Ambassadors International AMIE W
September 10, 2007 - 11:41am EST by
thistle933
2007 2008
Price: 22.75 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 260 P/FCF
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 0 TEV/EBIT

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Description

Operational mishaps and heavy spending during 2007 have created uncertainty regarding the recently acquired cruise business at AMIE.  This uncertainty has created an opportunity to buy into an attractive business (good demographics and market position) at 5-7x after-tax FCF assuming management does what it says it will, implying a potential double or more from today’s price. 

 

Downside is limited by the fact that AMIE’s acquisitions have left it in control of 92% of the river cruise capacity in the country.  AMIE can restrict supply to restore pricing discipline to this sector (which was lacking under prior owners), and new entrants are highly unlikely due to high replacement costs (AMIE is trading at a 50% discount to replacement cost, and profits have to improve to what AMIE is projecting in order to justify a return on current replacement costs).

 

In a meltdown, AMIE’s balance sheet provides further protection.  $73m of its $160m in debt is secured by two of its ships.  AMIE can return 45% of its debt to the government at the cost of losing 30% of its berth capacity.  And the debt left behind would be a long dated convertible with a 3.75% fixed yield and a $56 strike price.

 

In addition, an investment in AMIE means partnering with a shareholder-friendly family with a long track record of outstanding capital allocation.  It is likely over time that the Ueberroths will create value through their capital allocation skills and contacts throughout the travel industry.

 

THE UEBERROTH FAMILY

 

AMIE is controlled by the Ueberroth family, which owns 23% of the shares outstanding.  Peter Ueberroth (70) is a director and former chairman, and his son Joe (37) is chairman and CEO.  Peter’s career has been filled with achievements, including building and selling First Travel, fixing and selling Doubletree to Hilton (his basis in the sale to Blackstone is maybe 15 cents/share), running the LA Olympics, as a commissioner turning around Major League Baseball, and making a bundle investing in Pebble Beach. 

 

By all accounts, Peter is a highly honorable man who is relentlessly focused on getting value for money.  See this story for some background:  www.golfbusiness.com/pageview.asp?doc=1555

 

The Ueberroth family’s primary business interests are Ambassadors International (AMIE), Ambassadors Group (EPAX), Pebble Beach, and the Contrarian Group, which is a privately held investment firm.  EPAX runs a student exchange program in partnership with the US Government, and has had a very strong run, as the stock chart will show.

 

EPAX was spun-off from AMIE in 2002, leaving behind $100m in cash and a corporate travel business.  Joe Ueberroth became CEO, and has spent the last four years looking for cheap travel assets to buy. 

 

Reviewing the family’s business dealings gives a sense of conservatism, shareholder-friendly actions, and extraordinary access to people in the travel industry.  Over any long period of time, the Ueberroth family seems likely to allocate capital intelligently in the travel business, and owning AMIE is a way to partner with them.

 

AMIE’S CRUISE SHIPS

 

AMIE has some smaller businesses – a marina construction company, a small reinsurer that is being wound down, and a small corporate travel and events company – but the main event is the ten cruise ships acquired during the last 18 months.

 

These ships are organized into the Majestic America Line, which operates paddle wheelers on America’s Northwestern and Southern rivers, and Windstar Cruises, which operates sail-powered ships in the Caribbean and Mediterranean. 

 

Here are the capacities, build costs per berth, and AMIE’s purchase cost per berth for each of the ten ships (costs are per berth, and are in thousands of 2007 dollars – I have inflated the build costs at 3% annually from build date, which seems conservative given what has happened to the price of steel):

 

 

 

 

Build

Purchase

Area of

Ship

Berths

Built

Cost

Cost

Operation

Majestic America Line

 

 

 

 

 

Queen of the West

142

1993

201

142

Northwest rivers

Columbia Queen

150

2000

397

      58

Northwest rivers

Empress of the North

223

2003

293

142

Alaska

Contessa

48

1986

 

52

Alaska

American Queen

436

1995

213

49

Southern rivers

Mississippi Queen

412

1976

 

49

Southern rivers

Delta Queen

176

1926

 

49

Southern rivers

 

 

 

 

 

 

Windstar Line

 

 

 

 

 

Wind Surf

312

1989

 

164

Caribbean/Med

Wind Star

148

1986

 

164

Caribbean/Med

Wind Spirit

148

1987

 

164

Caribbean/Med

Total

2,195

 

 

 

 

 

Frommers has descriptions and reviews of both lines that are great background – see www.frommers.com/trip_ideas/cruise/category.cfm?catcd=ADV.  Both lines are intimate experiences (150-450 berths, rather than thousands) and have highly loyal customer bases.  On my trip on the American Queen this summer, they had a party for repeat passengers.  About 120 passengers of the 340 on board showed up.  Two dozen had been on 5 or more cruises, a dozen on 10 or more, and one man had been on 40.  All talked about coming back to see friends from prior cruises, and to explore additional rivers.  The historical content and laid back atmosphere seem to be big draws.

