IPOs, Initial Public Offerings: pre & post IPO

Norwegian Cruise Line Holdings (NCLH)

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Based in Bermuda with executive offices in Miami, Norwegian Cruise Line Holdings (NCLH) scheduled a $400 million IPO with a market capitalization of $3.4 billion at a price range mid-point of $17, for Friday January 18, 2013.

S-1 filed January 8, 2013.

Manager, Joint Managers:  UBS Investment Bank/ Barclays/ Citigroup/ Deutsche Bank Securities/ Goldman, Sachs/ J.P. Morgan.
Co Managers:  DNB Markets/ HSBC/ SunTrust Robinson Humphrey/ Wells Fargo Securities/ Apollo Global Securities.

SUMMARY
NCLH is a major cruise ship operator, competing with Royal Caribbean Cruises Ltd.(NYSE:RCL), $7.76 billion market cap and Carnival Corp (NYSE:CCL), $29 billion market cap.

Sector comparison
From the low prices this year, RCL is up 59% and CCL is up 22%, which shows institutional interest in the cruise line sector.

Recent price

Low price

Low Month

% increase

Royal Caribbean Cruises (RCL)

$35.64

$22.46

June

59%

Carnival Corp (CCL)

$37.00

$30.43

March

22%

NCLH’s operating percentages have been increasingly favorable the past three years but nine month revenue is essentially flat.

2009

2010

2011

Sept 9 mos ’11

Sept 9 mos ’12

Total revenues ($mm)

$1,855

$2,012

$2,219

$1,731

$1,773

Cruise operating exp % of rev

70%

67%

66%

65%

64%

Operating income % of rev

9%

11%

14%

16%

17%

Reported Net income % of rev

4%

1%

5.7%

7.4%

9.4%

Proforma net adj for IPO % of rev

6.4%

10.4%

VALUATION

At the mid-point of the pricing range, NCLH is prices at the same Price/Earnings ratio as RCL, and is priced at a premium in terms of price/sales, price-to-book value, and price-to-tangible book value.

In addition, both RCL and CCL pay dividends.  NCLH has no plans to pay dividends.

Valuation Ratios

IPO Mrkt

Price /

Price /

Price /

Price /

Dividend

annualizing Sept 9 mos

Cap (mm)

Sales

Earnings

BookValue

TangibleBV

Yield

Norwegian Cruise Line Holdings (NCLH)

$3,409

1.5

14.2

1.5

2.1

none

Royal Caribbean Cruises (RCL)

$7,760

1.0

14.2

0.9

0.9

1.35%

Carnival Corp (CCL)*

$28,790

1.8

15.0

1.2

1.5

2.70%

SCORECARD

Mgt

Market

Market Do-

Proprie-

Total

1-5, 5 is high

Growth

mination

tary

rating

20 is perfect

2

2

2

1

C+, 7

Pre-IPO grade-score summary
. Many IPOs in today’s environment are graded C+ and scored 7
. If the pre-IPO grade is below C+ or the score is below 7,
then our analysts may have some concerns about the company’s
outlook and/or its market segment
. If the pre-ipo grade is above C+ or the score is above 7,
then our analysts believe the company’s overall business outlook
is more favorable
Glossary of financial terms

RECOMMENDATION
IPOdesktop is neutral to positive on NCLH because analyst reports may be favorable based on future growth.  For example, NCLH has three ships on order, with an option on a fourth, to add to its current 11 ship fleet.

Overall NCLH is priced at a premium relative to RCL and CCL.  However, NCLH has made impressive improvements to its income statement expense ratios.  It may be unrealistic to assume further expense ratio improvements, so profit growth will probably have to come from top line revenue increases.

IPOdesktop would be surprised if NCLH jumped to much of a premium in its first few days of trading.

BUSINESS
NCLH is a leading global cruise line operator, offering cruise experiences for travelers with a wide variety of itineraries in North America (including Alaska and Hawaii), the Mediterranean, the Baltic, Central America, Bermuda and the Caribbean.

