Buying Silversea will certainly improve Royal Caribbean's offering in the luxury and expedition sectors. Will it be happy as a majority shareholder, as it says now, or will it eventually want complete control?
The transaction, announced Thursday morning, will see the world’s second largest cruise company take a 67 percent stake in Silversea, a nine-ship line based in Monaco.
“You can see how this crown jewel completes us,” said Richard Fain, chairman and CEO of Royal Caribbean Cruises. “Ultra-luxury and expedition cruises are gaps in our portfolio today. Both are projected to have strong demand growth, and both are vacation products used by our higher-yielding guests.”
In a call with analysts and media Thursday morning, Silversea Chairman Manfredi Lefebvre d’Ovidio, whose father founded the line, explained why he found the deal appealing.
“I was not thinking about partnering with anybody, but I did realize that myself and Richard shared a vision about the future of luxury,” he said. “And thus, Royal Caribbean became not just any partner. It was, in my mind, the only one.”
The deal valued Silversea at $2 billion, which includes $500 million of debt. It is expected to be completed later this year; though the company did not know exactly when. Royal Caribbean will consolidate Silversea’s financials into its earnings once the transaction is final.
Including $350 million in debt that Royal Caribbean assumed, the value of the transaction was $1.35 billion — which happens to be the cost of the newest ship in the company’s fleet, the 5,518-passenger Symphony of the Seas. Lefebvre will qualify for additional payment of 472,000 shares, valued at $50 million, based on meeting performance metrics in 2019-20.
Royal Caribbean shares closed at $113.50, up more than 5 percent.
“We view the Silversea addition as complementary to Royal’s existing portfolio of brands, while providing a healthy foothold in the growing and high-yielding luxury and expedition markets,” Sharon Zackfia, a William Blair analyst, wrote in a note to investors.
She wrote that Silversea generates $600 million in gross revenue, and that in the 12 months that ended September 2016, passengers spent $539 a day, nearly three times more than on Royal Caribbean’s ships.
Filling a Gap
Headquartered in Miami, Royal Caribbean owns the megaship-packed Royal Caribbean International, the premium Celebrity Cruises, and the upscale-but-casual Azamara Club Cruises. It also has a stake in European lines Pullmantur and TUI Cruises.
But the company doesn’t have a true luxury offering in its portfolio, unlike biggest competitors Carnival Corporation, which owns Seabourn, and Norwegian Cruise Line Holdings, which acquired Regent Seven Seas Cruises in 2014.
“We believe that adding an ultra-luxury and expedition brand to our portfolio not only complements our current offering, but provides a tremendous opportunity for growth and value creation,” Fain said. “With this partnership, we become brand leaders in every segment we compete in.”
Founded in 1994, the family-owned Silversea competes with Seabourn and Regent. Its ships are small, between a 100-passenger Galapagos vessel and the 608-passenger Silver Spirit, which was recently cut in half so it could be lengthened.
The company has ramped up its orders, announcing new ships to be delivered in 2020 and 2021 for a total of about 630 million euros, or $736 million. That will bring the fleet to 11.
In a statement announcing the most recent order last month, Lefebvre said: “It was my father’s dream to grow Silversea to at least a 12-ship fleet; today, we are one step closer to fulfilling his vision.”
While the ultra-luxury category might get most of the attention, Silversea’s four expedition ships are also mostly new territory for Royal Caribbean. Celebrity Cruises has vessels in the Galapagos, as does Silversea, but the smaller line also goes to destinations including Antarctica, the Arctic, South Pacific, the Russian Far East, and South America.
Carolyn Spencer Brown, Editor at Large at the industry news and review site Cruise Critic, said the biggest cruise lines have “sniffed at expedition’s potential and possibility” for years, worried that the segment was too small or wouldn’t scale.
But she said the site has seen excitement around expedition cruising grow, and lines that specialize in the niche have been adding capacity.
“Now you have somebody on the scale of Royal Caribbean that buys into an expedition line,” Spencer Brown said. “It’s the last of the big three to get to luxury mainstream, but it’s the first of the big three to get to expedition.”
Making a Deal
In an interview with Skift, Lefebvre said the deal came about because he was looking for an equity investor to grow Silversea. He told Fain, whom he has known for some 20 years, “as a matter of courtesy,” which led to a dialogue.
“Evidently, what I was looking for was tying in some way to what Richard was looking for,” he said. “And that conversation that we’ve had over time brought us to develop a different kind of opportunity … to grow this business far beyond where it could have gone by itself.”
In an email, Global Chief Communications Officer Rob Zeiger wrote that the early conversation took place a little more than a year ago, but when Fain suggested a majority stake, “Manfredi threw me out of his office.” Zeiger noted that Fain’s recollection was “said with a smile.”
“Things evolved from there,” he wrote.
For his part, Fain said Royal Caribbean had been thinking it needed an ultra-luxury presence.
“But actually creating a brand is an incredibly difficult thing to do, and here you have the enterprise that has created one and made it successful,” he said.
Fain said the controlling stake would give Silversea the benefits of economies of scale and other support in a way a smaller investment would not. The company expects to achieve at least $50 million in synergies.
And, he added, the deal was a good fit because of the duo’s personal chemistry.
“I’ve admired Manfredi for a long time; he’s tolerated me for a long time,” Fain said. “I think we felt we could work together.”
Lefebvre will remain in his role as executive chairman, and Silversea CEO Roberto Martinoli will stay in his position heading up the line’s management team.
Silversea’s Future With Royal Caribbean
Everyone who spoke about the deal Thursday said they were thinking of it as a long-term partnership rather than an opportunity for Royal Caribbean to own Silversea outright.
“We are long-term in this together,” Fain said. “We expect to be long-term arm-in-arm and at some point in the far distant future, we’ll cross that bridge when we come to it,” he said when asked whether Royal Caribbean intended to buy the rest of the line.
Executives also wouldn’t say yet how they planned to grow the brand.
“Certainly, one of the main reasons of going into this is we want to take part in this growing luxury and expedition segment,” said CFO Jason Liberty. “Silversea does have several ships on order today. It’s something we will be considering in terms of how the brand will grow going forward.”
The last major cruise acquisition, when Norwegian Cruise Line Holdings bought Oceania and Regent parent Prestige Cruise Holdings in 2014, came with benefits for the buyer, said Morningstar analyst Jaime Katz.
“I think there were a lot of best practices shared across that organization the reverse way, from Prestige to Norwegian, that resonated and worked for that consumer base,” she said.
She called the Silversea deal “interesting.”
“You just have higher revenues and higher costs,” Katz said. “There are some efficiencies they’ll squeeze out of the business as they bring it onto the Royal platform. And then you have shared sourcing for all the goods they weren’t able to get before. … Also, you have a cross-list of consumers who could move up from that and be marketed to from the [Royal Caribbean Cruises] brands.”
Skift Europe Editor Patrick Whyte contributed to this report.
UPDATED: This story was updated to include executive quotes, reaction, and additional details.
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Photo credit: Silversea's Silver Cloud. Royal Caribbean is buying a 67 percent stake in the cruise line. Silversea