Royal Olympic Cruise Lines (ROC) is seeking to raise $81 million net by selling 43.5 percent of its shares through an initial public offering (IPO).

The remaining shares (56.5 percent) will be held evenly between the Potamianos and Keusseoglou families, who own the two companies that merged to form Royal Olympic in 1995, Epirotiki Cruise Line and Sun Line Cruises, and various other businesses affiliated with ROC.

Lazard Freres & Co. and Donaldson, Lufkin & Jenrett Securities are underwriting the stock sale. The offering price is expected to be between $15 and $16. That would make a total evaluation of the company in excess of $200 million or $63,400 per berth. The offering price also implies an estimated P/E of 15, based on 1997 earnings, compared to P/Es of 25 for Carnival Corporation and 20 for Royal Caribbean International.

Plans call for the ROC stock to trade on the NASDAQ as early as mid-February. At press time, the underwriters were conducting a road show.

Use of Proceeds

According to the prospectus, $30 million will be used to repay debt; $19.2 million will go towards the $32 million purchase of the Awani Dream 2 (ex­ Cunard Countess); $15.8 million will be used to make payments towards two new ships ordered from Blohm + Voss and to be delivered in 2000 and 2001; and $10 million will be spent on the refurbishment of the Apollon, (ex-Star of Texas, ex­ Mardis Gras) which will be acquired from a company owned by the Potamianos family. The rest of the proceeds will be used for working capital.

ROC will also purchase the Olympia I (ex-Orion) from another company owned by the Potamianos and Keusseoglou families.

According to the prospectus, there are also various management and consulting agreements in effect between ROC and companies owned by the two families.

ROC expects to fund the $12.7 million balance of the purchase price for the Awani Dream 2 from the sale of another ship, the Olympic (ex-Fiestamarina, ex­ Carnivale) and with cash from operations.

Other obligations

During the construction of its two new ships, ROC must make three so-called progress payments of approximately $8.4 million each and $133.8 million upon delivery of each newbuilding.

According to the prospectus the company expects to make the final payment from funds borrowed under an agreement with German lenders (Kreditanstalt fur Wiederaufbau), which will provide financing of $133.8 million for each of the two ships, repayable over 12 years.

Fleet Expansion

The ROC fleet presently consists of six ships, five of which are owned by the company and one of which is chartered, and range in capacity from 300 to 900 passengers.

In addition, for 1998, the company has entered into agreements to purchase the 1965-built 500-passenger Awani Dream (ex-World Renaissance) for $14 million and the Awani Dream 2, which was built in 1976, for $32 million.

Also to be added in 1998 is the 1953-built Olympia I although she will sail one-day cruises.

The 1962-built Apollon will be chartered to an unaffiliated third party while the Olympic will be sold.

Then, by 2000 and 2001, the two 836-passenger newbuildings, which will be built at a total cost of $167 million each, will join the fleet.

Once all the deals have been consummated and the newbuildings are paid for and delivered, ROC said it will have a fleet of nine overnight ships (eight owned and one chartered) with a total capacity of 5,246 passengers.

Business Strategy

ROC's business strategy is based upon operating medium-sized vessels, which it said are more versatile and suitable for cruising in the Mediterranean, according to the strategy outlined in the prospectus.

The company will also focus on destinations, target what it calls "older, more educated and discerning travelers," and will use multiple marketing strategies by targeting travel agents as well as tour operators.

ROC also hopes to stay competitive by expanding and modernizing its fleet.

And in contrast to what ROC called the larger Caribbean lines, which often promote their ships as destinations, ROC will emphasize its "ports of call and land destinations which are rich with historical, religious and cultural significance."

ROC also intends to maintain a high staff-to­ passenger ratio and said that the relatively smaller size of its ships will enable passengers to embark and disembark more efficiently in port.

Risk Factors

Several risk factors, however, serve to differentiate ROC from other publicly held cruise companies.

First of all, the company has largely been protected by Greek cabotage rules which have precluded non-Greek flagged vessels from sailing roundtrip from Greek ports. These rules will be repealed Jan. 1, 1999, thus opening up Greek waters for competition.

Secondly, through one if its founding companies, ROC's history also includes the somewhat dubious distinction of having lost four ships. Epirotiki lost four ships in the period between 1988 and 1994. If similar mishaps were to occur again, they not only affect the company's image but can also be expected to force insurance costs to go up.

Thirdly, ROC operates ships that range in age from 21 to 44 years. Clearly, such ships are more prone to mechanical break-downs and higher maintenance and operating costs. At the same time, they may also be less attractive to passengers who may prefer to sail on the newer ships.

