Royal Caribbean Just Doubled Down on the Cruise Business

If you blinked, you probably missed the news earlier this month that Royal Caribbean (NYSE:RCL) acquired the remaining 33% of Silversea Cruises, the ultra-luxury cruise line, that it didn't already own. RCL stock has moved sideways since the June 10 announcement. Source: Laszlo Halasi / Shutterstock.com If you're betting on the future success of Royal Caribbean, the move by chief executive officer (CEO), Richard Fain, is a good one. Here's why. The Move Did Not Involve CashRoyal Caribbean paid for the remaining stake by issuing 5.2 million shares of Royal Caribbean stock. That's approximately 2.5% of its outstanding shares. Based on a July 10 closing price of $51.77, the transaction is worth roughly $269 million. InvestorPlace - Stock Market News, Stock Advice & Trading Tips * 10 Cybersecurity Stocks We Need Now More Than Ever How much did Royal Caribbean pay for the 67% it acquired in June 2018? The cruise operator paid $2 billion, including the assumption of $1 billion in debt. It financed the deal with new debt. As part of the transaction, Silversea executive chairman Manfredi Lefebvre was slated to receive 472,000 shares of Royal Caribbean stock by meeting specific performance targets in 2019 and 2020. According to the company's 2019 10-K, Silversea operates eight ships with a total capacity of 2,450 or a little over 300 berths per ship. It has another five on order for delivery over the next four years. "Silversea is a crown jewel, and the acknowledged leader in luxury and expedition cruising- two key markets that are poised for growth," Fain said, announcing its 67% purchase. "Uniting our two companies presents an extraordinary opportunity to expand vacation options for guests and create revenue in strategic growth areas."So, to buy 67% of Silverseas, Royal Caribbean borrowed $1 billion and assumed an additional $1 billion in Silversea debt. Add in the $269 million in stock it's using to buy the remainder, and you get $2.27 billion paid for the entire ultra-luxury cruise line. In hindsight, it would have been better to pay for the initial 67% in stock and not cash, because RCL shares were trading around $115. The $1 billion in equity acquired would have cost Royal Caribbean 8.77 million shares, while retaining $1 billion in cash, which has become invaluable during the novel coronavirus.Assuming an all-stock transaction price of $2.27 billion for 100% of Silversea, it would have required issuing 19.74 million shares in 2018. Today, that same transaction would need issuing 44.96 million shares, or more than double. What Silversea Cruises Does for RCL Stock? One of the best allocators of capital was Henry Singleton, the engineer-CEO of Teledyne during the 1970s and early 1980s. He was known for issuing stock to make acquisitions when the company's share price was high and using debt when interest rates were reasonable and its share price was low. It's easy to second guess why Royal Caribbean didn't issue stock. It's my guess Silversea's investors wanted something tangible for their troubles since its founding in 1994 by Lefebvre's father. It's water under the bridge. Silversea brings to Royal Caribbean is a brand that won't face the same issues regarding crowds and health safety that its massive boats will continue to fret over. This means it shouldn't have any problem filling its ships, whose passengers willingly fork out more than $5,000 for trips to exotic locations around the world. "Ultraluxury and expedition cruises are gaps in our portfolio today," Fain said in 2018. As the wealthy consider where they want to travel post-Covid-19, the fact that each of the Silversea ships has an average of 300 berths, less than one-eighteenth the number on its largest ship -- Symphony of the Seas has 5,500 berths -- will be a significant selling point. Further, the ships will have a much easier time practicing social distancing come September or October when sailings are scheduled to resume. If I had the money and wanted to take a cruise, Silversea would be on my radar. Royal Caribbean's move to bring Silversea Cruises entirely in-house is a bold move. And it's a smart one. The Silversea investors who got Royal Caribbean stock in the deal, ought to hold on to their shares.Long-term, RCL is a winner.Will Ashworth has written about investments full-time since 2008. Publications where he's appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities. More From InvestorPlace * Why Everyone Is Investing in 5G All WRONG * America's 1 Stock Picker Reveals His Next 1,000% Winner * Revolutionary Tech Behind 5G Rollout Is Being Pioneered By This 1 Company * Radical New Battery Could Dismantle Oil Markets The post Royal Caribbean Just Doubled Down on the Cruise Business appeared first on InvestorPlace.