Royal Caribbean Group’s agreement to acquire a 50% stake in Sandals Resorts for roughly $3 billion sent shockwaves through the travel industry in late September. The initial surprise has worn off. However, Wall Street still has questions.
A History of Unusual Moves
The joint venture is the biggest investment to date by a cruise line in a business that isn’t cruise-related, said Larry Pimentel, a former cruise CEO and a distinguished cruise executive-in-residence at Florida International University’s Chaplin School of Hospitality & Tourism Management.
Pimentel noted that Carnival Corp.’s 2003 purchase of P&O Princess for $5.4 billion exceeded the size of the Royal-Sandals partnership, but that transaction involved two cruise operators. He described a cruise line buying a “fundamentally different asset” as “completely intriguing.”
Bernstein’s analyst note recorded that news of a possible Sandals transaction emerging on Sept. 22 caused Royal Caribbean’s stock to decline by 6%. Pimentel also observed a further dip of over 3% the next day, implying “that Wall Street is much more cautious about this than most.”
Nevertheless, in the week after the disclosure, Royal Caribbean Group’s share price recovered and ended at $265.86 on Sept. 30.
Read Also: Expedition Cruises Expand Accessibility Options for Disabled Travelers
The Analysts Weigh In
He wrote that Bernstein is “not celebrating the deal,” and argued that allocating the capital to share repurchases “would almost certainly have been more accretive at current valuation levels.”
Clarke warned that Sandals’ primary adults-only brand might not align with Royal Caribbean’s family-oriented image. He added that Sandals, with approximately 6,400 rooms in total, contributes merely a 7% increase in capacity “at a far higher cost per berth than a new ship.”
Furthermore, Clarke pointed out that Sandals’ properties are heavily clustered in the Eastern Caribbean—a region where Royal Caribbean already offers a robust product. He described the Caribbean as “the lowest-yielding market for Royal Caribbean in recent years.”
Deutsche Bank analyst Chris Woronka expressed overall approval of the transaction but acknowledged investor confusion. He remarked, “Cruise lines always talk about how they’re a better value than land-based vacations,” and added, “So why would you do something that’s so outside of your core competency?”
Building a Vacation Ecosystem
Expanding into new areas may bring advantages, according to Assia Georgieva, CEO and principal analyst at Infinity Research. She interprets the partnership as a component of Royal Caribbean’s larger strategy to “create an ecosystem” that can “capture the wallet of its customers for different vacation experiences.”
Georgieva also said that Royal Caribbean estimated that people spend only about 20% to 25% of their annual vacation budgets on cruising, with the rest going to land-based trips. “Now Royal can look at their guests and say, ‘OK, we’ll capture them on an ocean itinerary, then possibly we’ll get them on a river ship,'” she said. “Then, if they decide to go to the Caribbean for a land-based vacation, we’ll grab them with Sandals, as well.”
Read Also: Travel Agencies Redesign IC Agreements to Prevent Fraud and Audits
Woronka similarly called the deal, at its core, “a marketing play,” and suggested that some of the market’s knee-jerk reactions might have been overblown. “Wall Street is famous for reacting negatively when there’s something they don’t expect, even if you can argue that it’s a very good thing,” he said. “I think it will turn out to be a really strong, favorable deal.”
Georgieva added that the 50% joint venture may be a way for Royal Caribbean to test the waters before going all in on land vacations. She said the company followed a somewhat similar path in luxury cruising with Silversea, first acquiring roughly 67% of the line in 2018 before taking on full ownership in 2020.
“I think they’re using a 50% joint venture at this point just to see how the business is run,” Georgieva said. “And if they like the business, it’ll become 100%.”
Rivalry and Reaction
Rival cruise giant Carnival Corp. was also asked for comment on the deal during its third-quarter earnings call on Sept. 29. CEO Josh Weinstein declined to speak directly about “somebody else’s deal,” but he said that Carnival was “very proudly a cruise company.”
While the company has real estate assets such as Bahamas private destinations Celebration Key and RelaxAway Half Moon Cay, they are for cruise customers and to enhance the cruise product, Weinstein said. “We are just laser-focused on improving our cruise business,” he said. “We are very proudly a cruise company, and everything we do is to is to enhance the cruise experience for our guests.”
