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Royal Caribbean - Part 2
From SN Guides
Revision as of 10:42, 27 April 2016; view current revision
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Part 1 also records that during the 1970s Gotaas-Larsen came under the control of Jack Seabrook and the efforts that he and his assistant Richard Fain made to break the RCCL board room decision making deadlock that was frequently created by the eccentric, ego-driven, tangled disputes between the two Norwegian shareholders. It outlines the two Americans limited success in the slow, tedious, work of converting the Norwegians to normal corporate governance. By the end of the 1980s Seabrook was over 70 and he privately decided to dispose of his remaining business activities. As a stand-alone business, the Gotaas-Larsen tanker and gas-tanker operations were of interest to a number of potential buyers, but none of them wanted a one-third interest in RCCL. Seabrook offered to sell his shareholding to the Norwegians or to buy them out. They declined both proposals. So as the Part 1 history closed, Seabrook began secretly to explore ways of selling his RCCL investment.
The Carnival Bid
The first stage in Seabrook’s disengagement was his deal to merge RCCL with his Admiral Cruises. This gave Seabrook temporarily a slightly larger shareholding than either Norwegian, who were due to produce a matching investment after the legal formalities for the creation of Royal Admiral were completed. These formalities were given a low priority and production of final documentation proceeded in a very dilatory manner.
The negotiations with Carnival involved Richard Fain and placed him in a very difficult position. Fain was Seabrook’s deputy and Joint Managing Director of Gotaas-Larsen as well as Chairman and CEO of Royal Admiral. The Arisons realised that whilst Seabrook was a seller, Fain was not.
In August 1988, after months of discussion, Seabrook and the Arisons surprised the industry by announcing a deal for Carnival to acquire the Gotaas-Larsen holding in RCCL at a generous price. The RCCL constitution gave the other shareholders the right of first refusal, but this was circumvented by Carnival offering to buy the Gotaas-Larsen subsidiary that owned the RCCL shares, so there would be no change in the RCCL shareholder. The same purchase offer was made separately to the other two shareholders on the basis that only one would be bought. Thus the first to accept would obtain a high price, while the other would be trapped as a minority shareholder. As a further twist, the Carnival offer was subject to due diligence and approval by the Carnival board. This gave Carnival the opportunity to walk away if neither of the other shareholders agreed to sell.
The announcement horrified the Norwegians. They knew that Seabrook wanted to sell, but surely not to Ted Arison, who had so humiliated their fellow Norwegian ship-owner Knut Kloster in 1972 (See Carnival – Part 1) To them Carnival was an inferior operation, even though it made much more money than RCCL. They also felt that the Arisons merely wanted to examine their books. They discussed a joint bid to buy out Seabrook, but as usual were unable to reach agreement. While they were arguing, the Skaugens began discussions with Carnival and to Wilhelmsens’ dismay a second share sale agreement was announced. The combined sale value was $550 million, but Skaugen had extracted a crucial concession as part of the deal. The Wilhelmsens were given 40 days to decide whether to match the $550 million price and if they did go ahead they had a further 30 days to close the deal, with no higher bids from Carnival to be allowed. Most of the shipping world considered that this was merely a face saving gesture, but they had not appreciated that the Wilhelmsens had so great an emotional attachment to “their” RCCL that they were willing to risk their entire business to ensure its independence.
For the Skaugens and Gotaas-Larsen it became a waiting game, as they were both convinced that Wilhelmsen would not be able to produce $550 million. Richard Fain was in a very awkward situation, as he wanted to remain with RCCL, but initially Arne Wilhelmsen regarded him a traitor. He had lunch with Micky Arison, where it became clear that Fain could have no role in RCCL under Carnival ownership. Fain offered his resignation from RCCL, but all parties wanted him to stay to provide short-term management continuity, so he worked hard at re-establishing his relationship with Wilhelmsen. He re-directed the lawyers to complete the creation of Royal Admiral, as the existence of the new company was essential if Wilhelmsen was to complete any transaction within the deadline, but there was no timescale applicable to Carnival. In the process Seabrook became increasingly annoyed by Fain’s insubordination.