Each of NCLH’s 11 modern ships has been purpose-built to consistently deliver a “Freestyle Cruising” product offering across its entire fleet, which NCLH believes provides a competitive advantage. By focusing on “Freestyle Cruising,” NCLH has been able to achieve higher onboard spend levels, greater customer loyalty and the ability to attract a more diverse clientele.

However, if “Freestyle Cruising’ continues to be popular, competitors can be expected to offer their versions as well.

NCLH established the very first private island developed by a cruise line in the Bahamas with a diverse offering of activities for passengers. Also, NCLH is also the only cruise line operator to offer an entirely inter-island itinerary in Hawaii.

BASE LOADING
NCLH utilizes a base-loading strategy to fill capacity by booking passengers as early before sailing as possible.

Base-loading is a strategy that focuses on selling inventory further from the cruise departure date by utilizing certain sales and marketing tactics which generate business with longer booking windows.

Base-loading allows NCLH to fill ships earlier, which prevents discounting close to sailing dates, in order to achieve targeted Occupancy Percentages.

Specific initiatives to achieve this include:Casino Player Strategy. As part of this strategy, NCLH has non-exclusive arrangements with approximately 90 casino partners worldwide including Caesars Entertainment, in which affiliates of both Apollo and TPG have investments, whereby loyal gaming customers are offered cruise reward certificates redeemable for cruises on NCLH ships.

Through property sponsored events and joint marketing programs, NCLH has the opportunity to market cruises to Caesars Entertainment’s customers. These arrangements with casino partners have the dual benefit of filling open inventory and reaching customers expected to generate above average onboard revenue through the casino and other onboard spending.

RECENT DEVELOPMENT – NET YIELDS
For the three months ended December 31, 2012, NCLH believes that Net Yields (Net Revenue per Capacity Day). will be between approximately $156.00 and $156.50, and Occupancy Percentage* will be approximately 102.4%.

*The ratio of Passenger Cruise Days to Capacity Days. A percentage in excess of 100% indicates that three or more passengers occupied some cabins.

In addition, for the first quarter of 2013, NCLH has slightly higher booked occupancy for cruises as compared to first quarter of 2012, and at higher pricing.

SHIPS ON ORDER
NCLH has three new ships on order and an option to build a fourth, all of which would be delivered through 2017.

Norwegian Breakaway and Norwegian Getaway are under construction with Meyer Werft and are scheduled for delivery in April 2013 and January 2014, respectively, and each will approximate 144,000 Gross Tons and 4,000 Berths with an aggregate cost of approximately €1.3 billion, or $1.7 billion based on the euro/U.S. dollar exchange rate as of September 30, 2012. Financing arrangements provide for financing for approximately 90% of the contract price of these two ships.

In October 2012, NCLH reached an agreement with Meyer Werft to build a new cruise ship for delivery in the fourth quarter of 2015 with an option to build a second ship with an expected delivery date in spring 2017.

RED FLAG?
NCLH intends to avail itself of the “controlled company” exception under the NASDAQ rules, which eliminates the requirement that NCLH has a majority of independent directors on its Board of Directors.

APOLLO CONTROLLED
Pursuant to the terms of the Shareholders’ Agreement, within 90 days following the consummation of this offering, our Board of Directors will consist of nine directors, including five directors designated by the Apollo Funds, two directors designated by Genting HK and two independent directors (one designated by the Apollo Funds and one designated by Genting HK).

PRINCIPAL SHAREHOLDERS POST-IPO
Genting HK, 43.4%

Apollo Funds, 32.5%

TPG Viking Funds, 10.8%

Apollo Global Management, LLC is an American private equity firm, founded in 1990 by former Drexel Burnham Lambert banker Leon Black.[2] The firm specializes in leveraged buyout transactions and purchases of distressed securities involving corporate restructuring, special situations and industry consolidations. Apollo is headquartered in New York City, and also has offices in Purchase, New York, Los Angeles, Houston, London, Frankfurt, Luxemburg, Singapore, Hong Kong and Mumbai. The firm has invested over $16 billion in companies.[3]

As of September 2011, Apollo managed over US$65 billion of investor commitments across its private equity, capital markets and real estate funds and other investment vehicles making it one of the largest alternative investment management firms globally.

