Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positi

Norwegian Cruise Line Holdings Ltd (NASDAQ: NCLH ) entered into a $3.025B acquisition deal for the two brands operated by Prestige cruises. Adding a total of 6,500 berths, or approximately the number of double occupancy rooms with the 9 additional ships, Norwegian will now be operating its own brand as well as the Oceania cruises and Regent Seven Seas cruises.
For those familiar quality inn maingate west in orlando florida with my previous pieces on cruise operators, I like to employ a metric comparing the market capitalization of the cruise line vs. the number of berths available for use. This is a rough estimate however I find it useful as a comparison since the berths are the drivers of revenue on ships and it is a good way to compare different operators on a similar scale. The cost of this acquisition works out to approximately $473K per berth, which is an enormous premium on the $233K approximate market capitalization per Norwegian berth I calculated here .
This indicates management is placing a significant quality inn maingate west in orlando florida premium on goodwill such as the brand, future cost savings or efficiencies quality inn maingate west in orlando florida through quality inn maingate west in orlando florida the purchase of prestige's developed infrastructure, and/or on the quality of the rooms themselves. Regent and Oceania are considered by management to be leaders in the upscale cruise segment, therefore it is reasonable that a certain premium over the regular capitalization per berth exists. However, whether this classification as upscale translates into higher revenues quality inn maingate west in orlando florida or higher margins remains to be see when NCLH reports results including the figures of the Prestige brands. Most Recent Quarter
quality inn maingate west in orlando florida Norwegian reported its second quarter of 2014 in July with sales of 765M for the quarter, up 18.9%. This increase is primarily due to the two new Breakaway class ships in operation and a 3.3% improvement in revenues per day of availability or net yield.
quality inn maingate west in orlando florida With the increase in sales, it is interesting quality inn maingate west in orlando florida to observe above the fluctuations in expenses as some are more and some less directly attached to sales growth. The most surprising and beneficial improvement is noticed quality inn maingate west in orlando florida in the Commissions, Transportation and Other expense category, which now represents 15% of sales rather than 18%. The overall decrease in expenses as a percentage of revenues of 4% shows the excellent progress the company is making in becoming a more efficient operation as it grows the size of its fleet.
Compared to competitors Royal Caribbean (NYSE: RCL ) and Carnival Corporation (NYSE: quality inn maingate west in orlando florida CCL ), Norwegian is handily leading the pack with the highest gross margin on its sales in the most recent quarter reported:
Though only time will tell, it seems this management team is the best hand in which to send the 8 upscale ships under both brands to continue to deliver strong margins in a highly competitive industry. However, the acquisition is substantial for a company that itself quality inn maingate west in orlando florida has only 13 ships before the deal. Norwegian may experience difficulty reaping from the synergies of operating all these brands so suddenly, and its current high margins may suffer. Debt
Norwegian will pay for the acquisition through the issuance of 20.3M shares, or by adding approximately quality inn maingate west in orlando florida 10% to the existing float, and the balance paid through cash and debt. Using the current price of $36.25 this would raise approximately $736M before fees, leaving Norwegian to finance the balance quality inn maingate west in orlando florida of approximately $2.3B.
At the end of its second quarter, Norwegian reported $3.5B in total debt, up from $3.1B at the start of the year. Adding the balance of the Prestige acquisition would push this figure to approximately $5.8B. Conclusion
As is concluded in my last piece on Norwegian, debt is my biggest concern quality inn maingate west in orlando florida with this company. Cruise operating is a capital heavy industry and therefore leverage is to be expected, however I am concerned about the repayment of debt negatively affecting quality inn maingate west in orlando florida shareholder returns.
Furthermore, quality inn maingate west in orlando florida Norwegian has performed admirably in this last quarter and I do believe the company will make excellent use of its new acquisition. However quality inn maingate west in orlando florida the purchase compared to the size of Norwegian is very significant, and I would wait to see the first series of post-acquisition results before quality inn maingate west in orlando florida considering an investment. Mainly, I would like to see similar strong margins on the new higher sales figure, coupled with a balanced quality inn maingate west in orlando florida cash flow with a reasonable debt repayment rate before placing an investment.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article. (More...)