Fourth, the company also operates in waters and calls at ports in a geographic region which in recent years has suffered from periodic political unrest and terrorist activities.

Fifth, because it sails mainly out of Greece and because a large portion of its passengers are from North America, ROC depends on long-haul airlift and thus may be more exposed to factors that affect air transportation - from higher fuel prices to acts of terrorism.

Finally, ROC will also be operating a fleet of different ships, thus lacking the economic and operating efficiencies of the largest cruise companies. Hence, ROC will be dependent on passengers paying relatively more for its cruises.

Financial History

According to the prospectus, accounting for the two cruise lines as if they had joined forces in 1992, the combined results was a loss of $4.4 million on revenues of $59 million in 1992; net income of $3.2 million on revenues of $65 million in 1993; and a loss of $4.7 million on revenues of $79 million in 1994.

In the 1995, when Epirotiki and Sun Line merged, they posted a record loss of $11.7 million on revenues of $85 million. But already in 1996, ROC nearly broke even, posting a small loss of $777,000 on revenues of $170 million.

This was followed in its 1997 fiscal year, ended Nov. 30, 1997, with a net income of $7.7 million on revenues of $120.6 million.

ROC attributed the growth in revenues to increased rates. The two founding companies are no longer fighting each other in the Greek marketplace nor allowing tour operators to pit them against one another.

The 1997 profits were said to be a result of the efficiencies and economies of scale that in due time were realized from the merger of the two cruise lines.

For the first nine months of its year ended Aug. 31, 1997, ROC posted operating expenses at 71.4 percent of revenues, compared to 70 percent the previous year; selling and administrative expenses at 19 percent, compared to 23.2 percent; and depreciation at 4.1 percent, compared to 4.8 percent.

The operating margin was 5.5 percent in 1997, compared to 2 percent in 1996 while other expenses amounted to 1.8 percent of revenues in 1997 compared to 2.2 percent in 1996.

ROC said that higher operating expenses in 1997 resulted from a higher number of cruising days in 1997 than in 1996 and higher per-day operating costs.

Higher operating costs were attributed to higher crew costs due to a new collective bargaining agreements, an increase in bunkers costs and an increase in port charges.

Market Position

In its prospectus, ROC claims to be the largest cruise operator in the Mediterranean east of Italy, with approximately 55 percent of the capacity, and the second largest in the Mediterranean at large with an estimated 9.4 percent of capacity, compared to 15 percent for Costa Crociere.

In 1996, ROC claimed to have carried a total of 120,000 passengers and to have sailed at 90 percent paid occupancy throughout the summer. In 1997, according to the prospectus, the ships sailed at 93.1 percent occupancy. Since 1992, occupancy has ranged from 91.7 percent to 60.8 percent. In 1996, approximately 44 percent of the company's passengers and 64 percent of its revenues came from North America.

In recent years, ROC has increased marketing efforts in other countries, and in 1996, 29 percent of its bookings came from passengers residing in Western Europe and eight percent from South and Central America.

Sales and marketing are coordinated by a 30-member sales department in Piraeus, a New York office with 53 employees and 20 independent sales people, as well as sales offices in London, Paris, and Rome.

ROC generates 65 percent of its revenues through travel agents, 30 percent through tour operators, and five percent comes directly frorm consumers.

Future

ROC said it is currently exploring areas for potential growth in product offerings. This may include extending the Mediterranean season and new programs in South America, in the Baltic and along the coast of Norway.

ROC offers tour packages which include airfare and land-based accommodations in addition to the cruise, and also "cruise-only" packages.

Also, since its two new ships will have an estimated cruising speed of 27 knots, the company believes they will allow it to operate itineraries more efficiently - such as round-trip 14-day South America cruises from San Juan - as well as to visit more ports of call within the same time periods now offered.

ROC said the smaller passenger capacity of its new ships is also consistent with its strategy of offering more intimate cruises.

Recommendation

In light of the market dynamics, ROC must expand and must modernize its fleet in order to survive, hence, the IPO.

The proceeds from the offering will reduce debt and help expand the fleet, but these ships will still be old. In addition, there are many business relationships between ROC and companies owned by the two families that can be reasons for conflicts of interests between investors and the majority owners.

ROC also Jacks much of an earnings history and once the new ships come on line, the company is going to have to boost its earnings significantly to service its debt commitment which should amount to an estimated $25 million per year for the new ships, starting in year 2000.

Also, with more cruise operators in Europe and loss of the cabotage Jaws, ROC cannot count on its past business for future success. But ROC has years of experience and knows the business; Sun Line has enjoyed an excellent reputation for years. ROC also needs a bit of good luck so that its favorite sailing region does not become tainted by new acts of violence.