Wilhelmsen initially contacted his old Harvard Business School acquaintances who were now working in New York investment banks. He discovered that finance was available for a leveraged buyout, but this would burden RCCL with so much short-term debt that the company would not be able to buy the new ships it desperately needed to remain competitive. Wilhelmsen wanted equity investors, but the Wall Street crash at the end of 1987 had closed any public avenue of finance. He needed to bring a very wealthy private investor to the table.
Fortunately Wilhelmsen had a powerful ally in the French banker Paul Bequart, who was head of shipping finance at Banque Indo-Suez and who had arranged the construction finance for Sovereign of the Seas. Bequart had helped to ensure that Chantiers de l’Atlantique had obtain that order and he would get further business if RCCL placed an order for two sister ships. Carnival had never placed an order in France, so Bequart was likely to lose business if it acquired RCCL. This spurred him to phone all likely contacts and he was delighted when he obtained an expression of interest from Jay Pritzker, a Chicago based American who controlled a family fortune that was greater than the reserves of many nations and renowned deal maker.
Bequart dashed to New York, dragged Wilhelmsen away from his inconclusive meetings and the pair flew to Chicago. The meeting with Jay Pritzker and his son Tom was an astonishing success. The Pritzker empire included the luxury Hyatt hotel chain and RCCL seemed to promise a good fit. If the financing made sense they were prepared to move.
At 10.00 the following evening, Fain received a phone call at his Miami home from Jay Pritzker, asking him to be in Chicago the following day to discuss the business. The two men had met three years earlier. Fain caught the first flight out of Miami and on arrival at Pritzker’s apartment was ushered into a meeting with the Pritzkers, their bankers and the Israeli shipowner, Eyal Ofer, who had flown from London at Pritzker’s request. After a day-long discussion the Pritzkers agreed to support Wilhelmsen, provided Fain became full-time Chairman and CEO.
At this point Fain could no longer remain on the board of Gotaas-Larsen so he devoted himself to RCCL and to processing the vast amount of legal documentation needed to finalise the creation of Royal Admiral and to complete the take-over of the Gotaas-Larsen and Skaugen shares. Once the Arisons realised that Pritzker was backing Wilhelmsen they knew that they had no chance of acquiring RCCL, nevertheless they continued to exert unremitting pressure in case they could fluster the lawyers and RCCL into a position where Carnival could sue.
The financial arrangements covered both the $550 million take-over of the outgoing shareholders’ interests and funding for two new ships. Pritzker and Ofer provided $252 million and $325 million loan finance was advanced jointly by Kreditkassen, (a Norwegian bank) and by Bank of Nova Scotia. The transaction was completed on the very last day of the deadline. Wilhelmsen owned 49.5%, Pritzker 40.5% and Ofer 10% of Royal Admiral.
A long term effect was that the transaction created lasting enmity between Micky Arison and Richard Fain. It also created lasting hostility between all levels of management in Carnival and Royal Caribbean. Another consequence was that Royal Caribbean began the second phase of its life loaded with debt. The final remarkable outcome was the size of the funds involved in the very public fight between Carnival and the Wilhelmsen faction, convinced Nico Van Der Vorm, the representative of the owners of Holland America Line, to enter into discussions on the sale of their more valuable business to Carnival. These negotiations sailed through and three weeks after the completion of Wilhelmsen’s deal, the shipping world was astonished by an announcement that Carnival had bought Holland America for $625 million. Once again Carnival had overshadowed RCCL.
