The travel industry is changing and it may not all be good

One of the things I have said consistently over the last twenty-five years of helping people find the very best vacation, is that the cruise industry, as small as it is, has more drama and corporate intrigue than any other industry three time its size. In the last twenty years the number of cruise lines has dropped from over thirty to three dominant lines, and if there is any truth to a rumor that surfaced today, the population is going to get smaller. "Insiders" report that Carnival Corporation, parent to Carnival Cruise Lines, Holland America, Costa, Princess, Cunard and others may be preparing to offer $35.00 a share for Royal Caribbean Cruise Lines, parent of Royal Caribbean International, Celebrity, and Azamara. Carnival Corp. has something over 80 ships with 10 new builds on order, RCCL has over 20 ships with 7 new builds on order including two copies of the world's largest cruise ship, the Oasis and Allure.

From a stock price above $40.00 for Royal Caribbean (RCL) and close to $60.00 for Carnival Corp. (CCL) both have tumbled with RCL at one time close to $5.00 a share and a target price of $1.00 tacked on it by Barclay back in January. Carnival dropped as low as the mid-teens. RCL closed on July 6 at $12.89 with Carnival at $25.44.

For a number of reasons, I don't plan to rush out and buy a lot of RCL even though I think the breakup value (value of the assets if they were sold off individually) is probably close to $26.00 a share based on publicly available information.

Some of those reasons include:
1. Regulatory hurdles - It's true total cruise sales, as a percentage of total vacation sales is quite small. But if CCL were to take over RCL, the new entity would control about 82% of all North American cruise berths and revenue. I don't see the U.S. Department of Justice letting that happen in the U.S., nor various regulatory agencies in Europe letting this happen.
2. The "chemistry" between the top execs at CLL and RCL, Micky Arison and Richard Fain, is the sort of thing that makes legends, with a spirit of competition that seems very real even though there are those that would say it isn't. I don't see CCL taking over RCL without it being hostile, on a level that would make the RJR Nabisco takeover described in "Barbarians at the Gate" a veritable picnic.
3. $35 a share would be about a 34% premium over breakup. CCL has never paid a premium for anything it acquired that I know of and is unlikley to start now.

This merger would be a bad idea if for no other reason than it concentrates too much of an industry in one board room. That said, the seascape will almost certainly change this year because both cruise lines are undervalued and the industry, although prices are on the rise for the first time in a year or so.

Some have suggested Star Cruises, an Asian based line (parent of Norwegian Cruise Line until Apollo Management bought NCL) might be a logical buyer. I don't think that will happen because Star has their own issues, they lack liquidity, and the capital raising power to come up with the roughly $8 billion needed.

So, if there is any chance that RCL could be in play, who might be the player? Apollo Management. This is a money raising machine. Yes they have had problems over the last few months, have nearly twice the money needed to buy RCL at risk with Harrah's and more. But they went back into the REIT (Real Estatte Investment Trust) market in the last couple of days and are raising money just like old times. While still a stretch, Apollo seems more likely to succeed should RCL be put in play than Carnival Corp. Apollo owns three cruise lines, NCL, Oceania, and Regent. They control something over 10% of the industry and would be a formidable competitor to CCL should such a venture succeed.