Genting Hong Kong Limited is an investment holding company. The Company’s subsidiaries are principally engaged in the business of cruise and cruise related operations and leisure, entertainment and hospitality activities. The Company is principally engaged in the operation of passenger cruise ships. The Company operates in two segments: cruise and cruise related activities, and charter hire and others. Cruise and cruise related revenues consists of sales of passenger tickets, which include air transportation to and from the cruise ship, and revenues from onboard services and other related services, including gaming, food and beverage. Other operations of the Company include charter hire and others. The Company’s subsidiaries include Star Cruises Asia Holding Ltd., Star NCLC Holdings Ltd., Star Cruise Management Limited, Cruise Properties Limited, Star Cruise Services Limited and Superstar Virgo Limited, among others.

TPG Capital (formerly Texas Pacific Group) is one of the largest private equity investment firms globally, focused on leveraged buyout, growth capital and leveraged recapitalization investments in distressed companies and turnaround situations. TPG also manages investment funds specializing in growth capital, venture capital, public equity, and debt investments. The firm invests in a broad range of industries including consumer/retail, media and telecommunications, industrials, technology, travel/leisure and health care.

The firm was founded in 1992 by David Bonderman, James Coulter and William S. Price III. Since inception, the firm has raised more than $50 billion of investor commitments across more than 18 private equity funds.

COMPETITION
Royal Caribbean Cruises Ltd.
(NYSE:RCL)

Carnival Corporation
(NYSE:CCL)

USE OF PROCEEDS
NCLH expects to net $370 million from its IPO.  Proceeds are allocated to repay debt.

FINANCIAL

Norwegian Cruise Lines NCLH, C+, 7

Post IPO shares: 200mm

Global cruise line operator

IPO Mkt

Bermuda/Miami

Cap (mm)

2009

2010

2011

Sept 9 mos ’11

Sept 9 mos ’12

$3,409

Total revenues ($mm)

$1,855

$2,012

$2,219

$1,731

$1,773

@$17

Cruise operating exp % of rev

70%

67%

66%

65%

64%

Operating income % of rev

9%

11%

14%

16%

17%

Reported Net income % of rev

4%

1%

5.7%

7.4%

9.4%

Proforma net adj for IPO % of rev

6.4%

10.4%

Valuation Ratios

IPO Mrkt

Price /

Price /

Price /

Price /

% offered

annualizing Sept 9 mos

Cap (mm)

Sales

Earnings

BookValue

TangibleBV

in IPO

Norwegian Cruise Line Holdings (NCLH)

$3,409

1.5

14.2

1.5

2.1

12%

COMPARE
Valuation Ratios

IPO Mrkt

Price /

Price /

Price /

Price /

Dividend

annualizing Sept 9 mos

Cap (mm)

Sales

Earnings

BookValue

TangibleBV

Yield

Norwegian Cruise Line Holdings (NCLH)

$3,409

1.5

14.2

1.5

2.1

none

Royal Caribbean Cruises (RCL)

$7,760

1.0

14.2

0.9

0.9

1.35%

Carnival Corp (CCL)*

$28,790

1.8

15.0

1.2

1.5

2.70%

*Annualizing Nov 9 mos

Recent price

Low price

Low Month

% increase

Royal Caribbean Cruises (RCL)

$35.64

$22.46

June

59%

Carnival Corp (CCL)

$37.00

$30.43

March

22%

SCORECARD

Mgt

Market

Market Do-

Proprie-

Total

1-5, 5 is high

Growth

mination

tary

rating

20 is perfect

2

2

2

1

C+, 7

 

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