While Carnival Cruise Lines and Gotaas Larsen have reached a principle agreement that Carnival will acquire Gotaas Larsen’s cruise interests in both Royal Caribbean Cruise Line and Admiral Cruises, Gotaas-Larsen’s Norwegian partners are claiming contractual rights that allow them to pre-empt Carnival.
Carnival Announces Agreement to Buy
In spite of previous attempts by Gotaas-Larsen to sell its cruise ship interests, Carnival shook the cruise industry when it recently announced that it had reached an agreement with Gotaas Larsen to acquire its cruise business for $260 million.
If the deal goes through, Carnival would assume Gotaas-Larsen’s share in Royal Admiral Cruises, the new holding company that has been formed for Royal Caribbean and Admiral, which would give Carnival 36 percent ownership in RCCL and 51 percent in Admiral.
The sale would create a wholly or partly-owned combined fleet of 19 ships which would have 25 percent of the North American cruise capacity by 1991.
The terms of the agreement value Royal Admiral Cruises at some $800 million.
Partners Also Seek Share
Gotaas Larsen’s Norwegian partners, the shipping companies I.M. Skaugen A/S and Anders Wilhelmsen & Co. are working frantically to preempt Carnival’s purchase and instead buy their partner’s share themselves. There is reportedly an agreement between the three companies that gives the partners a right of first refusal to buy out each other.
According to Alf Clausen, Managing Director of Gotaas-Larsen, it has not yet been decided who the actual buyer or buyers will be.
Legal counsel for Gotaas-Larsen claims that the partners first right of refusal does not apply to the present circumstances. Carnival meanwhile does not deny that its eventual aim may be to take over the entire Royal Caribbean-Admiral combination. A legal dispute meanwhile could drag on for years.
Not only were Gotaas-Larsen’s Norwegian partners supposedly surprised by the deal, but top management and employees at RCCL and Admiral were shocked.
In a joint statement issued by Micky Arison, President of Carnival, and John M. Seabrook, Chairman of Gotaas-Larsen, it was stated that the proposed transaction is subject to execution of definite agreements, approval by the board of directors of both corporations and other customary closing conditions. In addition, it is assumed that the federal government would not raise objections on the basis of anti-trust laws.
In a separate statement to Gotaas-Larsen employees, Seabrook said that cruising today is more like the resort hotel and leisure-time business than shipping. It is a sideline for Gotaas-Larsen, especially when we own a minority interest, he said. We want to be a pure shipping company, so our Board has decided to sell cruise and concentrate on our core business which is ocean bulk shipping.
Industry insiders, meanwhile, said that Gotaas Larsen had received an offer from cash-laden Carnival which it could not refuse and that it used the opportunity to get out of the cruise industry while it was ahead.
Arison said that while Carnival does not intend to merge its operations with those of its new partners, it would hope to create a better coordination process. In press interviews, Arison was quoted as saying that “if the managements share the mutual interests of their financial results, it would be in their best interest to improve those results.”
The acquisition would give Carnival increased benefits from even greater economies of scale, adding and spreading purchasing and negotiating leverage over the largest cruise fleet in North American waters.
Various speculative scenarios would give the Carnival combination preferential berthing rights and air space throughout in the Caribbean and West Coast markets. Tremendous impact would also be gained in sales and marketing, where the combined dollar muscle of the three lines could be exercised with travel agents, travel press and the mass media.
Through Admiral Cruises, Carnival could achieve dominance in the three- and four-day market out of Florida and gain access to the three- and four-day market on the West Coast and the seven-day market in Alaska. By holding one third interest in RCCL and three seats on its 10-member board, it would totally dominate the seven-day Caribbean market, as well as control one of its main competitors.
Carnival is represented in the negotiations by Bear, Stearns & Co., and Gotaas Larsen by Lazard Freres & Co. Both New York City-based banking firms.
Royal Admiral Gains Too
The benefits to be gained are not one-sided, however. RCCL would also supposedly gain access to a large number of first time cruisers which may wish to make their next cruise on a more upmarket ship. Although analysts disagree on the subject, claiming that ‘fun ship’ passengers are not readily converted to more traditional ships.
In any event, RCCL and Admiral would benefit from the economies of scales to be had.
