With the acquisition of Sitmar Cruises, P&O has reaffirmed its aggressive expansion plans for Princess Cruises.

P&O announced Thursday (July 28) that it has purchased all the stocks in Sitmar for approximately $210 million and that the acquisition is expected to be completed within 60 days. P&O is also assuming Sitmar's three newbuilding contracts, valued at $150 million each.

The two cruise lines will continue to operate their respective cruise programs through 1989, at which point Sitmar will be fully integrated in the Princess organization and all ships will operate under the Princess banner. Tim Harris, who is President of Princess Cruises, will also be President of the new cruise line.

Over the last few months, P&O and Princess executives have repeatedly confirmed their intentions to expand either through newbuilding or acquisition of another cruise line's newbuildings under construction.

The acquisition of Sitmar will enable Princess to expand much more rapidly than would otherwise have been possible through its own newbuilding program which at best would have given it one new ship by 1991.

New Princess Stays on Course

Sir Jeffrey M. Sterling CBE, Chairman of P&O, said that the new Princess Cruises will continue to market mostly 10- and 14-day sailings and that "there's bound to be some movement with some of our older ships before 1991" indicating that there is an excellent chance that Princess will try and sell a few of its older vessels by that time.

He said there would not be any major change in the pricing structure at Princess and that the target would continue to be upscale, older passengers who have the money and time to take longer cruises.

He also said that P&O expects to invest about $600 million in the cruise division by the time the three new Sitmar ships are delivered at the end of 1991. He also said that there is bound to be some cutback in personnel after the merging of the two companies and that he expected "wide marketing efforts" on the part of the new cruise line.

Sterling explained that the $600 million P&O plans to invest in its cruise division include the $210 million in cash used to acquire the Sitmar stock, $10 million in P&O stock that the Vlasov family trust has agreed to acquire, and the outstanding debt for the three new Sitmar ships.

Sterling said that the capitalization of P&O is about $5 billion and that market analysts are expecting a net profit before tax of about $500 million this calendar year. He said there was no immediate impact on the various stock exchanges where P&O is traded in London, Tokyo and New York.

Second Largest Cruise Line

With eight cruise ships and 6,780 berths in its present configuration, the new Princess Cruises becomes the second largest cruise line behind Carnival Cruise Lines (which has seven ships and 8,448 berths). In addition will be Sitmar's three new ships which are under construction: the 63,000-ton, 1,470-pax. FairMajesty to be introduced next year; and two yet unnamed 70,000-ton vessels, each accommodating 1,600 passengers, to be introduced in 1990 and 1991.

By 1991, Princess Cruises could have 11 ships with a total berth capacity of 11,450, compared to Carnival which will have 10 ships with a total berth capacity of 14,598.

However, in the upscale segment of the popular cruise market, where Princess operates, it could be the dominant cruise line, pending expansion plans by Royal Caribbean Cruise Line and Holland America Line.

Rough Seas?

According to industry analysts, Sitmar may have sailed in rough seas the last several years, although company officials deny this.

While the line has enjoyed a reputation for quality, it is also said to have suffered from a somewhat stodgy image and a family-oriented cruise identification it has recently tried to erase. This year the line introduced new visual imagery including a new insignia painted on the sides of the ships. Print advertising was beefed up and a national television campaign was undertaken.

But Sitmar is also said to have suffered from limited national market recognition (it is mainly supported by West Coast markets), and by problems with its itineraries in the up-and-down cycles of the Mexico and Alaska markets.

The combination of these factors may have led to the resignation of long-time Sitmar President John P. Bland in September of last year. He was replaced by Thomas E. Blarney whose future position with Princess Cruises is uncertain.

Last winter, Sitmar also announced that it had strengthened its capital base as a result of a partial stock purchase by private European-based interests outside the cruise industry. No further details were revealed.

Slow Ahead

Since taking delivery of the 45,000-ton, 1,260- pax. Royal Princess in 1984, Princess Cruises has been consolidating its position, while other major cruise lines have been expanding at a rapid rate.

The other four vessels in the Princess fleet are all in the 20,000-ton range and were built in the early seventies and late sixties.

While Princess has achieved national market recognition through its role in the popular television series "The Loveboat," it has also mainly been a West Coast cruise line with major market following on the West Coast. In spite of their efforts, neither Sitmar nor Princess appear to have the national market coverage of the major Miami-based cruise lines.

In addition, Sitmar and Princess have been competing in the Alaska and Mexico markets as well as in the Caribbean. Next year, this competition would have extended to the Mediterranean.

New Force

By combining the two fleets, the new Princess should emerge as a major contender in the American cruise market - in Alaska, Mexico, and the Caribbean as well as in Europe, and draw the benefits of similar economies of scale as RCCL, Carnival and NCL.

This economy of scale will enable Princess to negotiate better air deals, port costs, advertising outlay, and other expenses that affect the bottom line.

According to a statement from Princess Cruises, the line expects to achieve a one product fleet by building on the "product delivery reputations of both companies with their emphasis on Italian dining, Broadway entertainment, passenger care and warm personal service."

"Many synergies will come from the association of the two companies," said Tim Harris, President of Princess Cruises. "The offices are also in immediate proximity in Los Angeles so that there will be minimal disruption of valued employees."

Sitmar President Thomas Blarney said that the two lines will start to consolidate some of their marketing and reservation functions in about 60 days and that it will probably take until spring or summer before "we have a common product at sea."

Financial analyst Harvey Katz of Salomon Brothers said that the acquisition "seems like a natural for P & O because it is certainly a step-up for operating greater economies of scale and it takes some of the competitive factor away from Princess. In his opinion, both Princess and Sitmar were in the market for similar, upscale, older passengers who take longer cruises and both operated in the same regions and are perceived to be West Coast lines that attract mainly West Coast passengers. He said P&O's stock did not budge after the announcement.

Blamey said to CIN that the first six months of 1988 were the best six months Sitmar has ever had and that Sitmar is profitable. He also said that the merger represents an excellent opportunity for both lines to create an even stronger cruise line and an even better cruise product for the future.