Is it time to buy into a travel rally Down Under?
You're a bold investor if you do. But that is exactly what private equity firms KKR & Co. (KKR) and Bain Capital are doing.
New York-based KKR is buying Ritchies Transport, one of the largest bus companies in New Zealand.
Meanwhile, Virgin Australia said on Friday it will add nine Boeing BA 737-800 planes to its fleet from October, getting ready for an anticipated increase in Aussie domestic travel. Boston-based Bain Capital bought out Virgin Australia last November. Australia's second-largest carrier collapsed into voluntary administration in April 2020. It owed creditors A$6.8 billion (US$4.9 billion) when it entered administration, one of the first airlines around the world to collapse. Bain committed A$3.5 billion (US$2.5 billion) in financing, came up with a business plan that cut one-third of the staff and is getting the carrier back in the air.
Virgin shareholders took a beating as Bain took the competitor to Qantas QABSY private but averted disaster when the airline was burning through A$200 million in cash per month. Investors and employees ultimately bought into the plan. Bain now can slash and burn to turn "efficiencies" into a good sale price. But the Aussie government refused to bail Virgin out, so...
KKR didn't disclose the purchase price for Ritchies, but TechCrunch reports the deal values the bus company at more than NZ$500 million (US$347 million). That price tag would be a decent multiple on profits estimated at NZ$50 million per year for privately held Ritchies.
KKR says it's using money from its Asia Pacific infrastructure fund to finance the deal. It is KKR's first infrastructure investment in New Zealand.
Ritchies' buses have been rumbling on Kiwi roads for the last 86 years. The company runs a fleet of 1,600 unmistakable red-yellow-blue-striped buses through 42 depots around the country, serving some cities and local councils as well as private customers.
The Ritchie family will keep running the company, as it has since 1935. KKR pledges backing to help the company electrify its fleet.
Glenn Ritchie had protested earlier this year that it "doesn't ring bells to me" after the Australian Financial Review reported in March that the company had called in its bankers to find a "deep-pocketed new driver." The AFR said Ritchies had hired the Rothschild affiliate Cameron Partners to advise it on a sale. Looks like the AFR was right and Glenn's memory was playing tricks on him.
There has been other activity on the roads. Last year, the Australian bus company Kinetic agreed to buy Go Bus in New Zealand for around A$300 million (US$218 million). Kinetic itself is a rollup of several smaller Aussie bus companies orchestrated by its Canadian owner, the pension plan OPTrust.
Virgin Australia will have 77 planes in its fleet after increasing capacity, which should help it reclaim one-third of the Aussie airline market. It handed back many of its planes to its lessors during its downturn and near-collapse.
The company had a fleet of 85 Boeing 737s in June 2020, a couple months after entering administration, according to a Deloitte administrator's report. So it will be a smaller carrier than before COVID but ahead of the fleet of 30 to 60 737s that former CEO Paul Scurrah said would be in the air by mid-2021, depending on demand.
Both New Zealand and Australia have sealed themselves away from the rest of the world and are not letting international travelers in their domains. In Australia's case, it has a tight cap on how many Aussies it will let out, too. New Zealand suspended a mutual "travel corridor" with Australia in July when the Delta variant broke out in several Australian states.
New Zealand now says it plans to allow vaccinated travelers from low-risk countries to enter without quarantine, starting early next year. Australia says it will consider opening borders with low-risk nations if and when the vaccination rate reaches 80% of Australian adults. But a slow early rollout means only 25% of Aussies are fully covered, with 45% having had one shot.
Fortunately, both nations have a domestic market to fall back on. Citizens are encouraged to vacation locally and do their part to stimulate the economy. Qantas says this week it is moving forward with rather optimistic plans to start international travel with high-vaccine nations in December. Even more optimistically, it is bringing back five Airbus A380s to fly to the United States and Britain from mid-2022, a year earlier than originally forecast.
These deals are happening while the sector is beaten down and more than likely shortly before it gets back on its feet. Demand is high, not just for travel, but for travel companies. Expect more trips and deals to come.
