In just a few months, the cruise company Norwegian Cruise Linelost 80% of its capitalization. This did not stop L Catterton from investing $400 million in it. What guided them?
While Norwegian Cruise Line (NCL) shares fell Scott Dahnke and his team at L Catterton quietly watched the disaster. The partners of this private investment firm once got rich quickly by listing shares of a chain of beauty salons on cruise ships.
The company already has a series of successful investments. However, never before has Dahnke and his partners seen the fortunes of a major brand change so quickly. Even though Norwegian would not be able to set sail for any of its cruise ships for at least two more months, Dahnke decided that it was time to act..
«There is no doubt that customers love to travel… They want to get back on the water, says 54-year-old Danke. — We support a strong and well-positioned company in a sustainable industry.
The cruise industry has been hit particularly hard by the coronavirus. Among the largest cruise operators, Norwegian, with 2.7 million customers per year, ranks third after Carnival and Royal Caribbean Cruises. Shares of all three companies fell more than 70%.
Carnival recently announced that it will resume North American cruises on August 1, 2020, with the expectation that customers will begin traveling before a vaccine is developed. Norwegian is even more aggressive, but its 28 ships will not set sail until July 1, 2020.
Norwegian has little choice but to get back to work. The Bermuda-based cruise line is doing so poorly that in documents filed with the Securities and Exchange Commission in early May, the company warned investors of possible bankruptcy, saying , that there are “significant doubts” as to whether it will be able to continue operations under quarantine conditions. On the same day, L Catterton appeared on the horizon with $400 million, which the company invested through six-year convertible notes.
The condition of the capital injection from L Catterton was that Norwegian would raise at least another $1 billion through stock and bond offerings.
Currently the cruise company has $3.5 billion in available funds, which, as its head Frank Del Rio assures, is cover all expenses for at least a year and a half in advance. So far, the influx of funding has had little effect on Norwegian shares. At the end of 2019, Norwegian’s market capitalization was approximately $12 billion, and today it is $2.5 billion.
For L Catterton, which potentially owns 20% of the company, a full recovery of the cruise industry would mean a huge gain.
«We can’t predict the future, but the data we have, combined with 40 years of experience and what customers tell us, suggests the industry will recover ,” says Danke. — When this happens, NCL will be ready to once again demonstrate outstanding results“.
Danke is well acquainted with the “high seas.” In 2015, L Catterton paid $925 million for Steiner Leisure, an international spa provider and manufacturer of beauty productsof Florida, which owned OneSpaWorld, an operator of luxury spas and fitness centers on 176 ships for more than 20 cruise lines. OneSpaWorld has over 90% of the cruise ship wellness market.
This investment helped L Catterton’s partners understand the economics of cruise ships: passengers are loyal, wealthy older adults, and the business is generally recession-proof. According to research conducted by OneSpaWorld, the number of passengers on ships has grown by 6.7% per year over the past 25 years, despite fluctuations in the overall economy. The typical cruise passenger is 49 years old, has an average household income of $114,000, is married, and goes on a cruise approximately every two years. And he doesn’t skimp on himself. OneSpaWorld clients spend an average of $238 on spa services, from aromatherapy seaweed massages to Botox injections.
«This data is more compelling than anything I’ve seen in my career… Many customers are loyal and repeat cruises, – says Danke. — OneSpaWorld was our first direct investment in the cruise industry, which helped us understand it“.
In March 2019, L Catterton took OneSpaWorld public in a deal worth $850 million, retaining almost half of its previous stake. Between the IPO and January 2020, shares rose 37%. Now they have fallen by 50%. The company recorded revenue of $562 million in 2019, and while it will take a hit in 2020, revenue is expected to reach $654 million in 2021. L Catterton, which still owns 14% of OneSpaWorld, recently injected another $75 million into it, providing it with liquidity for another two years.