 

I haven’t been on the Windstar ships, but they also get strong reviews for their relaxed atmosphere, and ability (due to their small size) to get into hard-to-access ports in interesting places.

 

The paddle wheelers are also unique in the cruise business because they are US-flagged.  Under US law, cruise ships cannot travel directly between US ports unless they are US-flagged and US-crewed.  This makes it impossible for foreign cruise lines to compete on the rivers that make up most of Majestic America’s itineraries, and is why Majestic America has no competitors (other than a single 198 berth ship run by River Barge Excursions).

 

Being US-flagged also allows financing of ships with MARAD debt.  We can thank Trent Lott and other southern senators for this ridiculous subsidy by the US government, which provides a federal guarantee of long dated fixed rate borrowings to finance ships built in US shipyards.  As a result, AMIE has $73m of fixed-rate, long term debt at an average interest rate of 5.5%, and this debt is secured by two of the paddle wheelers (American Queen and Empress of the North) with no recourse to AMIE.  If things ever got really bad, AMIE could just hand these two boats back to the US government along with the $73m of debt.

 

HOW DID AMIE BUY THE SHIPS?

 

The prior owner of the Northwestern and Alaskan ships was the Oregon Rail Corporation.  Their initial success with Queen of the West (which was operated by the father of David Giersdorf, who now runs AMIE’s cruise business) led them to order a new ship, Empress of the North.  Unfortunately, construction costs came in above budget, and this clobbered their bottom line.

 

The prior owners of the Southern ships were the Delaware North Company.  They purchased the boats from Sam Zell’s bankrupted American Classic Voyages in October 2001.  Under ACV, the paddle wheelers had made ~$30K of EBITDA per berth from 1995-2000.  Sam used the paddle wheeler cash flow (and MARAD debt) to finance the construction of two huge (1000 berth) cruise ships in Louisiana in order to cruise in Hawaii.  Trent’s shipyards are good at cost-plus Navy contracts but not so good at for-profit business.  Their overruns levered ACV, and it filed for bankruptcy a month after 9/11.

 

The Delaware North people bought the boats thinking that they could persuade Congress to allow them to become casinos.  When this didn’t work, they resorted to discounting in order to fill the boats.  Average per diem rates fell from $290 under Zell to $180-200 under Delaware North.  Plus, many customers were angry that Zell’s bankruptcy had lost them their deposits.

 

My conversations with people at Oregon Rail and Delaware North suggest that the idea of combining the two operations was obvious due to the ability to cross-market and reduce central overheads, plus pricing power from becoming the only operator of river cruises in the country.  But neither company wanted to be a buyer.

 

So AMIE bought both lines in early 2006 (plus the Columbia Queen, which ACV had sold to a third party) for the assumption of $73m MARAD debt outstanding on the two ships plus $35m of cash and AMIE shares.

 

This $108m price was $70K per berth.  To get a sense of the Ueberroths as capital allocaters, note that after four years of looking for something to buy, they managed the following:

  • $73m of debt could be returned to the government along with two ships, leaving AMIE in control of 880 berths at a cost of $40K per berth.
  • The last ship built (Empress of the North) cost $260K per berth in 2003, and that was before the jump in the price of steel.
  • Profit for the two lines during 1995-2000 was ~$30K of EBITDA per berth.

 

And then in April 2007, AMIE bought the Windstar cruise line from Carnival.  Windstar’s profits had been reduced after 9/11 from $40K/berth to $18K/berth in 2006.  Windstar’s demographics are very different from Carnival’s, and the boats were in need of $10-15m of capital upgrades.  AMIE bought them for $100m, or $164K/berth, and financed the deal with $60m of debt and $40m of cash.

 

The Windstar ships are internationally flagged, which means they cannot easily serve US ports.  But unlike the paddle wheelers, which pay full US tax rates, the Windstar ships pay de minimis taxes – say, 5%.

