Carnival Cruise Lines has announced an agreement with Dial Corporation to acquire Premier Cruise Lines and its three ships.

The contract price is approximately $372 million less Carnival's assumption of two ship charters. The net price of approximately $220 million is to be paid in Carnival Cruise Lines Class A common stock to Dial and two individual minority shareholders, Bruce Nierenberg and Bjomar Hermansen, both executives of Premier. The number of shares to be issued will be based on the average price per share for the ten business days prior to the closing of the transaction which is planned for early June.

At the present trading price, Dial would receive about 10 million Carnival shares, which are expected to be put up for public sale.

In a prepared statement, Mickey Arison, Chairman and CEO of Carnival, said that Premier would continue to operate under its current name and management.

Net $220 Million

For the net purchase price of $220 million, Carnival acquires the 40,000-ton, 1,500-passenger Star/Ship Oceanic which was built in 1965 and refurbished in 1986. The ship's market price has independently been estimated from $80 million to $90 million. Along with Premier, however, comes the cruise line's contract as the "official cruise line of Walt Disney World" and its market position as the leading family-oriented cruise line.

Thus, Carnival is paying an estimated $130 to $140 million for Premier's market position. In the process, Carnival is also eliminating a tough competitive situation in Central Florida, where both cruise lines had been engaged in a price war for some time.

In addition, Carnival assumes the lease obligations on the two other Premier vessels, the 36,500-ton, 1,600-passenger Star/Ship Atlantic and the 17,750-ton, 950-passenger Star/Ship Majestic.

The net result to Carnival is that Carnival further manifests its position as the largest cruise line; it will totally dominate the short cruise market; and Port Canaveral becomes Carnival's busiest cruise port with five ships. But even more important, third quarter cruise revenues can be expected to soar to new records.

Moreover, while Dial seems to have negotiated an excellent price for its cruise investment, Carnival is getting an even better deal, since it is not only eliminating bothersome competition, it is also taking over a successful three-ship operation for less than the price of a new "superliner" at today's newbuilding prices. Carnival is also getting something else, which it never had, an out-island, Salt Cay, in the Bahamas.

The Star/Ship Atlantic is the former Atlantic of Home Lines, built in 1982; the Star/Ship Majestic is the former Sun Princess of Princess Cruises, built in 1972. A spokesperson for carnival was unable to release the length of the teases, however, or the purchase price option on the two vessels.

Rationale

The acquisition of Premier may have been Carnival's main key to earnings growth in the near term. Carnival has obviously faced saturation in the short-cruise market in Southern Florida following the introduction of the Fantasy and Royal Caribbean Cruise Line's Nordic Empress. Consequently, the line moved the Carnivale and the Mardis Gras to Port Canaveral, where a fierce price war erupted as the two cruise lines battle for passengers.

Carnival is also facing overcapacity and intense competition in the seven-day market in 1991 and 1992 which could mean limited earnings potential in that market segment.

Premier on the other hand had the upper hand in the short term mainly because of its established market position in Central Florida and its designation as the "official cruise line of Disney World." Carnival seems to have had some product problems in this market in particular in terms of mixing singles and families with children. Carnival, however, has deeper pockets and would probably have outspent and outsmarted Premier over the long haul.

Premier was also facing the awkward situation of needing additional tonnage in order to expand to the West Coast, but being unable to find it at affordable prices, although the rumor mill was bustling with unsubstantiated reports of Premier acquiring ships from Royal Viking Line.

Thus, looking at a no-win situation, Premier instead decided to bail out. Its two founders, Hermansen and Nierenberg, hold a ten percent interest each, and will make out handsomely after starting from scratch seven years ago.

Carnival may also have achieved something else. By making Port Canaveral literally a one­-company port, it may have pre-empted the viability of the planned Phoenix of World City Corp. to operate from Central Florida.

Bahamas dominance

Unless ships are re-deployed following the completed acquisition of Premier, Carnival will have six vessels in the short cruise market, one from Miami and five from Port Canaveral, with a total annual capacity of 796,000 passengers or 65 percent of the three- and four-day cruise market.

