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Kona Adventures Hicks | Hicks | Ballard | Rice

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Page 1: Kona Adventures -2

Kona AdventuresHicks | Hicks | Ballard | Rice

Page 2: Kona Adventures -2

Table of Contents

Executive Summary

Valuation Methodologies

Potential Buyers

Potential Target

Recommendation

3

10

16

20

22

Section

Table of Contents

2

Page 3: Kona Adventures -2

Executive Summary

Page 4: Kona Adventures -2

Executive Summary 4

13,678.23

0

2000

4000

6000

8000

10000

12000

14000

16000

1980 1984 1988 1992 1996 2000 2004 2008 2012 2016 2020

Macro Environment

Summary Consumer Confidence

Unemployment

91.4

50

55

60

65

70

75

80

85

90

95

100

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Sources: U.S. Census Bureau, IBIS World

Consumer Spending$ in Billions

• Dip in consumer confidence as a result of global economic concerns related to Brexit, as well as uncertainty surrounding the strength of the American economy and the upcoming election

• However, consumer spending continues to increase and is forecasted to grow at 2.6 percent through mid-2017 amid low interest rates

• Unemployment projected to remain largely stagnant through 2020 as jobs increase moderately

5.10%

0

2

4

6

8

10

12

1980 1984 1988 1992 1996 2000 2004 2008 2012 2016 2020

Page 5: Kona Adventures -2

Executive Summary 5

Life Cycle Stage Regulation Level

Revenue Volatility Technology Change

Capital Intensity Barriers to Entry

Industry Assistance Industry Globalization

Concentration Level Competition Level

Car Rental

3%

Tour and Package Travel Bookings

32%

Cruise Bookings

26%

International and Domestic Airline

Bookings23%

Accomodation

Bookings11%

Other

5%

Travel Industry Overview

Select Drivers 2016 Products and Services Segmentation

Industry State

Sources: IBIS World

$34.4bn

Mature

International Trips by U.S. Residents

Percentage of Services Conducted Online

Consumer Spending

Consumer Confidence Index

Domestic Trips by U.S. Residents

• International trips from the United States expected to rise by an annualized rate of 3.8% through 2022

• Depreciation of the Euro encourages travel abroad• Low crude prices trigger higher margins and the potential

for cheaper ticket prices

• Technological advancements in aircraft technology have made air travel more safely and more cheaply

• Low unemployment and rising disposable income spurs leisure travel

• Revenue projected to grow at CAGR of 1.9% through 2022

• Increased demand for and implementation of online capabilities has driven online sales growth

• Automated systems reduce agent headcount and payroll expense

• Moderate job creation in a strengthening economy will translate into additional money in consumer wallets, fueling purchases

• Economic turmoil in Europe and downward revision to China‘s growth prospects make predictions in the index unpredictable

Page 6: Kona Adventures -2

Executive Summary 6

Corporate Social Events

43%

Weddings

28%

BirthdayParties

16%

Other13%

Life Cycle Stage Regulation Level

Revenue Volatility Technology Change

Capital Intensity Barriers to Entry

Industry Assistance Industry Globalization

Concentration Level Competition Level

Event Planning Industry Overview

Select Drivers 2016 Products and Services Segmentation

Industry State

Sources: IBIS World

$4.9bn

Mature

Corporate Profit

• Industry clients are largely corporate• Industry revenue is increasing despite stagnating corporate

profit levels

Marriage Rate

• Declining marriage rates are pushing industry focus into other service segments

Industry Revenue v. Corporate Profit

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

Revenue ($m) Corporate Profit ($b)

Time Spent on Leisure and Sports

• Low unemployment leaves the average American with less leisure time, resulting in increased outsourcing to professionals

