Earlier last week Norwegian Cruise Line Holdings Ltd. (NCLH) declared its long-planned (and delayed) initial public offering will consist of 23.5 million shares priced between $16 and $18 a share. The offering is scheduled for January 18, 2013, but has the cruise industry recovered enough from the Costa Concordia disaster, a stagnant economy and other various woes to make the company worthy of investment? I believe the answer to this question is a resounding yes for reasons I outline below.
Norwegian currently operates 11 cruise ships in Europe, the Caribbean and North America and offers its guests a cruising model different from many of its competitors. Developed by Norwegian and termed "freestyle cruising," the model was designed to appeal to younger guests who chafed under the more regimented traditional style of cruising. Freestyle cruising allows guests the flexibility to choose when and where they would like to dine onboard, frees them from formal attire requirements and generally offers a wider range of entertainment options than traditional cruises. It has been highly successful for the company and Norwegian has built its entire business model around the innovative experience. Each of its 11 ships were custom designed and purpose-built for freestyle cruising and the company boasts one of the youngest, most modern fleets in the industry with a weighted average ship age of only 7.9 years.
In addition to its freestyle cruising model, Norwegian has been a pioneer in other advances within the cruise line industry. It was the first cruise line to operate a private island, Great Stirrup Cay in the Bahamas, which enables Norwegian to profit from the additional shore-based activities it can offer to guests. Norwegian has also put into place marketing and booking agreements with casinos worldwide to attract guests who are likely to spend more money gambling onboard ship than normal passengers.
Due to the complexities of U.S. maritime law which I have discussed previously, Norwegian is the only cruise line to operate an inter-island Hawaiian cruise ship, Pride of America. Norwegian's ownership and operation of the U.S.-flagged Pride of America gives it a competitive advantage because it is the only short term cruise offering in the Hawaiian islands for guests looking to cruise on a large vessel. Norwegian has proven itself to be creative in its thinking such as its purchase of the record breaking trans-Atlantic liner SS United States for conversion to a cruise ship as part of an expanded Hawaiian offering. Even though the SS United States venture did not pan out, it, along with the revolutionary freestyle cruising concept, illustrates the out of the box thinking Norwegian's management seeks to apply to the complex issues of the industry. In fact, the company's management team has successfully raised operating income margins by 1,530 basis points since the beginning of 2008.
Despite being founded over 45 years ago, Norwegian is in many respects an upstart company in a sea filled with veteran lines. Carnival Corporation (CCL) (CUK) is currently the world's largest cruise line with more than 106 liners and multiple brands within the Carnival family representing some of the oldest names in passenger liners. Carnival controls approximately 52% of the market. Royal Caribbean Cruises (RCL) is the second largest, is headquartered in Miami and controls more than 25% of the market.
Norwegian's 8% market share pales in comparison to these titanic companies; however, this is where much of the value proposition lies for investors as the company has significant room for growth through appealing to non-traditional cruise line customers with its freestyle cruising model. The company has proven itself an innovator and will likely reward investors with a respectable amount of growth in the coming years.
IPO Preparation & Use of Funds
Norwegian's IPO has been an on-again, off-again affair since the 1990s, but the company has finally brought the IPO to fruition. Norwegian significantly improved its 3rd quarter 2012 YOY performance with a 19.2% increase in profits of $128.2 million on revenue of $674.4 million. Savvy investors will wonder whether this is mere window dressing in preparation for the planned IPO or if the improved performance portends a longer-term upward trend. If the current owners were planning to cash out a significant chunk of their investment, then I would be concerned that the 3rd quarter numbers are window dressing and avoid the stock; however, the planned use of funds indicates Norwegian is prudently planning for the future.
Norwegian's prospectus [pg. 38 - 39] reveals that the company intends to use the estimated $470 million in offering proceeds to pay off existing credit facilities and senior notes. Cleaning up some of the company's $3.1 billion in debt will allow Norwegian to more easily bring into service the new ships it has planned for the next few years. Norwegian Breakaway will enter service in April 2013, Norwegian Getaway in spring 2014, its largest ship to date, codenamed Breakaway Plus, in October 2015 as well as a fourth ship it has an option on with German shipyard Meyer Werft for delivery in spring 2017. The cruise line's occupancy percentage range of 102-104% (an occupancy percentage of greater than 100% indicates 3 or more persons occupied a cabin) indicates that Norwegian's current ships are fully utilized. Any additional ships would only increase the company's margins as S,G&A expenses (currently ~8.4% of total expenses) should remain relatively flat and will be spread out over a larger fleet.
Potential investors should also note that Norwegian's owners have an extensive background in the hospitality and cruise ship industry. Apollo Management has current and/or previous ownership stakes in Caesars Entertainment, Great Wolf Resorts, Vail Resorts and Wyndham International among others while Genting HK operates a fleet of five cruise ships in the Asian Pacific market. The continued ownership and involvement by Norwegian's current owners should be viewed as a net positive by prospective shareholders as significant value is added by their industry experience and desire to realize further returns on their investment.
While I believe Norwegian offers investors a significant opportunity to realize gains through the growth of an innovative cruise line, there are several final items investors should take into consideration. The company's IPO will value it at approximately $3.4 billion; however, only ~11% of this will be floated on the public markets with the remainder staying in the hands of its current owners Apollo, TPG and Genting HK. While the publicly traded shares will possess voting rights, they obviously will not be enough to obstruct decisions by Apollo, TPG and Genting HK. Additionally, there is always the possibility that Apollo, TPG or Genting HK will sell all or a sizeable portion of their stake into the market at a discount to the market price. Finally, the company does not intend to pay a dividend which is appropriate for a company with a significant debt load and plans for expansion, but it is a factor investors should consider.
Norwegian's prospectus can be read in its entirety here on the SEC's website.