 

If you assume that Windstar can be returned to $30K/berth of profit (and it is on track to do $29K/berth during 2007), then the cash-on-cash return on the equity and additional investment that the Ueberroths put into the deal will be >25%.  This is further evidence of great capital allocation and strong contacts within the travel business.

 

For sake of comparison, recently announced new builds by the Oceania line (purchased this year by Apollo for $414K/berth) are $398K per berth.  Given the historic and unique nature of the Majestic and Windstar ships, and the ability to keep these ships going over time (the American Queen’s engines date from 1932), it looks as though AMIE got a good deal.

 

SO WHY IS THE STOCK OFF SO MUCH?

 

The cruise business is all about filling ships to 85-90% occupancy at the highest per diems possible.  Below 85%, it does not pay to have the ship sail.  It is no accident that the mass market for cruising is dominated by Carnival and Royal Caribbean – their ability to spread marketing dollars and agent commissions over a large base enables them to keep the boats full and avoid price wars.

 

AMIE began 2007 believing that its pricing was at least $100/day below the competition, and made it a key objective is to close this gap.  This was to be accomplished by refitting ships aggressively during 2007, and by shifting more marketing spend to direct mail and internet.  If a $50/day price hike could be implemented and brought to the bottom line, EBITDA per berth would rise by $14K (this assumes 300 sailing days per year, and 90% occupancy).

 

Also, in 2006 and 2007, Majestic America began the year with 25-30% of its bookings sold.  This resulted in 83% occupancy during 2006, which is not good enough.  So Giersdorf has targeted 60% booking for the beginning of 2008.  By front-loading spending, he is looking to break the cycle of under-booking followed by discounting that plagued Oregon Rail and Delaware North.  This front-loading and more emphasis on direct contact is the strategy employed by his father successfully prior to 2000, and he also has the advantage of cross-marketing between the two companies’ databases.

 

So AMIE is spending big time during 2007:  $15m on improving the boats’ physical condition, and $20m on marketing (double last year, and forecasted to drop to $12m next year).  Almost all of this is being expensed, and it is hurting current earnings.  But it has rejuvenated the boats’ physical condition – the engineers on the American Queen told me that no major maintenance spending is necessary on any of the paddle wheelers for at least 5 years.  And on the Q2 call, Joe Ueberroth forecasted just $1m of capital spending on the boats during 2008, compared with $13m of depreciation.

 

The biggest question is whether the big marketing spend will be effective.  In Q2, occupancy rates on Windstar were 93%, and per diems were an excellent $390/day.  So far, 30% of 2008 has been sold, and at prices 10% above 2007.  Windstar looks very well-positioned for 2008.

 

In the Northwest, occupancy rates are 96% on the Columbia River with decent per diems.  But Empress of the North hit a rock in May, and had to have all of her passengers evacuated.  While no one was hurt, AMIE lost $7m in missed sailings and other expenses.

 

Finally, on the Mississippi, management admitted on the Q2 call that they had underestimated the difficulty of winning back customers after the Zell bankruptcy and Delaware North discounting.  Occupancy on the American Queen is in the mid-70s, and per diems are not strong.  Getting American Queen from loss-making to her historical $14m of EBITDA (last achieved in 2000) requires 90 more passengers a week at decent prices.

           

The investment thesis boils down to some basic questions.  How likely is AMIE management to be able to return the boats to their 2000 level of profitability?  How long will it take them?  And across how many berths?  Currently the market is assuming that AMIE management is likely to fail.

 

One final blow to the stock is the announcement this summer that the Delta Queen – the company’s oldest and most authentic paddle wheeler – will have to be retired at the end of 2008.  This ship has an all-wood superstructure, and has operated despite violating Coast Guard regulations for decades due to periodic Congressional exemptions.  Renewal of this exemption at the end of 2008 appears unlikely.  While upsetting to some of her fans, this is an economic non-event.  The boat is just 8% of AMIE’s berth capacity, and over the years has made just $0.5-2m of profit, compared to up to $14m for a larger ship like American Queen, and management guidance for 2008 of cruise EBITDA of $45-50m.  I suspect that AMIE management is secretly relieved, as a fire killing dozens of passengers would have been terrible, and phasing the ship out can now be blamed on Congress.