In cases such as this, speculation tends to run overboard. However, Carnival’s attempted acquisition could also upset the service and supply industry in Miami. Carnival runs its own casinos and catering, for instance, while RCCL contracts these services out to concessionaires.
If Carnival succeeds in its acquisition attempt, it is expected to dominate the cruise business in the years to come. It will also consolidate its hold on the Caribbean, the fastest growing market for cruises, accounting for some 65 percent of the industry’s bookings.
It will give the line a huge competitive advantage and make life “tough” for its remaining competitor, Norwegian Cruise Line, according to analysts.
In various trade press interviews, however, Einar Kloster, Chairman of Kloster Cruise, was quoted as saying that shipline consolidation is good for the cruise lines and the consumer, and that the Carnival move confirms the healthy state of the industry.
Kloster and other Miami-based cruise line executives have expressed few reservations about the acquisition.
Carnival Wins Regardless
While the acquisition attempt is disputed, it appears that Carnival will turn out to be a winner regardless. If it acquires the Gotaas-Larsen cruise business, it will acquire control of one of its major competitors, and the added benefits of greater economies of scale and more marketing muscle.
If I.M. Skaugen and Anders Wilhelmsen manage to exercise their claim to rights of first refusal and buy Gotaas-Larsen’s share, the investment and debt burden would likely postpone any immediate plans for sisterships to the Sovereign of the Seas and give Carnival free reigns in continuing to build its cruise empire.
According to analysts, there are only two scenarios that would give Carnival any competition. One would be if Gotaas-Larsen does not sell, which in the latest developments appear to be a possibility, however remote; or sells to a new partner such as the Norwegian company Kosmos, which has previously negotiated to buy Gotaas-Larsen’s share.
The other is if Skaugen and Wilhelmsen buys out Gotaas-Larsen and later makes a public offering in the United States raising capital to pay off their debts and to continue the lines’ planned building programs.
Carnival’s move also serves to underline the major cruise lines belief that size is the best defense against heavy competition and escalating marketing expenses.
In July, P&O acquired Sitmar for $210 million, and according to industry analysts, there will be more mergers leaving the industry to be dominated by a few large players.
But there are few strong players or take-over candidates left. However, industry observers agree that Royal Cruise Line represents an attractive take-over candidate, but that the only big line left with cash (except Carnival) is Holland America Line.
As CIN went to press, Carnival traded for $13 1/8 (up slightly from 12 5/8 following the acquisition announcement) on the American Exchange and Gotaas Larsen traded for $38 on the NASDAQ, more than double its low for the yearly period and up $2 from its recent high of $36.
RCCL has become one of the big three Miami cruise lines and has built a reputation for quality, positioning it above Carnival and NCL in the marketplace.
RCCL, a partnership, operates five ships in the Caribbean and is owned in equal one-third shares by Gotaas-Larsen, I.M. Skaugen and Anders Wilhelmsen.
Operating downmarket from Carnival is Admiral Cruises, a corporation, which operates three ships on the Pacific Coast and in the Caribbean and has placed an order for a fourth vessel. Admiral is owned 51 percent by Gotaas Larsen and 49 percent by three private companies in varying proportions, including I.M. Skaugen and Anders Wilhelmsen. Admiral is the result of a 1986 merger between Eastern, Western and Sundance Cruise Lines.
Gotaas-Larsen was founded in 1946 by Norwegians Trygve Gotaas and Harry Irgens Larsen. In 1963, the American IU International Corporation took over and brought Seabrook aboard.
Gotaas-Larsen operates and charters some 22 gas carriers and tankers, but American investment analysts have recently recommended its shares partly for its cruise business.
Earlier this year, the owners of RCCL and Admiral agreed to merge their businesses under a newly formed holding company, Royal Admiral Cruises. Under that merger, Gotaas-Larsen would ultimately hold a 36.16 percent interest.
This year, Gotaas-Larsen has reported significantly improved profits from its cruise division over 1987. It said its net profits rose to $17.6 million in the second quarter compared to $7.9 million in the same period last year.
Gotaas-Larsen also said it expected to strengthen its cruise holdings by forming the new holding company, Royal Admiral Cruises, for Royal Caribbean Cruise Line and Admiral Cruise Line.
Gotaas-Larsen apparently changed its mind when Carnival made its offer.