Seeking that Moment in the Sun: Unfreezing the Leisure Deal Pipeline

If there has been one recurring theme over the last 3 years of deal making in the leisure market it is the repeated failure of processes to reach a ‘happy ending’. Whether it’s holiday parks, gyms, restaurants, cinemas or entertainment businesses there are dozens of processes where the value expectations of the asset owner has been a long way from converging with the willingness of a new investor to ‘pay that price’.

So what’s going on?

We think there are a number of underlying drivers of this mismatch of expectations:

• Normalisation of the post-Covid bounce
• Anaemic recovery and uncertain outlook of consumer confidence and spending
• Tepid volume growth meets limited pricing headroom
• Structural cost increase
• Capital intensive growth ambitions.

In total these factors add up to material uncertainties in the ability of businesses to be able to drive profit growth in the short-medium term – and for funds making ‘macro’ allocations means that consumer discretionary is far from the flavour of the month (or the year). At the same time, the post-Covid bounce that many businesses experienced served to anchor profit and value expectations of a number of leisure businesses at an unhelpful high-water market.

Taken together these make deal doing extremely difficult.

Where from here?

Time is obviously an important factor in allowing for convergence of value expectations – gradual realisation and rebasing of investors valuations starts to coincide with a slow increase in consumer confidence and spending and investor willingness to put new capital to work in this area. But as an asset owner, this slow drift of value is costing you, and often also comes at a time when some leisure assets are the last business in an increasingly long-dated fund.

We believe there is an alternative path, which looks to identify and deliver new sources of structural growth. This approach has to look beyond business as usual cost efficiency and an assumed market tailwind or incremental above inflation price increases. Instead you need to look to create certainty around structural growth drivers, and we would typically see these materialising in [x] areas

• Unlocking capital efficient space / site expansion: it’s not good enough to have a program that is expanding sites / footprint at <10% ROCE, there has to be a way to unlock funding or deliver returns that are going to be materially above hurdle rate. This can be facilitated by unlocking capital from existing estate (sale + leaseback, ground rental, etc)
• Format innovation within existing footprint: evolving the core product / proposition to access untapped pockets of demand while still maintaining the core essence of brand positioning and operating model (e.g. urban formats, small format, value / premium prop development)
• De-risked International expansion: unlocking new market growth yields major dividends but has to follow a rapid path to value delivery (not long-term payback on major capital risk). Using partners / capital light models to prove out market demand is a key route here.
• Synergistic M&A: finding opportunities to leverage operating capability, customer assets and scale into potential M&A targets can look beyond M&A as an accelerated form of space expansion. Where are there chunky operating cost bases that could be integrated or overlapping customer bases that can be combined to reduce acquisition / retention costs?
• Step-changing operating model / efficiency (reduce labour intensity): new tools and approaches (and consumer acceptance) create radical new opportunities to rethink the operating model. This can be through automation / self-serve or AI enablement, but has the potential to add 20-40% to the bottom line in lower margin highly geared businesses.

These are not ‘quick fixes’, but together present opportunity to step-change the mid-term structural growth prospects of the business. It’s through such initiatives that you can create enough fuel to drive a material reappraisal of investability – and with commitment and follow through help frozen assets to have their moment in the sun.

For more on the Leisure market, contact our experts.