Carnival will achieve better control of its already effective revenue management system and will be less vulnerable to competitors. Its only significant competition in the short cruise market will be RCCL with one new ship in the short cruise market. The rest of the 3/4-day fleet is composed of older tonnage.

3rd and 4th Quarter Earnings

While cruise revenues can be expected to soar, earnings can also be expected to increase, although at a more uncertain pace. The uncertainty factor is introduced by the unpredictability of the continued need for discounting, increased sales and marketing costs, and the softness of the Central Florida market. A large part of the visitors to Central Florida comes from the North East which has been affected the most by the recession.

However, as most economists predict that the American economy is on the path to recovery, that, plus the absence of a Mideast war, can be expected to generate improved load factors.

Moreover, Carnival has announced that it intends to raise prices by five percent by mid-year which in combination with expected reduced fuel prices, will also help boost earnings.

It is uncertain, however, how long it will take for Premier to benefit from the economies of scale offered by the large Carnival organization, or indeed, if there are any benefits in that context for Premier, which already is seen as highly efficient.

It is also uncertain if Premier's family market will allow Carnival to bus any more day-visitors to its fledgling Crystal Palace Resort & Casino.

Thus, the immediate stock market reaction was that Carnival shares fell 12 cents on the American exchange, closing at $21.75, in spite of Carnival's apparent scoop.

As Carnival grows, however, it also becomes more vulnerable to fluctuations in the economy and outside events to the extent that they affect the general American travel market.

Speculations

While a spokesperson for Carnival said that the company intends to continue operating the five vessels from Port Canaveral, other industry executives speculated that Carnival will move the Mardi Gras and the Carnivale to the West Coast, where they may operate three- and four-day cruises under the Premier flag as the "official cruise line of Disney Land".

Other executives said this was unlikely inasmuch as Carnival would probably need newer and larger vessels to serve that market. If so, several scenarios emerge: Carnival deploys another vessel to the West Coast; Carnival acquires yet another cruise line; or, another cruise line becomes the "official cruise line of Disney Land."

In the meantime, it is also speculated that Carnival will move the Holiday or the Celebration to Port Canaveral for seven-day cruises. At present, their present itineraries will also be offered on alternate Sundays by the new Ecstasy. The Carnival spokesperson, however, said that Carnival would maintain its ships in Miami on similar itineraries since they offer departures on Saturdays and Sundays.

Largest cruise line

With the acquisition of Premier, by June (1991) Carnival's total fleet will number some 19 ships with 22,112 berths, including the ships of Holland America Line and Windstar Cruises.

By 1994, the Carnival fleet will have grown to 22 ships and 28,612 berths, compared to the second largest cruise company, Royal Caribbean Cruises, which will have 11 ships and 15,948 berths in 1994.

While Carnival carried some 953,221 passengers in 1990, in its fiscal 1991, with the arrival of the Ecstasy and the addition of the three-ship Premier fleet, Carnival can be expected to carry nearly 1.5 million passengers. As the Cruise Line International Association (CLIA) has projected four million cruise passengers in 1991, that would give Carnival a market share of 37.5 percent.

Continued concentration

With Carnival's acquisition of Premier, the industry is concentrated even further in four large cruise companies. Out of the overall cruise fleet of 119 ships and 87,508 berths in 1991, the combined fleets of Carnival, Royal Caribbean Cruises, Princess Cruise Lines and Kloster Cruise will have 51 ships and 57,108 berths.

According to calculations by this newsletter, the top four cruise lines will have a combined capacity of nearly 2.9 million passengers in 1991, which would translate into a combined market share of 72.5 percent of the four million cruise passengers CLIA is projecting for this year.

Premier

Premier Cruise Lines was formed in 1983 by Bruce Nierenberg and Bjornar Hermansen, both former executives of then Norwegian Caribbean Lines, now Norwegian Cruise Lines, with financing from then Greyhound Corporation, now Dial Corporation.

Premier launched service with one small ship from Port Canaveral to the Bahamas and was successful in being appointed the "official cruise line of Disney World" which enabled it to build a reputation as a family-oriented cruise line.

Recently Premier has also developed its own out-island in the Bahamas as well as a unique combination of new ports-of-call among the Abacos islands in the northern Bahamas.