Page 7: Kona Adventures -2

Executive Summary 7

Company Overview

Service Mix Competitive strategy

Sources: Case Materials

Airfare Hotels TransportEvent

Planning

• Serve wide variety and scale of customer• Use cutting edge technology and superior customer service

to enhance customer experience and earn return business• Pursue acquisitive growth strategy to enter new markets and

gain market share• Enhance online presence to reduce agent headcount and

payroll expenses• Continue to grow core competencies

Airfare Accomodation

43%

Hotel Booking27%

TransportationServices

8%

Entertainment Planning

23%

Revenue Breakdown by Service Revenue and EBITDA Margin Trend

0%

10%

20%

30%

40%

50%

2013 2014 2015 2016 2017 2018 2019 2020 2021

$0

$50

$100

$150

$200

$250

$300

$350

Sales/Revenue EBITDA Margin

$ in Millions

Page 8: Kona Adventures -2

Executive Summary 8

SWOT Analysis

Sources: IBIS World

Strengths Weaknesses

Opportunities Threats

• Proven acquisition platform• Exceptional service leading to 85% customer

retention• Leader in travel and entertainment market

with strong core end markets • Strong vendor relationships

• Comprehensive product portfolio allows for increased customer penetration

• Enter international markets through use of fully integrated digital platform

• Growth in per capita income and steady unemployment will lead to growth in domestic and international travel

• Reliance on US market• Intense competition from other service

providers means limited margins and slow market share growth

• External pressure on travel industry

• Competition level of industry is high • Customers will go to agency with the best

price deal • Digital platform cannot replace the

expertise, guidance, and personal service of an experienced travel agent

• Business travel reliant on steady economic growth, business confidence, and profitability

Page 9: Kona Adventures -2

Executive Summary 9

Exclusive Access

• Ability to access events and reservations not available to the public

• Strong vendor relations deliver better prices to the end consumer

• Personalized customer service with real-time analysis simplifies the travel process

• International reach• Tech-enabled digital solutions provide the same

services with greater convenience

Removal of Administrative Travel Burden

Value Proposition

Sources: Case Materials

Arrw 2

• Specialty meetings and large corporate events• Group travel coordination and events

Facilitation of Corporate and Personal Events

Page 10: Kona Adventures -2

Valuation Methodologies

Page 11: Kona Adventures -2

Valuation Methodologies 11

Investment Highlight Commentary / Key Considerations

Growth Opportunities

• Significant whitespace to grow and expand customer relationships

• Opportunity to strengthen expansion of entertainment planning service segment both organically andinorganically

• Rapidly increasing scale and breadth of online service

Platform Attributes

• Experienced management with financial and technical expertise in the travel and entertainment and techindustries consistently delivers strong financial performance

• Expansive customer base with loyal blue chip customers

• Strong relationships with key vendors in the industry, including recognized airlines, hotels, transportationproviders, and event venues

Industry Environment

• 60% of market share controlled by regional and local agencies offers attractive opportunity to gain market sharethrough acquisition

• High valuations , elevated M&A activity, ample private equity dry powder available

o 9.0% increase in dry powder from 2014, totaling $755bn as of June 2015

Scarcity Value• Few practices of scale and caliber are available in the market

• Ample consolidation opportunities exist in surrounding markets

Investment Highlights

Sources: Case Materials, Preqin Global

Page 12: Kona Adventures -2

Valuation Methodologies 12

Public Comparables Analysis

Valuation

Sources: Case Materials, Bloomberg

• Focus on travel agencies, especially technology-enabled platforms, to reflect Kona’shigh potential in that space

• Inclusion of event planning and online reviewing platforms are meant to reflectKona’s growing presence in that space

2016 EBITDA EV/EBITDA Range

Kona Adventures 52.7 13.2x - 15.4x $695mm $811mm

Implied Valuation Range

Kona Adventures

($ in millions, except per share data) TTM

Price as Market Enterprise Gross EBITDA EBITDA EBITDA-Capex Enterprise Value / TTM Enterprise Value / NTM

Company of 10/24/16 Cap. Value Revenue Gross Profit EBITDA Margin Margin Less Capex / Revenue Revenue EBITDA

Tier I: Mkt Cap > $5,000 bn

Priceline Group $ 1,468.91 $ 72,604 $ 75,472 $ 10,592 $ 10,121 $ 4,227 95.6% 39.9% $ 4,007 37.8% 7.1x 17.9x

Expedia 124.79 18,704 20,614 8,720 7,131 1,625 81.8% 18.6% 855 9.8% 2.4x 12.7x

TripAdvisor 63.99 9,321 8,522 1,524 1,452 390 95.2% 25.6% 311 20.4% 5.6x 21.8x

Live Nation Entertainment 27.74 5,634 6,671 7,747 2,161 585 27.9% 7.6% 431 5.6% 0.9x 11.4x

