.4 billion demerger saw Madison Square Garden spin off a holding company for its sports and entertainment venues into Madison Square Garden Entertainment Corp, while MSG Sports Corp has become a pure-play sports company, with holdings in the New York Knicks and New York Rangers teams.

The sports and gaming theme was on full display in other geographies too. Among the top ten-largest deals in the sector worldwide were Sweden's Evolution Gaming purchasing NetEnt for US$2.3 billion to expand its online casino portfolio, equipment maker Callaway Golf Company buying driving range and virtual gaming group Topgolf International for US$2.3 billion, and Apollo Global Management acquiring Toronto-listed casino operator Great Canadian Gaming for US$2.2 billion.

Buying time

Highly accommodative debt markets have been a boon for not only the leisure sector but also other industries sensitive to the effects of the pandemic. Data from S&P Global show there were 169 covenant-relief transactions through the first nine months of 2020, topping the previous record set in 2009 amid the prior global financial crisis.

Rock-bottom interest rates and governments backstopping the weakest credits with loans and bond purchases have supported those companies and industries most in need. With 2020 drawing to a close, a number of vaccine trials are showing promising results, giving leisure businesses hope and investors the confidence to back these riskier debt issuers.

Cruise line operator Carnival successfully upsized its US$1 billion and €300 million unsecured note offerings to US$1.45 billion and €500 million respectively toward the end of November, the proceeds of which are partly earmarked for refinancing costs. Similarly, UK restaurant group Boparan Holdings, which bought both Carluccio's and Gourmet Burger Kitchen out of administration in 2020, finally managed to place £475 million of high yield bonds in November as part of its rescue refinancing, after a number of reported failed attempts to raise money earlier in the year. Both issuances pay investors approximately 7.6% coupons.

In the leveraged loan market, 6.1% of defaults in 2020 have been from leisure issuers, significantly behind oil and gas (27%), retail (12%) and telecoms (11%), according to S&P data. But these defaults and distressed M&A activity have the potential to rise. Whether the increase comes to pass will depend on how the vaccine program and pandemic pan out, as well as the extent to which consumer behavior returns to pre-pandemic norms or has been reshaped indefinitely.

For the time being, leisure businesses have bought themselves extra time in the debt markets, and acquirers in M&A situations have largely been homing in on resilient niches such as take-out dining and online gaming, which have flourished in spite of—or perhaps because of—pandemic-related restrictions.

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