One the household names in cruises is on the road now. The company is fairly large with revenues of $2.3B and $540M in EBITDA for the 12 months ended September 2012. The company is substantially remade in terms of management starting with the CEO Kevin Sheehan in 2007. All but three of the top dozen managers were hired by Sheehan. Overall they hail from a combination of cruise, travel and consumer finance businesses. The transition included the rationalization and focusing of the fleet with a branded experience. This is a classic private equity deal (led by Apollo and TPG) to turn around an ailing company in an established industry.

The market in North America is made up of just three large companies. It’s capital intensive with long-lead times for new capacity. The company manages to collect consumer deposits for cruises on new ships up to 18 months before launch.

Like many of our readers we have not been on a cruise. However the industry has grown consistently over the last decade so it’s clear that quite a few people do enjoy cruises. [North American demographics probably favor even better growth as an aging population finds air travel and long drives less appealing.]

Yield and revenue management for cruises is a critical part of the business. Avoiding having empty spots close to the date of sail is necessary to avoid heavy discounting. Growth has been fairly flat the last few years but is poised to accelerate with new ships coming online starting in 2Q2013 with the “Breakaway” ship sailing for the first time.

As far as differentiation goes Norwegian credits their “freestyle cruising” offering which allows patrons to dine and experience entertainment on their own schedule and inclinations instead of the old fashioned “dinner and a show” style of offering. The newer ships offer as many as 20 different dining options plus several branded entertainment options. The new Breakaway will offer three “Broadway shows” onboard as well.

The most obvious risk to the story is the consumer spending environment which impacts any high end consumer leisure activity. Although spending on cruises is probably more discretionary than other categories the longer lead times for bookings can help to smooth that out. Additional smaller factors include potential delays in the delivery of new ships and/or weather events that could delay or cancel planned cruises. Fuel costs are also a key element of the margins so have to be watched and managed.

Norwegian got sweet financing of 2.9% for their new ships which helps the balance sheet. Existing debt is close to $3B at much higher rates. Coverage of interest is more than adequate and there are no major near-term financings coming due according to management.

There will be over 200 million shares outstanding after the offering for a market capitalization of $3.4B. Combined with the debt this yields a TEV of $6.4B or 2.8x sales. Turns out that’s the average for a few names we threw together in hospitality but a bit above the other cruise operators which trade at 2.2x sales. This comp group will probably come in handy as Sea World gets ready to market their IPO later this year.

The deal is being led by UBS and Barclays with a gaggle of others following including Citi, Deutsche Bank, Goldman, JP Morgan, DNB, HSBC, SunTrust, Wells Fargo and Apollo.

We are not doing a transcript on this one but have made the Norwegian Cruise IPO roadshow slides available to Toffee members.



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