Tier II: Mkt Cap < 5,000 bn

Makemytrip Ltd 25.37 1,179 1,164 354 180 (76) 50.8% -21.4% (86) nm 3.3x nm

Libterty TripAdvisor 21.70 1,627 5,949 1,536 - 216 0.0% 14.1% 123 8.0% 3.9x 27.5x

Travelzoo Inc. 12.25 170 143 133 117 11 87.7% 8.1% 10 7.2% 1.1x 13.2x

Groupon 5.03 2,887 2,279 3,119 1,374 51 44.0% 1.6% (29) nm 0.7x 45.0x

Yelp 35.15 2,750 2,346 629 570 (0) 90.6% 0.0% (38) nm 3.7x nm

Median $ 2,887 $ 5,949 $ 1,536 $ 1,374 $ 216 81.8% 8.1% $ 123 8.9% 3.3x 13.2x

Mean $ 12,764 $ 13,684 $ 3,817 $ 2,567 $ 781 63.7% 10.5% $ 620 14.8% 3.2x 15.4x

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Valuation Methodologies 13

2016 EBITDA EV/EBITDA Range

Kona Adventures 52.7 10.0x - 14.4x $527mm $758mm

Implied Valuation Range

Precedent Transactions Analysis

Valuation

• Timing of precedent transactions lowers the implied multiples, mitigating the positiveeffects of synergies and premiums

• We focus on the upper end of this valuation range

• Includes range of travel coordinators, as well as entertainment planners

Enterprise Value /

Date Transaction Purchase Equity Enterprise LTM

Announced Acquirer Target Type Consideration Value Value EBITDA

1/23/2015 Priceline Group Inc. OpenTable Inc Public/Public Cash 2,496 2,378 44.80x2/12/2015 Expedia Inc Orbitz Worldwide Inc Public/Public Cash 1,336 1,596 11.43x

11/8/2012 Priceline Group Inc. Kayak Software Corp Puiblic/Public Cash and Stock 1,725 1,660 30.17x

4/27/2006 Carlson Wagonlit Travel BV Navigant International Inc. Public/Public Cash 278 478 8.25x

7/26/2011 Cox & Kings Ltd Holidaybreak Ltd Public/Public Cash 305 444 7.75x

7/31/2007 Goldman Sachs Capital Partners Aernaturist dd Private/Public Cash 91 91 27.05x

4/25/2008 Industrial Development Corp of Southa Africa Ltd Tourism Investment Corp Public/Public Cash 1,727 1,991 7.46x

3/6/2015 Fosun International Ltd Thomas Cook Group PLC Public/Public Cash 92 92 3.47x

7/7/2014 Expedia Inc Wotif.com Holdings Ltd Public/Publc Cash 699 584 8.49x2/10/2009 Live Nation Entertainment Ticketmaster Entertainment IncPublic/Public Stock 1,241 670 2.86x

Mean $999 $998 14.37x

Median $970 $627 9.96x

Sources: Case Materials, Bloomberg

Page 14: Kona Adventures -2

Valuation Methodologies 14

Discounted Cash Flow Analysis

Valuation• Key assumptions:

• Potential acquisition incorporated in projects

• Anticipated continued growth in key productsegments, in particular the Entertainment PlanningDivision

CAGR

2013 2014 2015 2016E 2017P 2018P 2019P 2020P 2021P ('16 - '21)