The comparative fleet statistics at the end of 1990 were: -
Nordic Empress was built by Chantiers de l’Atlantique at a price of $162 million and was delivered on 31 May 1990. It is an indication of the growing maturity of the cruise industry that she included, as a matter of course, many of the features that were regarded as revolutionary in earlier ships. The only new element in her design was that the external walls of her atrium and after stairwell were entirely made of glass. A modified version of the RCCL signature blue horizontal banding was applied and a disco aft of the funnel was enlarged into a Viking Crown Lounge. The ship’s machinery arrangements were new to the RCCL fleet. Each of her twin shafts being driven by a “father and son” layout with a 12 cylinder and an 8 cylinder Wärtsilä diesel engines coupled through a gearbox that allowed either or both engines to be selected to meet the ship’s powering requirements.
The basic specification of Nordic Empress was – 48,563 grt; 210.8 metres Loa; 30.7 metres beam; 1,600 passengers on the basis of 2 passengers per cabin; 2,020 passengers max; 686 crew; service speed 19.5 knots.
The new basic specification of Viking Serenade was – 40,132 grt; 185.0 metres Loa; 27.0 metres beam; 1,512 passengers on the basis of 2 passengers per cabin; 1,863 passengers max; 610 crew; service speed 18 knots.
The Megabrand Policy
It was clear to Fain that to obtain lower operating costs a new management style was essential and in some cases existing managers had to be replaced. He needed to take time however to learn the way the business should function. As a result there was period, where management consultants combed through the operations and Ed Stephan, the founder of the business was gradually sidelined. Some of the shore management tasks were moved to ships’ staff and shore management layers reduced. Unfortunately these departures removed most of the office staff with practical experience of operations on board the ships. This also resulted in a considerable degree of tension and discontent. To counter this Fain’s people set out a new long range strategy for RCCL. The future did not rest with acquisitions that it could not afford, but in the creation of RCCL as a “megabrand”, a product that operated around the world and catered for all ages and all nationalities. This strategy helped to galvanize RCCL in the short term, but to achieve sustained development new ships were urgently required
The basic specification of Monarch of the Seas and Majesty of the Seas was – 73,941 grt; 268.3 metres Loa; 32.2 metres beam; 2,354 passengers on the basis of 2 passengers per cabin; 2,744 passengers max; 780 crew; service speed 21 knots.
The greater economies of scale that were obtained from the two additional Sovereign Class ships boosted the company’s profit from a pitiful $4.3 million in 1992 to $60 million in 1993. By comparison Carnival recorded a profit of $318 million in 1993. The huge gulf between the profitability of the two companies enabled Fain to force change upon RCCL.
Providing passengers with very small cabins was a fundamental part of Stephan’s policy. His concept was to deter the passengers from remaining in their cabins, so that he could sell more drinks and merchandise in the public area of the ship. To avoid the cabins upsetting the passengers, RCCL provided far more quality cabin gifts than their rivals. It was typical of the RCCL wasted years that no study had been made of the economics of this policy. Even worse, no real effort had been made to contain the cost of the gifts. As Stephan was eased aside, Project Vision saw RCCL abandon their traditional approach to cruise ship design. As new ships, with normal size cabins entered the fleet, RCCL had to carefully manage the scaling back of the compensatory free gifts to avoid disappointing their returning passengers.
The 1990s saw the introduction of new Safety of Life at Sea (SOLAS) regulations. These required all new passenger ships to limit lifeboat embarkation heights to 25 metres above the waterline. They also restricted the size of atria, prohibited dead-end passageways and greatly enhanced fire safety regulations. All of these requirements ensured that the next RCCL ships were a complete design departure from previous vessels in the fleet; in fact their closest family relation was the Admiral ship that became Nordic Empress.
The major mechanical design change was the adoption of a diesel-electric power station system using five Wärtsilä 12V46 diesels, each coupled to a GEC Alsthom alternator producing 11,500 kW. The same plant was used to provide electricity for hotel services and to power two Cegelec propulsion motors with a total output of 20,100 kW providing a high 24 knot service speed for long range cruising. The 12V46 diesels are especially designed for electrical generation applications and provide a compact, space saving design with low nitrogen oxide emissions and quite running with low vibration. The engine rooms are located amidships; unusually far forward for a modern cruise ship.
