In a surprise development, Carnival Cruise Lines and the Dial Corporation have announced that they have terminated negotiations on the purchase by Carnival of Dial's cruise ship operations, Premier Cruise Lines.

In a brief statement, Carnival said it believed the acquisition of Premier would be dilutive to its earnings. According to the Dial Corporation, negotiations broke down due to a difference of option on future increased business activity, following the lower results of late 1990 and early 1991. "Carnival was not willing to pay the previously agreed upon price on a basis satisfactory to the Dial Corp," said John W. Teets, Chairman, President and Chief Executive Officer of Dial, in a prepared statement.

Teets also said that Dial had no interest in further negotiations but instead would continue to operate and expand its cruise business.

Carnival further announced that it is still considering proceeding in the near future with a proposed public offering of its Class A common stock, the proceeds of which would be available for working capital purposes, including ship financing, acquisitions and repayment of debt.

The two companies had announced on April 15, 1991, that Carnival would purchase Premier for $372 million, including the assumption of ship lease liabilities and the issuance of approximately $220 million of Carnival Class A common stock.

Rationale

While neither company is divulging much information, Carnival's withdrawal from what seemed like a good deal for both buyer and seller, would seem to indicate that Carnival is concerned that the cruise market at least in the near term may be softer than company executives have previously stated, thus diluting Premier's, and perhaps also Carnival's, yields.

According to one analyst, even if Premier makes no money at all in 1991, Premier would only reduce Carnival's annual earnings by 10 cents a share. To be non-dilutive, Premier would only need to earn $17 million pretax, he said.

Thus, for Carnival to state that Premier would be dilutive to its earnings, it must be assumed that Carnival foresees that Premier will incur a major loss in 1991.

One source said that Carnival probably came in relying on previous years' earnings, from 1989 and before. In 1990, Premier's earnings were said to have gone into a tailspin as the company "panicked" with the arrival of Carnival in Port Canaveral.

Several "bad" marketing decisions were made, according to sources, who were critical of the "Big Red Boat" campaign launched by Premier. Business for Disney World and Premier were also starting to turn soft as early as March and April of 1990.

Bookings Picking Up

Teets said that while business was poor in the first quarter of 1991, bookings in the past three months have been running in excess of 40 percent over the same period in 1990. But as Carnival apparently still expects Premier to lose money, it can only be assumed that those bookings are heavily discounted along with much of the rest of the industry.

Analysts said that Carnival cannot afford a dilution of its earnings which they said had been relatively flat the last several years. One analyst said that unless Carnival starts to accelerate its earnings growth, the company risks that Wall Street will put it on the back burner for a while.

Not only may Carnival not be able to afford a dilution of earnings by Premier, earnings from its present operations may also stay relatively flat in light of the present cruise market which is characterized by discounting. This would make any dilution difficult to accept, especially as the company is preparing another public share offering.

By paying down debt from the proceeds of the offering, Carnival would be able to increase earnings per share.

What If...

The acquisition would have given Carnival the Disney connection in Central Florida and virtually a monopoly on the three- and four-day market from that region, and control over 65 percent of the three and four-day Caribbean market, which would have given the company an opportunity to raise prices.

The potential would also exist for occupancy and yield improvements at Premier through the larger organization.

In addition, Carnival would also have gained an opportunity to establish three- and four-day West Coast operations from Los Angeles through affiliation with Disneyland. Also in the future, perhaps Carnival would have even gained an introduction to the European market through Euro­ Disney, scheduled to open in 1992, and expecting 11 million visitors in its first year of operation; along with the Japanese version of Disney World.

Furthermore, Premier has exclusive rights to out-islands in the Bahamas, which Carnival does not, plus, the Premier/Disney market would have given Carnival an opportunity to generate more business for its Crystal Palace Resort.

Thus, it seems that the reasons for not concluding the deal must have been compelling.

Next Move

The price war in Central Florida is likely to continue, with Premier enjoying a slight upper hand with its Walt Disney affiliation, family orientation and product quality, but dependent on Dial Corporation's commitment. So far, analysts said, Dial has given a clear signal that its intention is to sell, in spite of Teets recent comments to the contrary.

At press time, top Premier executives were in meetings at Dial's headquarters in Phoenix. Phone calls to Dial executives were not returned.

In the long run it is uncertain whether Premier can be a survivor - with a relatively small operation, limited to one port and one market. Now it may also be facing an unfair battle against Carnival's marketing resources where Carnival, through the due diligence process, also has gained access to most of Premier's trade secrets.

While Premier's contract with the Disney Company runs another eight years, sources said that the contract stipulates that Premier must put two more ships into service by 1992, or Disney has the option to work with another cruise line.

According to industry sources, Kloster Cruise and Royal Caribbean Cruises have previously looked at Premier as well. Kloster would seem to have ships available, however, its contract with Universal Studious may pre-empt any Disney affiliation.

Thus, the big questions hinge on whether Dial is willing to invest more in its cruise business in light of the expected battle with Carnival Cruise Lines, and if Premier can find two more ships at acceptable prices.

In due time, it may very well be that Carnival will come back with a second, but lower, offer.

The market reaction to the called off deal was negligible. At press time, Carnival's shares traded for around $23.75.