Tickets to ride: South Korea’s tourist industry is shaking off its COVID lethargy

Data InsightDealspeak 26 August

Tickets to ride: South Korea’s tourist industry is shaking off its COVID lethargy

The tourism sector was decimated by the advent of coronavirus (COVID-19), as the world went into lockdown, borders were closed, and airlines grounded. Despite vaccination roll-outs and the lifting of travel embargoes since then, global passenger traffic volume has yet to return to its pre-pandemic level. In line with the uneven recovery in tourist numbers across the Asia-Pacific (APAC) region, M&A activity in the tourism and leisure sector has been similarly disrupted.

The total number of M&A deals slumped 37% over the past three years, sliding to 168 transactions in 2021 from 266 in 2018, according to Dealogic data. In terms of deal value, M&A deals in 2020 totaled USD 18.2bn, which was significantly down from USD 31.1bn in 2019 and USD 18.3bn in 2018. However, APAC travel and leisure deal value returned with a bang in 2021, soaring near to its pre-COVID figure at USD 27.96bn, as Australia (USD 19.89bn/32 deals), China (USD 2.68bn/43 deals), and South Korea (USD 2.65bn/eight deals) led the way.

Activity in South Korea started to pick up last year, with deal value rising compared with 2018 and 2019. This recovery has continued into 2022, with four deals in the year to date (YTD) worth USD 511.8m, representing 12.75% of the total APAC market. Prior to the arrival of COVID, South Korea accounted for between 5% and 7% of the region’s tourism M&A, but global investors are increasingly targeting the country’s property and resorts assets.

The sale of a 13.97% stake in Hanjin KAL [KRX:180640] to Hoban Construction, a privately held residential builder that failed to acquire Asiana Airlines [KRX:020560] in 2019, marks the second-largest deal in APAC this year. This follows Singapore-based GIC’s USD 1bn acquisition in June of 31 hotels and leisure facilities in Japan. Hanjin KAL oversees hotels, resorts, and a travel business in its role as a holding company for Korean Air Lines [KRX:003490]. Note that the largest APAC deal in 2021 was a USD 7bn swoop by global investment firm Blackstone Group for a 90.01% stake in Crown Resorts, a casino hotel operator in Australia.

According to a Seoul-based private-equity executive, the country’s tourist market remains cautious, while it is “winter” for travel and leisure related start-ups looking to raise funds from investors. The current volume of air flights is half that of 2019, but the PE executive expects the market to recover in the second half of 2023. He anticipates the tourism sector continuing to lure investors and expects macro factors to eventually return to a healthier state.

Preparing for takeoff

One of the effects of the pandemic has been to drive usage of online tour operator platforms and apps, thereby avoiding the need for face-to-face bookings. This is expected to continue to grow and attract investors, as inland travel returns, while restrictions remain on outbound trips.

Consolidation among travel agents is unlikely, says another PE investor, because of a lack of synergies. However, he feels the need for digitalization and business diversification, and investment from other property-based leisure operators, will drive deal flow across the sector.

CVC Capital Partners’ portfolio company, GC Co, a domestic travel and leisure platform, raised USD 40m in April. The firm recorded sales of KRW 249bn in 2021, marking a rise of 60% year-on-year, and valuing the business at more than USD 1bn in the latest funding round, according to local reports.

GC Co’s local peer, Yanolja, raised USD 1.7bn from SoftBank Vision Fund 2 in July 2021, while other tour platform operators, H2O Company and Wishbeen, also sold partial stakes last year to strategic and financial investors.

Several Korean platforms are currently backed by financial sponsors and could be up for sale in the coming years, says the second PE investor. And this month, Hotel Lotte, a hotel and duty-free unit of Lotte Group, says that it plans to invest in Blank, a domestic media commerce company, as it looks to reach new business.

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