Following approval by the listing committee last Thursday, Asia's largest cruise operator is planning to move its primary listing from the Luxembourg Stock Exchange to Hong Kong, where it hopes to achieve greater liquidity and underline its growing commitment to the China market.
In doing so, it becomes the third company this year behind Hong Kong Exchanges & Clearing (HKEx) and the Saint Honore Cake Shop to achieve a listing by introduction. Originally, the company had hoped to launch a public offering via Credit Suisse First Boston and HSBC, but saw the plan sunk last month by difficult market conditions.
As well as offering the company a more visible platform, a Hong Kong listing was also intended as a means of raising new equity to pay down debt taken on earlier this year to fund a $1.2 billion acquisition of Norway's NCL Holdings, the world's fourth largest cruise operator.
Funds were to be raised by increasing the companyÆs share capital by a further 32% and issuing 200 million new ordinary shares, or convertible securities. Resorts World Berhad (RWB), its second largest shareholder and also a Genting group company, pledged to take up to $480 million of what was expected to be a roughly $800 million offering.
Since then, the company has conducted a 4-for-1 bonus issue at $0.10 per share, which increased Star Cruises' share capital from 624 million shares to 3.12 billion. The intended 32% equity increase has also now been achieved simultaneous to the HKSE listing, but has been primarily done through related parties rather than the public markets.
Bringing the company's share capital up to the 4.14 billion mark, a further 1.016 billion shares have been issued in a CSFB and HSBC-led offering. As it originally planned, RWB has taken up 609 million shares in the form of a $443 million convertible bond, while a further $55 million has been raised from a 75.8 million share placement to two unnamed strategic investors.
The remainder has been sourced from the Lim family, which controls Genting and has concluded a $240 million debt-for-equity swap representing 331 million shares and taking out an acquisition finance loan for NCL.
Bankers report that the new shares have been priced at HK$5.65, representing a 3.5% discount to Friday's closing price on Clob in Singapore, where the company obtained a secondary listing in April 1998 and has a current shareholder base of 1,600. Having averaged a fairly static $0.70 to $0.75 trading range for the last two months, bankers comment that liquidity in the counter is particularly thin, with an average day's trade seeing turnover of perhaps 50,000 to 70,000 shares.
As a result of the transaction, RWB's shareholding in Star Cruises has risen from 877 million shares to 1.5 billion, equating to a percentage increase from 27.5% to 36%. The Lim family, meanwhile, holds a greater number of shares - 2.2 billion up from 1.83 billion, but sees its overall percentage stake drop from 58.58% to 52%. The free float has similarly been reduced slightly from 12.5% to 11.26%, with a total of 466 million shares now outstanding.
The company is currently said to be trading at about 30 times forecast earnings and analysts take a negative view of the transaction over the short-term. "Over the longer-term this is undoubtedly a positive move for the Genting group," comments one Kuala Lumpur based analyst. "Star Cruises essentially operate floating casinos and the investment by Resorts World should give the latter a new growth engine at a point when the gaming market in Malaysia has become saturated."
"However," he adds, "We view this rather negatively over the short-term, because the market obviously wasn't ready for the cash call and the resulting transaction acts as a substantial cash drain on the family's finances."
Since it was established in 1993, Star Cruises has captured 70% of the cruise market in Asia, transporting about three million passengers per year. However, with the cruise sector estimated to comprise less than 1% of the region's holiday market, it is still operating from a very small base.
Globally, Asia accounts for a mere 6% share of the market, although Star Cruises estimates that the region's growth potential will be quickly realised. Over the next five years, for example, it forecasts that it will maintain an annual growth rate of 21%, more than twice the growth rate of leading US cruise operators over the past five years.
And although historically, cruising represents a very small portion of the international tourist trade, (3% of a $443.8 billion market excluding fares), the company also believes that it has demographics on its side. The key 45 to 64 year old age group is estimated to grow by 21.6 million in the US alone by 2010, representing 27% of the year's total population versus 21% in 1998.
One of its major challenges going forward, however, will be to turn around NCL. Having registered losses from 1991 to 1997, the company turned in net income of only $1.005 million on turnover of 607 million last year and is also said to be heavily geared.
For the nine months ended September 30, Star Cruises recorded an operating income of $105.8 million compared to $73.2 million the previous year. For the third quarter alone, it recorded an operating income of $89.1 million on revenue of $435.9 million, compared to $29.7 million on revenue of $109 million during 1999. This represents respective increases of 200% and 300%.
