Deal Mechanic: Out of the park

UK-based mid-market firm Epiris – formerly known as Electra Partners – had been keeping a close eye on the holiday parks sector for some time before it came across Park Resorts, an operator offering caravan holidays at 39 sites across the UK.

“It's a very resilient sector in terms of economic ups and downs, and we saw it as a high upside sector in terms of transformation potential,” says managing partner Alex Fortescue.

“It's still very fragmented, and so [it's] a big M&A driven opportunity to drive growth, and [there's] still relatively high scope to implement operational improvement.”

Park Resorts had been acquired by GI Partners in a secondary buyout in 2007. When Epiris looked at the business four years later, Lloyds Bank held a significant chunk of the debt and was looking to exit. Epiris spotted an opportunity.

“The thesis there was that, worst case, we would hold the debt to maturity. We bought the debt at just over 50 pence in the pound, and we thought we would make somewhere between 1.7 and 2 times money simply from holding the debt to maturity.”

In January 2012 Epiris paid £45.5 million ($56.3 million; €52.4 million) for Lloyds' portion, and then picked up several more debt tranches, taking the initial investment up to £70 million and giving the firm a blocking minority. This allowed Epiris to work with GI, the management team and other banks on a consensual restructuring.

“Essentially that involved extending the maturity of the debt, converting a piece of our debt into a PIK instrument and, crucially, us getting equity control of the business,” Fortescue says.

This meant Epiris' effective entry price was around 7x EBITDA – considerably below the market price for the sector of 9.5-10x, Fortescue says.

1 FIRST STEPS
Epiris' first task was to sit down with the management team to identify potential investment opportunities to drive capacity across existing sites.

“Because they had been so starved of capital, that had to start from square one,” Fortescue says.

“They didn't have any view as to where those opportunities were, we had to go site by site and look at where we could add extra pitches or holiday caravans, how we could drive capacity and growth.”

This generated around 100 potential projects which, due to the restructuring of the financing, Epiris could fund and see a quick return to growth. Epiris also undertook some succession planning; chief executive David Vaughan was looking to retire, so Epiris worked to find a replacement, appointing David Boden in 2013.

2 BUILDING OUT
A large part of the value creation plan for Park Resorts was add-on acquisitions. Epiris had already identified a number of opportunities when it was evaluating the initial debt transaction.

The first acquisition was South Lakeland Park, held by Irish bank NAMA, which Epiris acquired for just over £40 million.

“The business had been going backwards operationally,” Fortescue says.

“There, we implemented a very quick turnaround programme to drive synergies. We replaced the management team and centralised it within the Park Resorts business, and started driving the sales side of the business, which had been languishing under NAMA's stewardship.”

Epiris removed a head office and IT hub from the Lake District, moving it down to the Park Resorts headquarters in Hemel Hempstead, saving around £2 million. 

Shortly afterwards Epiris acquired a pair of parks, Southview and Manor Park, from NAMA, again at an attractive entry price. 

3 CATCHING UP
The caravan parks sector has gene-rally been behind similar industries such as hotels and airlines on yield management, Fortescue explains. This was a clear area where significant, measurable improvement could be made.

“The old model had been to produce a catalogue that was mailed out and had the prices in it, you stuck to those prices for the season, and you might have a bit of clearance of unsold inventory at the last minute,” he says.

Epiris worked with management to implement yield management software tools, allowing pricing to be adjusted minute by minute according to demand.

“That's led to significant growth in average pricing and has meant less discounting at the last minute as well,” Fortescue adds.
   
4 FINAL MERGER
The final piece of the M&A story was Park Resorts' merger with Alchemy Partners-owned Parkdean Holidays.

“We'd always seen Parkdean as an interesting M&A candidate for Park Resorts in that it was geographically very complementary – Parkdean was much stronger in the West Country, versus Park Resorts being much stronger on the south and the east coast,” Fortescue says.

“In addition, Parkdean was stronger at the holidays side of the business, selling caravans for rental for a week or four days, whereas Park Resorts was much better at the sales side, selling a caravan outright and then renting a pitch by the year.”

Epiris approached Alchemy, which was receptive to the idea of a merger. The two firms initially worked together with the two CEOs and CFOs on integration planning and synergies. “The conclusion of that confirmed the initial hypothesis that there was significant value in putting the two businesses together, partly from cost synergies, but partly, and more interestingly, from best practice and the fact that each business had its own particular area of strength.”

The merger was agreed in August 2015, and completed following competition clearance in November. The combined business was renamed Parkdean Resorts.

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Epiris continued making improvements into 2016, until it became clear Parkdean was ready to sell.

“We felt our core role was done, we'd delivered that transformation, and it was time to seek an exit,” Fortescue says.

“We'd taken a business doing £30 million of profit; we'd taken essentially a distressed balance sheet there, we'd taken it forwards, restructured the balance sheet. We'd driven the M&A and driven the organic growth and created now a £120 million EBITDA business.”

Epiris hired Rothschild in summer 2016 to hold an auction process. The business was acquired by Canadian private equity firm Onex Corporation for £1.35 billion, which delivered proceeds of around £405 million to Epiris' major client, listed private equity investment trust Electra Private Equity, a return of around 3.9x and an internal rate of return of around 46 percent.

“The fact that we'd bought the debt meant that essentially we had no leverage working for us in this deal,” Fortescue says.

“We were in the most senior instrument, which obviously meant it was a relatively lower risk deal for us, we couldn't have lost our money, but also means delivering just under four times money on an unlevered basis is a particularly strong return, we think.”