The cruise industry suffered from coronavirus even more than the entire tourism industry as a whole - cruise liners were one of the first centers of COVID-19 outside of China. This did not stop the investment company L Catterton, in which a large share is owned by the richest European Bernard Arnault. Investors invested $ 400 million in the Norwegian Cruise Line cruise operator, which lost 80% of its capitalization in just a few months. What were they guided by?
While stocks Norwegian Cruise Line (NCL) sank like the Titanic, with the end of 2019 until the end of April having fallen in price by 80% to $12, Scott Duncan and his team from L Catterton quietly watching the disaster. Partners of the private investment company of Greenwich, Connecticut, had already made a fortune rapidly by placing shares on the stock exchange network of salons on cruise ships and focused on working with the most prestigious brands. In the end, the letter "L" in their name refers to the financial support from LVMH, the famous French manufacturer of luxury goods.
The company already has a series of successful investments in the prestigious interior design brand Restoration Hardware, a manufacturer of natural dog food Lily"s Kitchen and Peloton, the maker of bicycles with connection to the Internet. However, never before Danko and his partners were not seen to position a strong brand so quickly changed. Despite the fact that Norwegian will not be able to send in swimming, none of their cruise ships at least another two months, Duncan decided it was time to act.
"Is that clients love to travel, no doubt about that... They want to go on water, — tells 54-year-old dunk. — We support a strong and occupies favourable position the company in a sustainable industry."
The cruise industry was particularly hard hit by the coronavirus. Not only that, the whole tourism industry was paralyzed, cruise ships have become the center of the first major outbreaks outside China. Among the largest cruise operators Norwegian from 2.7 million customers a year, is the third largest after Carnival and Royal Caribbean Cruises. Shares of all three companies fell more than 70%.
Carnival recently announced that from August 1, 2020 will resume cruises in North America, hoping that customers will start to travel before it invented the vaccine. Norwegian is even more aggressive policies, but of the 28 ships set sail until 1 July 2020.
Norwegian particularly have no choice but to get back to work. The case of cruise lines, from Bermuda are so bad that in documents submitted to the Commission on securities and stock exchanges in early may, the company warned investors about a possible bankruptcy, saying that there is "substantial doubt" as to whether it can continue the activity in conditions of quarantine. On the same day appeared on the horizon L Catterton with $400 million that the company invested through a six-year convertible bonds. This is similar to the support that Warren Buffett provided Goldman Sachs in 2008, as bonds, thanks to which L Catterton would later become the largest shareholder of the cruise line, bring 7% of revenue.
Condition capital injections from L Catterton was that Norwegian will attract not less than $1 billion through placement of shares and bonds. The company did so: the day after the warnings about bankruptcy and investment from Catterton L Norwegian announced that it raised $2 billion by selling common shares for $460 million and after two the placement of $1.54 billion
Now cruise companies have $3.5 billion of available funds, which, as stated by its leader Frank Del Rio, cover all expenses for at least a year and a half ahead. Until now, the influx of funding had little effect on the stock Norwegian. At the end of the 2019 Norwegian market capitalization was approximately $12 billion, and today it is $2.5 billion For L Catterton, which potentially owns 20% of the company full recovery of the cruise industry would be a huge win.
"We can't predict the future, but the data that we have, combined with 40 years of experience and what clients tell us, suggest that the sector will recover, says danke. — When it happens, NCL will be ready to show outstanding results."
Danke familiar with "the open sea". In 2015 L Catterton paid $925 million in Steiner Leisure, an international provider of Spa services and beauty products manufacturer out of Florida who owned OneSpaWorld, the operator of luxury spas and fitness centers with 176 ships of more than 20 cruise companies. OneSpaWorld is more than 90% of the market of wellness on cruise ships.
This investment helped the L Catterton partners to understand the Economics of cruise ships: passengers are loyal to wealthy older people, but business in General is protected from recessions. According to the results of a study conducted OneSpaWorld over the last 25 years the number of passengers on cruise ships increased by 6.7% per year, despite fluctuations of the economy as a whole. A typical passenger liner of 49 years, family income averages $114 000, he is married and goes on a cruise about every two years. And he saves himself. Customers OneSpaWorld spend an average of $238 on Spa services, from aromatic massages using seaweed to Botox injections.
