Kloster Acquiring Royal Cruise Line

Kloster Cruise Limited is acquiring the two-ship operation of Royal Cruise Line, which will further strengthen its dominant position at the luxury end of the market and instantly make it a major player in the European cruise market.

RCL, which is said to be profitable, has a loyal following in the upscale over-60 market and generates more than half of its passengers in California. In the summer season, its ships operate in the Mediterranean and in Northern Europe.

“We are acquiring RCL for $225 million,” said Trygve Hegnar, Chairman and CEO of Kloster Cruise. “The company is earning money; it has a good cash flow; the ships are in excellent condition; and its cruises are already booked 90 percent through 1990,” Hegnar added.

Hegnar would not confirm reports that he had also negotiated with Epirotiki, but said that Kloster Cruise was receiving frequent propositions. “We are currently operating from a position of strength,” Hegnar said. “People are coming to us and we are looking at their propositions.”

Hegnar said that he was not presently considering any other acquisitions, but that the company instead is focusing on a newbuilding program to strengthen its position mainly in the Caribbean.

“Our next step is also to gain a foothold outside of the American market,” Hegnar said. “Presently 90 percent of our passengers are American.” He indicated that he would like to see the development of cruise markets for Kloster in Europe and the Far East, particularly Japan.

Shareholders of Vard (parent company of Kloster Cruise) reacted favorably to the acquisition of RCL. At press time, A shares were up by NOK 7 to NOK 136, and B shares by NOK 10 to NOK 133.

Kloster’s move also comes as Princess Cruises is expanding its cruise operations in Europe and Royal Caribbean Cruise Line will be entering the European market for the first time this summer (1990). Cruise line executives see increasing potential in Europe based on the growing strength of that market.

According to prepared statements from Kloster Cruise and RCL, RCL will continue to operate as a separate division with offices in San Francisco and Piraeus. Pericles Panagopoulos, Chairman and Owner of RCL, will become a member of the Board of the new RCL.

The acquisition was partially financed through a loan syndicated by an American bank, according to Hegnar.

The addition of the 1,052-passenger Crown Odyssey, which entered service in 1988, and the 460-passenger Golden Odyssey, which entered service in 1974, but was completely refurbished in 1987, brings the Kloster fleet to 12 ships and 10,630 berths, including the vessels of Royal Viking Line and Norwegian Cruise Line.


At $225 million, Kloster is paying about $149,000 per berth for RCL. In contrast, Princess acquisition of Sitmar was estimated at $69,000 per berth. However, two of its ships were quite old. The Royal Admiral purchase was estimated at $126,700 per berth. According to sources, the estimated value of Carnival’s acquisition of Holland America was $137,000 per berth after considering the other properties in the transaction.

On the balance sheet, Kloster has a $150 million letter of credit with the Industrial Bank of Japan. The company’s long term debt, mainly ship mortgages, was estimated at about $300 million before the acquisition of RCL.

The company’s market value, based on berth prices comparable to recent transactions would make NCL worth about $770 million, RVL about $425 million, and RCL $225 million, totalling more than $1.4 billion.

Hegnar said that he did not believe that new ships can be built today for less than $150,000 per berth.

Kloster’s earnings, which started out strong in the first quarter of this year, leveled off in the second and third quarters due to the Eastern Airline strike, the troubles in China and more recently Hurricane Hugo. According to Hegnar, earnings will also be strong in the fourth quarter.

Hegnar said that Kloster will show “nice results” for the year as a whole. He emphasized, however, that the results of the company’s new marketing efforts will only show later in 1990 and 1991.

“It takes a long time before the impact of changes become evident in the cruise business,” Hegnar said. “Our initial actions to cut costs and increase onboard spending showed immediate results, but when our cruises are booked up to 12 to 16 months in advance, it takes a long time before the impact of our marketing efforts translate into increased earnings.”


The industry’s focus on Europe, however, has several motivations. While cruise line executives anticipate a growing market, they are also increasingly aware of more competitive markets in the Caribbean, on the West Coast and Alaska. At least for the near term future, new ships are expected to exceed the annual growth of demand.

Thus, the cruise lines are not unexpectedly seeking to develop new markets.

While RCL gives Kloster a solid foothold in the European cruise market for upscale, over-60 passengers, it is also expected that the RCL ships would be attractive to upscale European cruisers, especially in the West German market.

Western Europe has a population base of some 350 million people of which barely 500,000 cruise annually, compared to the United States with some 240 million of which more than three million will have taken a cruise this year.

While the summer season represents an extraordinary opportunity to dominate the upscale market with RVL and RCL, the winter season may be more challenging, according to observers, who noted that it is traditionally more difficult to sell cruises in South America and the Far East.


While Hegnar would not confirm negotiations with other suitors, Kloster’s acquisition of RCL would seem like a total turn-around from its courting of Epirotiki which operates in the mass market. While Epirotiki reportedly enjoys a strong market in Europe, it has never done particularly well in the United States. It is believed, however, that Epirotiki’s European market support would have generated a good synergy effect with NCL. Art Lubin, President of Epirotiki in the United States, recently denied knowledge of any negotiations taking place.

Closer to Home

While Kloster already has a dominant position in the upscale market through its Royal Viking Line division RCL will broaden the range of its dominace in the upscale market. According to Hegnar Kloster will now have more than 60 percent of the upscale market. But RCL will do little to boost Kloster’s other division, Norwegian Cruise Line, operating mainly in the Caribbean where competition may be more intense against Carnival Cruise Lines and Royal Caribbean Cruise Line, both of which are bringing in large new ships.

But Kloster is pursuing a different tack. Instead of getting involved in the big-ship race, the company is asking yards for bids on 1,200- to 1,400-passenger vessels. Hegnar said he is determined to build new ships within a three to five year program. “Medium-sized ships will give us more flexibility,” he said. “While the ships are primarily destined for the Caribbean, the size will give us much more flexibility in terms of choosing itineraries and ports than the mega-vessels.”

Hegnar also noted that the 1,200- to 1,400-passenger capacity ships would be suitable for operations elsewhere in the world and could sail under the flags of its three different divisions. Hegnar said that he expected to receive bids from yards by the end of December and that he hoped to place building contracts by mid-January.

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