Carnival Corporation is attempting to outbid Royal Caribbean International in an effort to take over Celebrity Cruises. Regardless of the outcome, Carnival's move immediately pushed RCI's common stock down, and may make the acquisition costlier for RCI.

Celebrity to RCI or Carnival?

RCI and Celebrity first announced that they had reached an agreement on June 17 for RCI to acquire Celebrity for $500 million and the assumption of approximately $800 million in debt.

Now, at press time, Carnival offered to purchase Celebrity for $525 million. Carnival, which first offered $510 million on June 23, and also said it will consider increasing the purchase price, said it has held conversations on-and-off with Celebrity for years.

Also, while RCI has stated that it will operate Celebrity as a separate brand, there have been reports that Celebrity will be merged into RCI. Hence, Carnival made the point that its intention is to operate Celebrity as a separate brand with its current management.

The Battle Is On (Again)

By the end of July, RCI had hoped to have completed its acquisition of Celebrity which would make RCI a multiple brand operator and result in a total fleet of 20 ships and 38,000 berths with an annual capacity of nearly two million passengers or a 28 percent market share by the year 2000.

If Carnival succeeds, its total fleet will count 47 ships and 63,252 berths with an annual capacity of three-and-a-half million passengers for a market share of 40 percent.

And, even if Carnival does not acquire Celebrity, it will "succeed" by making the acquisition costlier for RCI, its biggest competitor, and contribute to internal turmoil at Celebrity fueling the rumors that RCI will merge Celebrity into its fleet and organization.

Another time RCI and Carnival battled was in 1988 when Carnival's take-over attempt of RCI was thwarted by one of the owners who exercised his first right of refusal vis-a-vis partners who chose to sell. 

Good Deal?

Whether Celebrity is acquired for $500 million or $525 million plus the assumption of debt, the transaction puts a per berth evaluation on Celebrity from $159,352 to $162,417.

That is less than what Celebrity has paid to build its three Century-class ships and includes its organization, market position and excellent reputation.

The relatively low price can be attributed to the fact that Celebrity is not profitable and, in light of the competition and its shoreside costs and capital costs, had little hope of being profitable anytime soon.

Besides, one of Celebrity's owners, the Overseas Shipbuilding Group (OSG), has long been reported to want out of the venture. Since OSG invested $220 million in Celebrity in 1992, the company bas not made enough of a return to even pay the interest on its investment.

Multiple Brands

Both RCI and Carnival have said they will operate Celebrity as a separate brand, but it is unclear exactly how they both would do just that.

While Carnival could simply add Celebrity to its long list of brand names, it is unclear how it would differentiate Celebrity from Holland America Line, for instance, unless Celebrity would be the "modern" premium product and HAL the "old­ fashioned, for-the-older-set" premium product.

As far as RCI is concerned, in the marketplace both RCI and Celebrity are perceived to be premium products, although within the industry, RCI is at the upper end of the contemporary market, and Celebrity prides itself on being "super premium."

Celebrity's ships are more spacious and the cruise experience is more sophisticated. But not by much. Both companies sail to the same ports and charge the same for their cruises. So, how will consumers be able to differentiate between the two?

Adding to the confusion may be RCI's programs in Europe and the Far East which by definition are in the premium market. Also in Alaska and Bermuda, the two brands' programs overlap.

The hardware also overlaps in certain areas. Celebrity's first two ships, the Horizon and the Zenith, are closer to the upper contemporary market than are the company's new Century-class. By the same token, RCI's Vision ships can be defined as premium market ships by design and spaciousness.

So clearly RCI faces a task in differentiating the two brands.

Meanwhile, RCI has consistently been touting its single brand and mega brand strategy and how all of its growth has been internal.

The challenge for either RCI or Carnival will be: 1) to differentiate the brands sufficiently; 2) to create a stronger market position for Celebrity; and 3) to quickly make Celebrity profitable.

Meanwhile, since Celebrity has been controlled by the privately held Chandris Group, there has been only limited access to the company's financial performance.

Market Position

Perhaps limited by its size, Celebrity has never been able to penetrate the market to the extent that Carnival, RCI, or HAL, its closest competitor, have.

But while HAL can look back on a long history, Celebrity only started service with its first ship in 1990. Thus, the new company has come a remarkably long way in seven years.

HAL begets comparison because it has eight ships with some 10,000 berths, compared to five for Celebrity with some 8,000 berths, and is also a premium product, although straddling both the premium and contemporary markets based on sailing programs.

Based on a comparison with HAL, Celebrity has the potential to be very profitable under the umbrella of a large parent cruise company. (A spokesperson for HAL claimed it is the second most profitable cruise line in the industry.)

Through combined economies of scale, the new owners can first be expected to look at cutting costs at Celebrity both shoreside and aboard ships.

Then, by positioning the product better in the marketplace, whether image-based or by ship deployment, Celebrity should command higher per diems.

If that works, fine. If not, expect the new owners to be more heavy-handed.

In addition are potential conflicts such as between corporate cultures where different hotel and marine departments, for instance, may have to work together.

But regardless, there is not much time. Wall Street is not known for its patience.


The key to success for this marriage to work, however, becomes product differentiation since the cruise lines involved are already in many of the same markets and are known for their quality products.