A
private equity group known for playing its cards so close to the
vest that it does not even have a Web site suddenly emerged last
week as the presumptive 50% owner of one of the world's biggest
largest cruise lines.
Apollo Management,
the New York-based company that raised eyebrows in the cruise
industry with its acquisition of Oceania Cruises last March,
dramatically upped its ante in the cruise sector with the
announcement that it would take a $1 billion stake in NCL Corp.,
sharing ownership with Malaysia-based Star Cruises.
"This investment --
not just its size but who the investor is -- validates everything
we have been doing over the last seven years," NCL's CEO, Colin Veitch, declared in a conference
call with the news media on Aug. 17. "It is a huge vote of
confidence for NCL's Freestyle cruising concept."
NCL Corp. has 13
ships in service, with a 14th, the Norwegian Gem, slated for
delivery in October.
The transaction,
valued at about $4 billion when future considerations for the NCL
America operation in Hawaii are included, is expected to close by
the end of this year.
Apollo, which was
formed in the 1990s, has made several strategic investments in
travel and leisure holdings, including Vail Resorts and a pending
investment in Harrah's Entertainment. It purchased Oceania for $850
million in March but said last week that it had no plans to combine
the two cruise companies.
Star Cruises, NCL's
sole owner since 2000, agreed to sell half of NCL, citing its own
need for capital to finance its growth plans in Asia, particularly
in what it called the Greater China market.
NCL said the
investment, in the form of common stock, was designed to strengthen
its balance sheet and its ability to expand. The line has reported
several straight quarters of losses, bogged down by debt, which
Apollo's investment would be used to pay off, thereby increasing
the line's liquidity.
The deal gives
Apollo three of five seats on NCL's board and control of NCL
management. Star retains two seats and wields certain veto rights
in matters such as major acquisitions and expenditures.
Apollo said it had
no immediate plans to change NCL's management.
Steve Martinez, the
Apollo partner who signed the deal, voiced support for Veitch and
the rest of NCL's management. He said Apollo hoped its capital
infusion would help NCL continue to execute on what Apollo saw as a
sound business plan that had not lived up to its
potential.
"They've had some
challenges, clearly, in some of their operations," Martinez said.
"[The investment] gives the company full flexibility to execute on
the plan without having to worry about the balance sheet at all.
That's the right way to ultimately run a company -- to focus on the
operation."
Martinez said
Apollo was impressed with NCL's strategy of differentiation through
Freestyle cruising and its next generation of F3 ships, the
150,000-ton, 4,200-passenger ships that are on order with Aker
Yards.
Apollo will be
spared the brunt of losses from NCL's U.S.-flagged, interisland
Hawaii cruising operation, NCL America, which has dragged down
NCL's profits over the last two years.
Under a
sub-agreement, NCL America will be treated separately in the
transaction, and Star Cruises will bear "specified costs and
expenses of NCLA to allow time for the business to continue to
develop."
Veitch said during
the call that Star would underwrite the losses "until the time we
can clearly see the prospects of the business."
While Veitch
conceded that the ships could possibly be taken out of Hawaii, he
added that all the shareholders were "aiming for a profitable
business in Hawaii. ... Otherwise, we'd deal with it
now."
According to the
contract, if NCL America turns itself around and becomes
successful, both partners would invest a combined $340 million in
the company. If it does not, the operation would shut down and one
NCL America ship would go to Star Cruises' fleet, the other to
NCL's international fleet.
Wall Street
analysts, who generally ignore NCL because it is not a publicly
traded company in the U.S. (Star Cruises is listed on the Hong Kong
and Singapore exchanges), were quick to comment on the
deal.
"An investment of
this size is a vote of confidence by Apollo in the long-term
fundamentals of the cruise industry, especially given the current
credit environment," UBS equity research analyst Robin Farley
said.
That Apollo was
interested in further cruise line acquisitions was not a surprise.
When Apollo acquired Oceania in March, a familiar industry name
surfaced in the deal: Adam Aron, a former president of NCL and now
a senior operating partner at Apollo.
Aron told Travel
Weekly at the time that Apollo would be interested in making
further cruise industry acquisitions. Speculation had focused on
possible acquisitions of smaller cruise lines. But NCL's struggles,
mostly in its Hawaii operations, have been well publicized. And
while Veitch has stated his desire that NCL be taken public, its
financial position made that goal difficult.
"The IPO never
occurred, and this is a better financial solution for NCL and
Star," observed Ken Dubbin, a former Royal Caribbean Cruises and
Carnival Corp. executive, now head of a
boutique consulting company. "This will certainly help NCL become
more competitive, as they will be able to continue to build new
vessels. Now they just need to figure out how to become
consistently profitable and generate acceptable returns, which has
been NCL's great enigma for the past 35 years."
Dubbin recalled
that Apollo had been involved in discussions with NCL's
shareholders as far back as the mid-1990s, when Aron was
president.
Martinez said in an
interview that the deal was not directly tied to Aron's past
position, adding that Apollo had been in contact with NCL for a
long time.
"We've been
continually talking to them about an opportunity to partner with
them," Martinez said. "The timing was right. They were looking to
take on a partner, and we were able to make them comfortable that
we had a shared vision ... and we were able to bring the capital to
bear that we think provides the liquidity and the better balance
sheet to execute on the business plan."
Until now, private
equity had not infiltrated the cruise industry's major
lines.
Bob Sweeney,
president of Innovative Travel Acquisitions in Atlanta, said that
the industry's high barriers to entry were among the reasons it was
now seeing private equity. Also, private equity looks for
opportunity.
"Only 15% of our
population has cruised. That's a big untouched market," Sweeney
said. "Everybody's flown, taken land trips, but not everybody's
taken a cruise. They see that big, possible pie."
Sweeney, who spent
nine years working on Wall Street, said the market would expect
Apollo to flip NCL in four to five years. "These guys are steam
rollers," he said of private equity groups in general. "It's
numbers only."
Martinez countered
that Apollo did not plan to flip NCL, and that part of the
agreement precludes either shareholder from doing so without the
other's consent. He said an appropriate exit strategy with NCL
would be through the public market.
"We think the
company would be a very attractive equity story," Martinez said.
"That is very much a part of [NCL's] ultimate path."
UBS's Farley, in an
analysis note on the transaction, spelled out a common theory since
the announcement of the transaction.
"We would expect
Apollo to monetize its investment in NCL in the future through an
IPO, which could perhaps ultimately combine Oceania and NCL into
one company."
As for NCL's daily
operations, the cruise line and its shareholders said nothing major
would change. Sweeney wasn't so sure.
He noted that
equity players, historically, try to cut costs and squeeze what
they can out of acquisitions. In the case of the cruise companies,
that could mean commissions.
"Will Apollo do
that? I hope not," he said. "But they might be more apt to do it
than a company that has long-standing relationships with the
front-line agency owners."
To
contact reporter Johanna Jainchill, send e-mail to [email protected].