"These data are more convincing than anything I've seen in my career... Many clients are loyal and go on a cruise again, says danke. — OneSpaWorld became our first direct investment in the cruise industry, which helped us to understand it".
In March 2019 L Catterton brought OneSpaWorld on the stock exchange in a deal worth $850 million, saving almost half of their previous share. For the period from the IPO to January 2020 shares rose 37%. Now they have fallen by 50%. In 2019, the company recorded revenue of $562 million, and although in 2020, it will suffer, it is expected that in 2021 revenue will reach $654 million L Catterton, which still owns 14% OneSpaWorld recently poured into it another $75 million, providing liquidity for another two years.
L Catterton, established in 1989, was formerly known as Catterton-Simon Partners, as one of its founders was William Edward Simon, an investment banker and Treasury Secretary under Nixon and Ford. In the early 1980s, Simon shook wall street when first bought with borrowed money manufacturer of greeting cards Gibson Greeting Card Co., a year and a half later brought the company to the stock exchange. So he managed to turn a investment of $80 million approximately $300 million and personally earn over $70 million with investments of only $330 000. This transaction resulted in a boom in leveraged buy-outs in the decade.
In 2016, Catterton has partnered with the investment division of LVMH — L Capital. L Catterton partners, including John. Michael Chu and Scott A. Duncan, owned 60% of the company, and the rest belongs to luxury-goods producer LVMH and its owner Bernard Arnault, the third in the list of world's richest people and richest businessman in Europe with a fortune of $91.8 billion
Duncan, who received a degree in mechanical engineering at the University of Notre Dame and an MBA from Harvard, joined the firm in 2003. Prior to joining Catterton, he worked in the investment division of Deutsche Bank and was a partner at McKinsey. Co-Director Catterton, 61-year-old Michael Chu was one of the founders and began his career as a banker in Hong Kong.
Today, capital L Catterton is $20 billion, the company invests in its leading consumer brands: the operators of fitness centers Equinox, and ClassPass manufacturer's hot sauce Cholula and Honest Co., company Jessica Alba in producing high-quality diapers, cosmetic products and kitchen cleaning products.
Bold bet L Catterton at cruise company associated with serious risk. As at 31 December 2019 Norwegian net debt was approximately $6.5 billion and Today this figure exceeds $7 billion, and the latest round of debt financing with interest rates held more than 12%. According to Kharin Condo, Vice President and analyst, Advent Capital Management, a large part of debt obligations associated with the pledge ships, as well as two resort Islands in the Caribbean sea, owned by Norwegian. "The volume of secured loans is great, and we believe it will continue to grow," he says.
Danko insists that the Norwegian is in a better position relative to all other major cruise lines. According to him, in addition to the "outstanding leadership team", it features the newest and smallest of the fleet, allowing greater flexibility to move the court and keep at a high level, margins and revenues per passenger.
Undoubtedly, after the lifting of the quarantine, that will change, however, the life industry will never be the same. Marketing Professor in the College of business, Cornell University Robert Kotnik says that operators of cruise liners will have to increase the cost of security. "If you look to the future, the first thing you have to do to the cruise lines is to provide iron guarantee health and security."
In addition, it is likely that margins will be reduced on vehicles is likely to be fewer passengers. However, Duncan argues that Norwegian is not necessary to aspire to the same occupancy rate to justify the journey. According to him, transaction costs are reduced, because it decreases the cost of fuel, one of the largest items of expenditure of cruise lines.
Pandemic will be a severe test for the business model of Norwegian. However, if to do conclusions on the basis of historical experience, the September 11 attacks, which initially froze almost all the costs of travel, in the end had little effect on tourism. Moreover, according to Kvetnica, airlines and cruise ships during the year returned to almost full capacity. If it so happens and this time, Scott Duncan and partners L Catterton swimming would be the best.