EBITDA 35.8 41.1 46.5 52.7 60.7 66.8 75.3 88.4 104.2 18.59%

% margin 22.00% 23.38% 24.51% 25.55% 27.00% 27.01% 27.52% 29.02% 30.52%

Depreciation & Amortization 0.30 0.40 0.60 0.50 0.50 0.60 0.64 0.72 0.81

EBIT 35.5 40.7 45.9 52.2 60.2 66.2 74.6 87.6 103.4 18.64%

% margin 21.82% 23.15% 24.20% 25.30% 26.78% 26.77% 27.28% 28.78% 30.28%

Taxes 13.7 15.7 17.7 20.1 23.2 25.5 28.7 33.7 39.8

EBIAT $22 $25 $28 $32 $37 $41 $46 $54 $64 18.64%

Plus: Depreciation & Amortization 0.3 0.4 0.6 0.5 0.5 0.6 0.6 0.7 0.8

Less: Capital Expenditures 0.3 0.5 5.5 0.7 0.6 0.7 0.8 0.9 1.0

Less: Increase in Net Working Capital 0 7 (1) 3 1 2 0 3 4

Unlevered Free Cash Flow $22 $33 $34 $36 $39 $44 $48 $58 $69

WACC 9.55%

Historical period Projection period

Cumulative Present Value of FCF $150

Terminal Year EBITDA (2020E) 88

Implied Exit Multiple 11.36

Terminal Value $1,004

Discount Factor 0.63

Present Value of Terminal Value 636$

% of Enterprise Value 80.97%

Enterprise Value $786

Enterprise Value

Terminal Value

$786 2.000% 2.250% 2.50% 2.750% 3.000%

8.546% 831 860 891 925 962

9.046% 783 808 835 864 895

9.55% 741 763 786 811 838

10.046% 704 723 744 766 789

10.546% 672 689 707 726 747

Enterprise Value

Perpetuity Growth Rate

16.90 2.000% 2.250% 2.50% 2.750% 3.000%

8.546% 17.88 18.50 19.17 19.90 20.69

9.046% 16.84 17.37 17.95 18.57 19.25

9.546% 15.94 16.40 16.90 17.44 18.02

10.046% 15.14 15.56 16.00 16.47 16.97

10.546% 14.45 14.81 15.20 15.62 16.06

Implied Enterprise Value / LTM EBITDA

Perpetuity Growth Rate

Sources: Case Materials, Bloomberg

Page 15: Kona Adventures -2

Valuation Methodologies 15

Leveraged Buyout Analysis

Sources: IBIS World

(1)

(1): Numbers in thousands

Free Cash Flow 2017 2018 2019 2020 2021

EBITDA $60,700 $66,800 $75,261 $88,362 $104,223

Less: CapEx (600) (700) (811) (903) (1,012)

Less: Increase in NWC (1,245) (2,249) (215) (2,949) (3,595)

Less: Cash Interest (18,840) (18,840) (18,840) (18,840) (18,840)

Less: Cash Taxes (14,646) (16,838) (19,388) (22,409) (26,014)

FCF for Debt Repayment 25,369 28,173 36,007 43,261 54,762

Free Cash Flow

Implied Offer Price Per Share

Returns Analysis

Terminal EBITDA $104,223

Exit Multiple 7.8x

Enterprise Value $807,729

Less: Net Debt (196,479)

Equity Value at Exit $611,250

Sponsor Ownership at Exit 40.0%

Sponsor Equity Value at Exit $244,500

Sponsor Equity Value at Closing 37,915

IRR % 45.2%

Cash return 6.45x

EBITDA Exit Multiple

6.8x 7.3x 7.8x 8.3x 8.8x

25.0% $17.24 $17.54 $17.84 $18.13 $18.43

Sponsor 22.5% 17.55 17.88 18.21 18.54 18.87

Required 20.0% 17.90 18.26 18.63 19.00 19.36

IRR% 17.5% 18.29 18.70 19.11 19.51 19.92

15.0% 18.74 19.20 19.65 20.10 20.56

CapEx as % of D&A

142.0% 141.0% 140.0% 139.0% 138.0%

25.0% $17.84 $17.84 $17.84 $17.84 $17.84

Sponsor 22.5% 18.21 18.21 18.21 18.21 18.21

Required 20.0% 18.63 18.63 18.63 18.63 18.63

IRR% 17.5% 19.11 19.11 19.11 19.11 19.11

15.0% 19.65 19.65 19.65 19.65 19.65

Return Analysis

• Entry and exit multiples based on results of precedent transactions analysis

• Strong FCF’s dedicated towards repayment of debt• Senior Debt 5.5x EBITDA, Equity 0.7x• Leads to valuation range of $942-$980 million

Summary (1)

Page 16: Kona Adventures -2

Potential Buyers

Page 17: Kona Adventures -2

Potential Buyers 17

Potential Financial Sponsors

• Venture Capital firm focusing on technology such as cloud & enterpriseIT, healthcare IT, cybersecurity, and most importantly internet &marketing services

• General investment fund focusing on growth companies with aportfolio totaling over $19.6 billion

