Apollo Management, which earlier this year spent $325 million for a 68 percent share of Oceania  Cruises, is also making a $1 billion investment in NCL Corporation (NCL) for 50 percent ownership and control with three out of five voting members on NCL's board. The Star Group retains 50 percent ownership.

A sub-agreement covers NCL America (NCLA), whereby deferred compensation of approximately $500 million will be paid to Star in the future. According to Colin Veitch, NCL president and CEO, the sub-agreement is intended to give measures recently implemented at NCLA time to work (make the brand profitable). Meanwhile, Star will cover future losses up to $50 million in Hawaii for an unspecified period of time.

However, it is believed that NCL's new owner constellation will have about a year and a half to decide whether to close down its so far unprofitable NCLA unit.

If NCLA is continued, payment to Star will be all cash, if NCLA is not continued, the payment will be in the form of cash and a ship.

NCL announced earlier this year that it would reduce its capacity in Hawaii by pulling the Pride of Hawaii out, renaming her the Norwegian Jade, and deploy her in Europe for the 2008 summer season. Less capacity in Hawaii is expected to reduce the pressure on pricing.

''New legislation allows us to draw up to 25 percent of our hotel crew from our international fleet," Veitch said in a conference call. The crewing adjustment started in June.

Taken together, Veitch expressed confidence that the two initiatives will help to improve pricing while also lowering costs.

(Historically, Hawaii has never supported more than one or two medium-sized ships in inter-island service. It was only when NCLA was launched that capacity grew dramatically.)

Stronger Balance Sheet

The new investment is intended to strengthen NCL's balance sheet and its ability to continue to expand. The proceeds from the investment will also be used to repay existing NCL indebtedness.

With the assumption of debt, Apollo's $1 billion investment values NCL at approximately $4 billion, according to Veitch.

When chartered ships are excluded, NCL's current fleet consists of nine ships and 19, 7 40 berths, according to the company, with three more ships and 10,800 berths under construction, including the Gem launching service in October. (A third option for an F-3 class ship expired earlier this month.)

Valuation

Apollo appears to have gotten a good deal. The $4 billion valuation gives NCL an estimated per berth value of $202,634, compared to newbuilding prices that tend to range from around $200,000 to $225,000 per berth for contemporary and premium market ships. The average age of NCL's fleet is four years, making it one of the youngest in the industry.

Commented Veitch: "The Gem will be the ninth new Freestyle ship we have introduced since 2000, while we will also be retiring our fourth mid-sized ship since 2000.

"The new F3 generation, named F3 as the third generation Freestyle ships, will be introduced, starting in 2009 (giving NCL one year without capacity additions to absorb).

"We have made great strides in profitability on our international ships."

Veitch added that his wish is to continue a robust newbuilding program.

In the same conference call, Steve Martinez, a partner in Apollo, said that he believes NCL is in the middle of a transitional period and that the Apollo investment will help the brand move ahead. Apollo, based in New York, manages $33 billion globally.

David Chua, president of Star Cruises, noted that new ownership structure will allow Star to focus on Asia, particularly on mainland China, with new marketing efforts and new ships.

Strategy

In the short term there are no plans to merge Oceania and NCL, according to Martinez, who also noted that Apollo is not investing in Star Cruises.

Industry sources, however, expect Apollo to buy out Star, then merge the operating functions of NCL and Oceania for greater efficiency, and then take the company public.

Star's owners are focused on Asia and particularly on gaming, and there seems to be little reason for them to continue to hang on to NCL.

The Star group, including NCL, has posted losses in five out of the past seven years.

The big question for Apollo becomes whether NCL can be grown into a sufficiently profitable company. NCL's share of the North American market is estimated at 10.6 percent in 2007, compared to 49.8 percent for Carnival corporation and 30.3 percent for Royal Caribbean Cruises.

Veitch used to say that travel agents must have good reasons to sell NCL cruises - such as Homeland Cruising, which NCL focused on after 9/11, Hawaii and Freestyle Cruising.

Homeland Cruising is no longer a viable differentiator, the future of the Hawaii operation is uncertain, and Freestyle is to some extent being copied and adapted in the form of more alternative dining venues aboard other ships. So the challenges are there for Apollo and for NCL's management.

Veitch was traveling and not available for comments, and Martinez was supposed to be available, but declined to comment once he learned that Cruise Industry News wanted to ask questions about strategy and long-term intentions.