 

VALUATION

 

Free cash flow during 2006 was negative $3.6m, and for the first two quarters of 2007 has been negative $1.1m.  Note that 2006’s results were impacted by discounted bookings made by the prior owners, and 2007’s results are impacted by the spending and Empress grounding discussed above – roughly $30m pretax in total ($15m refurbishment spending on the boats, $8m increased marketing, and $7m lost revenues from the grounding).

 

Management has repeatedly stated that the paddle wheelers made historical EBITDA of $30K+ per berth, and asking around the cruise industry confirms these numbers.

 

We can assume three cases for profitability during the 2008-2010 years.  In the low case, AMIE gets EBITDA to half of 2000’s levels of $30K/berth.  In the middle case, AMIE gets to $25K/berth, which is what management has given as 2008 guidance.  In the high case, AMIE uses pricing power and cross-marketing to get to $35K/berth, slightly in excess of 2000’s profitability.

 

I assume $4m of maintenance cap ex, compared with guidance of $2m for 2008 (Joe’s $1m for the cruise business, and an estimated $1m for the marina business).  I am also backing out of the $22.75 share price the the $3/share of cash (net of customer deposits, which show up as restricted cash) on the balance sheet.  And the Windstar operations are taxed at 5%, whereas everything else is taxed at 38%.  Note that I am also assuming that Mississippi Queen is back in service, and Delta Queen and Contessa have been sold (for no proceeds).

 

EBITDA / Birth ($K)

 

15

25

35

Berths

 

1,971

1,971

1,971

Cruise EBITDA

 

  30

  49

  69

less:  Maint Cap Ex

 

    (4)

    (4)

    (4)

less:  Interest Expense on Ship Debt

 

(4)

(4)

(4)

less:  Interest Expense on Conv Debt

     

(4)

(4)

(4)

Cruise Pretax Income

 

     18

37

57

plus:  Marina Pretax Income

 

     7

     7

     7

less:  Taxes

 

(6)

(12)

(17)

Free Cash Flow

 

19

32

47

shares out

 

11.5

11.5

11.5

Total FCF

 

$1.65

$2.75

$4.05

   % FCF yield on $22.75/share

 

8%

14%

21%

 

Note that Carnival and Royal Caribbean are trading at a 15x p/e, and at maintenance FCF yields (backing out spending on new ships) of 7% and 9%, respectively.  The middle and high cases above would translate to $35-50/share at an 8% FCF yield.

 

And the demographic picture for AMIE is brighter than for the big players.  AMIE customers tend to be older, more affluent people.  These are groups that are growing in size.  It is likely that AMIE’s customer base is growing at least 5% annually – the cruise industry talks about growth in the high single digits for all demographics.

 

WHAT’S THE DOWNSIDE?

 

Obviously this can be a cyclical business, as the impact of 9/11 shows. 

 

But AMIE has several levers that it can use to minimize downside:

  1. Restrict supply.  Now that AMIE owns all of the paddle wheelers, it can simply remove capacity from the rivers.  That is why Mississippi Queen is sitting out all the rest of 2007 and 2008 – to restore pricing power on the Mississippi.
  2. Liquid balance sheet.  AMIE’s debt is fixed rate and low cost.  Even if you assume no profitability from the cruise business, a cash flow projection will take you through 2011 before interest and principal payments use up AMIE’s unrestricted cash.
  3. Cash flow generation.  Even with all of the spending and issues in 2007, AMIE is essentially cash flow breakeven.  The company spent $1.5m on share repurchase during Q2, and may spend more.
  4. MARAD debt.  In a crunch, AMIE can cut its debt by 45% by sending the MARAD debt back to the government at the cost of 30% of its berths.  The convertible debt left behind has a 3.75% coupon.

 

Finally, at $22.75/share, AMIE is trading at half of replacement cost, which is at least $300K/berth given the cost of recent builds and the subsequent rise in the price of steel.  Note that US law requires that ships cruising the US rivers be built in US shipyards, so you can’t shop around for the Korea or China price.

 

Share Price

$22.75

$45.00

Shares Out

11.5

11.5

Equity Value

260

518

Plus:  Debt at 6/30/07

169

169

Less:  Unrestricted Cash at 6/30/07

(34)

(34)

Enterprise Value

395

653

less:  Value of Marina Business

(60)

(60)

Cruise Enterprise Value

335

593

Berths

1,971

1,971

Cruise Enterprise Value / Berth ($K)

$170

$300

 

Another way to think about downside is that the primary problem in this high fixed cost business is attracting enough demand at good prices to get above 85% occupancy.  It looks as though AMIE’s occupancies are good everywhere but the Mississippi.  2008 will be the farewell year for the Delta Queen, and this is likely to improve demand.  But if demand in 2009 is not strong, AMIE can just leave Mississippi Queen in dry dock, retire Delta Queen, and try to transfer Delta Queen’s business to American Queen.  Moving American Queen’s occupancy from mid 70s to mid 90s will require an additional 87 passengers each cruise, which is just 50% of Delta Queen’s capacity.