The public rooms follow the open plan used in Nordic Empress and provide a greater cohesion, both within the ship and with the outside world. The two deck height area behind the nested lifeboats is fitted with vast glazed curtain walls for the central lobby and the main restaurant, which also features a “floating” mezzanine. The Viking Crown Lounge is moved down to upper-deck level, ahead of the funnel and above the nine-deck high atrium. This allows sunlight to filter down through the atrium and moving the Viking Lounge from its previous mid-funnel position integrates this feature closer to the ship’s other activities. Legend of the Seas finally abandoned the traditional RCCL arrangement of grouping cabins around athwart ships passageways. The cabins themselves are much larger than those fitted in previous RCCL ships and included balconies for 83 suites and 231 cabins.
The basic specification of Legend of the Seas and Splendour of the Seas was – 69,430 grt; 264.26 metres Loa; 32.0 metres beam; 1,804 passengers on the basis of 2 passengers per cabin; 2,064 passengers max; 735 crew; service speed 24 knots.
Continuing Project Vision
The Finnish ships have a greater passenger capacity, so to provide a larger dining area the lifeboats are mounted one deck higher and the lower deck of the dining room is extended to the sides of the ship. The glass curtain-wall is divided horizontally and the lower section provides sunlight past a mezzanine and down to the dining room deck. The revised lifeboat position also required detail changes to be made to many of the other public rooms. Despite these variations to the original plan, the ships retain Project Vision’s overall feeling of spaciousness and light.
The first of the Finnish built ships was named Grandeur of the Seas and was delivered in December 1996. Her sister was named Enchantment of the Seas and was delivered in July 1997. The contract price was $300 million per vessel.
The basic specification of Grandeur of the Seas and Enchantment of the Seas was – 73,817 grt; 279.1 metres Loa; 32.2 metres beam; 1,958 passengers on the basis of 2 passengers per cabin; 2,440 passengers max; 776 crew; service speed 22 knots.
In October 1994, RCCL signed a contract with Chantiers de l’Atlantique for the final pair of Project Vision ships at $277 million per vessel. The ships were very similar to Grandeur of the Seas with only minor internal changes. The diesel prime-movers changed however, to four Wärtsilä 12V46B diesels, each producing 12,600 kW. Rhapsody of the Seas was delivered in April 1997 and Vision of the Seas followed in 1998.
The basic specification of Rhapsody of the Seas and Vision of the Seas was – 78,491 grt; 279.0 metres Loa; 32.2 metres beam; 1,998 passengers on the basis of 2 passengers per cabin; 2,416 passengers max; 783 crew; service speed 22 knots.
Nevertheless Fain felt it should be explored, if only to find an in-house use for the ships that were no longer suitable for the main brand. The obvious place was the under-developed European cruise market and an opportunity arose when RCCL was approached by Costa Crociere, a family controlled Italian cruise line that was quoted on the Milan stock exchange.
The Costa shipping business began in the Mediterranean coastal cargo trades in 1924. After WW2 Costa entered into the Italy-South America emigrant trade and became a significant operator before successfully moving into cruising. Costa had aggressively expanded its cruise fleet in the 1990s and was now in danger of overreaching its capital base. The problem was that as RCCL was itself fighting to reduce its heavy debt structure and taking on Costa would probably result in a damaging downgrading of RCCLs credit rating. After a lengthy and seriously overdone due diligence the RCCL board only consented to make a formal offer to take a 20% stake in Costa. As RCCL expected, this offer was rejected by Costa. What RCCL had not expected was that Costa promptly rebounded and joined the Carnival empire. This acquisition further extended Carnivals lead over its competitors: -
Royal Caribbean History