Royal Caribbean Group (NYSE: RCL) shares fell 5% to $224.03 in Wednesday morning trading after the cruise operator confirmed an agreement to acquire a 50% equity stake in Sandals and Beaches Resorts for approximately $3 billion. The market response dragged down rival cruise operators as well, with Carnival (NYSE: CCL) and Norwegian Cruise Line Holdings (NYSE: NCLH) both sliding 3%.
Under the terms of the deal, Royal Caribbean is purchasing its half-stake in the privately held, all-inclusive resort brands at a valuation of approximately 10x forward EBITDA.
To fund the $3 billion purchase, Royal Caribbean secured committed debt financing from Morgan Stanley. The transaction is expected to close early next year and become accretive to earnings following the close.
The broader cruise industry experienced downward pressure alongside Royal Caribbean’s announcement:
- Carnival (NYSE: CCL): Dropped 3% to $21.69.
- Norwegian Cruise Line Holdings (NYSE: NCLH): Slipped 3% to $13.77.
- S&P 500 ETF Trust (SPY): Eased 0.5% to $769.52.
The sector was already experiencing a difficult year prior to the news, with Royal Caribbean down 17% year-to-date (YTD), Carnival down 28% YTD, and Norwegian down 38% YTD. However, Royal Caribbean suffered the largest single-day drop among the group because it is the only operator committing capital to land-based assets.
Wall Street’s reaction reflects contrasting views on Royal Caribbean’s land-based expansion:
The Bull Case: Supporters emphasize that a 10x forward EBITDA multiple for a marquee resort brand with strong pricing power is reasonable, and management expects the venture to add to earnings next year.
The Bear Case: Skeptics point out that using debt to enter land-based resort management introduces a fundamentally different operating model from cruise ships. Because financial accretion remains several quarters away, investors are marking down the stock to account for near-term leverage and execution risk.
