Existing travel services businesses in Sub Saharan Africa(SSA) plan to merge their travel management companies to form a leading travel group (the “Group” or “TCI”) for the region. TCI will be a growing force in the travel industry in Africa, operating competitively throughout SSA.
TCI is a Mauritius-based travel services group, invested in a portfolio of mostly franchised, category specialist and formula driven, high touch and high tech travel service outlets, tour operations, global travel retail brands and support services operating throughout SSA.
TCI manages a number of leading global travel Brands – Uniglobe Travel, First Car Rental (East Africa), GSA agents in East Africa for Air Mauritius, Air Sudan, Air Zimbabwe, Yemeni Airways, Pakistan Int. Airways, Turkish Airlines
TCI’s growth will be primarily driven by a combination of key company owned outlets and franchisee owned outlets, (thereby also reducing the capital requirements of the group), allowing TCI Management to focus on building brand equity through aggressive marketing, and unlocking value within its own travel operations and the franchise system through vertical integration and shared services initiatives and group volume opportunities.
The group currently manages $80 million in third party sales through 20 outlets, with $40 million being managed through 5 outlets under the direct control of management. Segmental sales are roughly as follows:
Total Group Under Direct Control
• Corporate travel – $60million $30 million
• Leisure travel/tours – $17million $7million
• Car rental – $1million $1million
• Airline GSA – $2million $2million
The economies of SSA are expected to continue growing at double digit figures until 2020, on the back of a commodities and infrastructure development boom and a huge migration of people (4.5% pa) from rural to urban areas.Travel is expected to continue to grow at a multiplier of this economic growth in SSA.
SSA’s strategic holdings of key mineral , metals and oil are huge and it is one of the top producers of almost every category. Africa has a population almost equal to India and a higher number of middle class than India and is undergoing faster urbanisation than India. Travel and Tourism is a leading beneficiary of this growth and development and still in an early phase of its deregulation and developent as a key sector of the African economy, compared to mature declining industry in the Western world.
Travel and tourism accounts for approximately 10% of the GDP of most SSA countries and corporate travel is estimated to be worth over $10billion in total. Spending on business travel in SSA has been growing at double digit annual rates for the last two decades, and growth seems set to continue and accelerate in line with growing economic activity.
TCI is expected to grow organically and through acquisitions in SSA, while also improving performance through the adoption of advanced systems and shared services needed to provide unique valued added services to its diverse regional client base of midsized, relatively big spenders on business travel and discerning leisure travelers.
TCI will be one of the top Regionally based sophisticated travel management service companies geared to manage its clients business and leisure trips more efficiently, effectively and economically, providing unbeatable travel experiences, logistical and marketing support to industry airlines and other suppliers. TCI will be able to achieve substantial cost savings and greater effectiveness through centralisation of marketing, administration, accounting and some operational activities.
TCI’s Regional target market is one in which the promoters have been operating successfully for a considerable time (on average 10 years each and a combined 105 years in total). In the last three years they have achieved annual increases in aggregate sales of around 25 per cent per annum.
TCI will be equipped with the resources – human, marketing and business systems needed to continue to expand their sales at the annual compound rate of at least 25 per cent per annum called for in the forecasts. This growth will be both organic growth and acquisitions of other Uniglobe franchises or targetted travel management companies in the Region, as well as expansion of its niche tour operations, airline logistics and marketing support and car rental business.
Considerable improvements in sales and profitability are expected due to a combination of:
• Improved marketing and sales through centralised focus and sharing,
• Productivity improvement from improved business processes, shared services and automation
• Margins improvements from changes in product mix, bulk buyig discounts for early settlement and value based selling ,
• Cost reductions from shared services solutions and synergistic activities.
• Improved liquidity due to injection of private equity, enabling faster growth and related profitability over the next 4 years.
Gross Third Party Sales of TCI are currently at an annual rate of $80 million (i.e. approximately 1,2% of total estimated regional spend on travel of $10billion). This currenty yields an operating profit of $1million (on Revenue of $5million after operating expenses of $4 million. i.e 20% of Revenue)
TCI’s initial capitalisation is estimated at $5 million ( i.e. 5 * PBT ).
A private equity partner is being sought to provide $5 million for a 40% equity stake in order to have adequate cash to fund organic and acquisitive growth over the next 5 years. This will take the liquidity ratio from 0.4:1 to 1:1 and enable us to build a solid liquidity ratio of 2,5:1 over the next five years as profitability and growth improve.
The forecast – and the target – for 2020 is for total group sales to be $300million (i.e. only 3% of total expected travel spend of $20billion in SSA.)
Of this TCI will control directly $200 million and franchised offices $100million.
On an EV for TCI in 2020 of $60 million (PBT of $12.5 million x 5); a 40 per cent share for the private equity partner is $24million ( 5.8*cash); Dividends in Years 2 to 5 at the rate of 40 per cent of PAT generates equates to $10million cash; private equity partner’s 40% share equal to R4 million – (giving the private equity partner a total return of 6.8*cash)
On these assumptions and forecasts, annual IRR over five years on the private equity partner’s $5 million investment would be +/-35 per cent pa.
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