• International Private Equity Firm with a focus on mid-market dealsinvesting primarily in Western Europe who recently just purchased aDutch e-commerce company with an emphasis on the online travelmarket for €15.4m

• Invests in superior middle-market companies requiring capital foran acquisition, expansion or recapitalization with an emphasis withOperating Cash Flows in excess of $2m and experiencedmanagement team with sustainable competitive advantage overthe market

Buyer Description Relevant Portfolio Companies

Undisclosed Travel Document Expediting Business

Sources: Bloomberg, CapitalIQ, Firm Website

Page 18: Kona Adventures -2

Potential Buyers 18

Potential Financial Sponsors

• Extremely well known brand recognition recently emphasizing emphasison tourism and lodging services with announcement of opening the newHyatt Waikiki Beach hotel

• Similar investments: PortAventura, Queens Moat Hotels

• One of the largest Private Equity firms in the world

• “Global travel continues to be an attractive investment area.Consumers are increasingly shifting their spending from things toexperiences.” Sandra Horbach, cohead of Carlyle Group’s US buyoutteam

• Private Equity firm dedicated to investments in travel and leisurebusinesses

Buyer Description Relevant Portfolio Companies

Queen’s Moat Hotels

• 100% of investments focused on travel companies and seeks activelygrowing travel companies

Sources: Bloomberg, CapitalIQ, Firm Website

Page 19: Kona Adventures -2

Potential Buyers 19

Potential Strategic Buyers

• Major industry player with recent acquisitions focusing on ecommerceand travel planning solutions

• Leading player in travel industry focusing on maintaining elite statusthrough acquisitions of competitive smaller companies

• Various acquisitions to improve overall services and digitalefficiency of company

Buyer Description Recent Acquisitions

• Diverse acquisition portfolio of airlines, hotels, and travel agencies

• Niche industry player with acquisitions focusing mostly on digitalplanning

Sources: Bloomberg, CapitalIQ, Firm Website

Page 20: Kona Adventures -2

Potential Target

Page 21: Kona Adventures -2

Potential Target 21

Target Candidate

Sources: travelzoo.com, Yahoo Finance

Travel Zoo

0

5

10

15

20

25

30

35

10/24/2011 10/24/2012 10/24/2013 10/24/2014 10/24/2015

Five-Year Share Price Trend

Headquarters:Market cap:Current share price:

• Global media commerce company with more than 28 million members in North America

• Publishes deals for more than 2,000 travel, entertainment, and local businesses

Strategic Rationale

• Broaden spectrum of services and offerings• Opportunity to channel existing customers towards Travel

Zoo businesses• Penetrate international markets• Increase focus on individual customer / family end markets• Achieve synergistic efficiencies

New York City$166.84M$12.30

Page 22: Kona Adventures -2

Recommendation

Page 23: Kona Adventures -2

Recommendation 23

Recommendation

$942.00

$695.00

$527.00

$723.00

$980.00

$811.00

$758.90

$811.00

300.00 350.00 400.00 450.00 500.00 550.00 600.00 650.00 700.00 750.00 800.00 850.00 900.00 950.00 1000.00

Leveraged Buyout

Comparable Companies

Precedent Transactions

Discounted Cash Flows

Football Field Valuation BenchmarkLeveraged Buyout

• Strong cash flows and leading management team make Kona Adventures a good LBO candidate

Comparable Companies

• We benchmarked Kona against a comparable universe chosen because of similar business plans and relative size

• Focus on technology enabled platforms

Precedent Transactions

• Precedent Transactions analysis gives us a large valuation range due to small prior deals and more recent large transactions

• We focus on the upper end of this valuation because of Kona’s similarities with large deal companies

Discounted Cash Flows

• WACC calculation include:• Re-levered Beta from comparables• Liquidity premium of 3%

• Potential acquisition incorporated in valuation

Enterprise Value (EV)

Page 24: Kona Adventures -2

Recommendation 24

Recommendation

Continue Acquisitive Policies

• Implied Valuation Range: $710mm to $800mm

• Growing volume of M&A activity in the travel/tourism industry

• Competitive landscape

• Major players looking to gain increased market share through acquisitions

• Given highly fragmented market, driven byregional firms, we recommend Konacontinue to take advantage of it’sacquisitive policies

• Kona should pursue the purchase ofTravelzoo and other relevant private firms