Star Cruises focus on Asia-Pacific

Deal with Apollo Management paves the way for more concerted effort

PETALING JAYA: Star Cruises Ltd, which is 19.89% owned by Resorts World Bhd, plans to focus its financials and resources on its Asia Pacific business, especially Greater China, given the region's growing travel and tourism markets. 

The effort will be more concerted, given last Friday's transaction involving US-based private equity firm Apollo Management LP investing US$1bil cash into NCL Corp Ltd (NCLC) in return for a 50% stake in NCLC.  

Upon completion, which is expected in the fourth quarter of this year, NCLC will cease to be a subsidiary of Star Cruises.  

“We realise that there is a need for more capital in Asia, given its strong growth potential. We are bringing in a new investor because we have built a great business. However, we cannot afford to put in more capital (into NCLC),” president David Chua in a teleconference in Hong Kong yesterday. 

The cruise business is capital intensive and requires a period of gestation. “Shipbuilding takes three to four years before delivery but we have to make an initial payment of some 30%,” he said.  

The group is the world's third largest cruise line presently operating a combined fleet of 21 ships with over 32,300 lower berths with an additional three vessels and some 10,800 lower berths due to be delivered by 2010. 

NCLC, based in the US, has a fleet of 14 ships in service and under construction. It oversees the operations of Norwegian Cruise Line, NCL America and Orient Line.  

NCLC president Collin Vetch said proceeds from Apollo's investment would be used to pare down its borrowings, hence creating more liquidity for growth.  

Chua added that Star Cruises and NCLC had stand-alone lenders. Star Cruises, on its own, has some US$480mil of debt secured against US$1.3bil worth of assets with cashflow of about US$150mil to US$160mil.  

Apollo and Star Cruises have also entered into a sub-agreement pertaining to NCLC's Hawaiian operations under subsidiary NCL America Holdings Inc (NCLA).  

The shareholders will take 16 months to consider whether to continue or discontinue the operations of NCLA, which gives it time to realize the benefits of various measures recently implemented to raise revenue yields and to lower crew turnover and payroll costs.  

The sub-agreement provides for a deferred distribution with a value of approximately US$500mil being made to Star Cruises by NCLC during 2008, as results from the recent measures materialize.  

Together with Apollo's US$1bil investment, this implies pre-money enterprise valuation of NCLC of US$4bil based on US$2.5bil of NCLC net debt as at March 31.  

Two initiatives that were recently introduced include the legislative reform of the manning requirements on US cruise ships effective in June, which should reduce turnover and payroll costs. 

The reduction in NCLA's deployed capacity in Hawaii from three ships to two, effective next February, should increase ticket pricing.  

As such, NCLA's performance should improve next year compared to the previous two years, Vetch said.  

Apollo Management is a leading private equity investor with over US$33bil of assets under management. Its investments in the leisure sector have included Vail Resorts, Oceania Cruises, Sirius Satellite Radio and AMC Entertainment.  

Earlier this year, it announced the acquisition of Harrahs Entertainment.

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