 

If AMIE did this, total berth capacity would fall to 1,607.  If restricting supply got EBITDA to $30K/berth, total cruise EBITDA would be $48m, which is the same as the mid case FCF yield of 14% above.

 

And it is highly unlikely that restricting supply in this manner would result in new entrants.  Construction costs of $300+K/berth make new entrants unlikely unless they could be assured of at least $30K/berth EBITDA.

 

POSSIBLE UPSIDE

 

The Ueberroths may continue to deploy cash on an intelligent basis.  If you do a cash flow model out assuming $30K of EBITDA per berth and cash redeployed at a 15% return, you get $50-60/share in 4-5 years.

 

THE BIG QUESTION

 

Will the Ueberroths and David Giersdorf manage to return the cruise operations to historical levels of profitability?  2007 has been a tough year, but a lot of the pain has resulted from spending to maximize results going forward.  And management has several levers to pull to influence the outcome that were unavailable to prior owners (cross-marketing, holding back supply, relationships within the travel business).

 

 

Catalyst

Evidence of stronger 2008 bookings
Solid performance in 2008
Share repurchases
    sort by    

    Description

    Operational mishaps and heavy spending during 2007 have created uncertainty regarding the recently acquired cruise business at AMIE.  This uncertainty has created an opportunity to buy into an attractive business (good demographics and market position) at 5-7x after-tax FCF assuming management does what it says it will, implying a potential double or more from today’s price. 

     

    Downside is limited by the fact that AMIE’s acquisitions have left it in control of 92% of the river cruise capacity in the country.  AMIE can restrict supply to restore pricing discipline to this sector (which was lacking under prior owners), and new entrants are highly unlikely due to high replacement costs (AMIE is trading at a 50% discount to replacement cost, and profits have to improve to what AMIE is projecting in order to justify a return on current replacement costs).

     

    In a meltdown, AMIE’s balance sheet provides further protection.  $73m of its $160m in debt is secured by two of its ships.  AMIE can return 45% of its debt to the government at the cost of losing 30% of its berth capacity.  And the debt left behind would be a long dated convertible with a 3.75% fixed yield and a $56 strike price.

     

    In addition, an investment in AMIE means partnering with a shareholder-friendly family with a long track record of outstanding capital allocation.  It is likely over time that the Ueberroths will create value through their capital allocation skills and contacts throughout the travel industry.

     

    THE UEBERROTH FAMILY

     

    AMIE is controlled by the Ueberroth family, which owns 23% of the shares outstanding.  Peter Ueberroth (70) is a director and former chairman, and his son Joe (37) is chairman and CEO.  Peter’s career has been filled with achievements, including building and selling First Travel, fixing and selling Doubletree to Hilton (his basis in the sale to Blackstone is maybe 15 cents/share), running the LA Olympics, as a commissioner turning around Major League Baseball, and making a bundle investing in Pebble Beach. 

     

    By all accounts, Peter is a highly honorable man who is relentlessly focused on getting value for money.  See this story for some background:  www.golfbusiness.com/pageview.asp?doc=1555

     

    The Ueberroth family’s primary business interests are Ambassadors International (AMIE), Ambassadors Group (EPAX), Pebble Beach, and the Contrarian Group, which is a privately held investment firm.  EPAX runs a student exchange program in partnership with the US Government, and has had a very strong run, as the stock chart will show.

     

    EPAX was spun-off from AMIE in 2002, leaving behind $100m in cash and a corporate travel business.  Joe Ueberroth became CEO, and has spent the last four years looking for cheap travel assets to buy. 

     

    Reviewing the family’s business dealings gives a sense of conservatism, shareholder-friendly actions, and extraordinary access to people in the travel industry.  Over any long period of time, the Ueberroth family seems likely to allocate capital intelligently in the travel business, and owning AMIE is a way to partner with them.

     

    AMIE’S CRUISE SHIPS

     

    AMIE has some smaller businesses – a marina construction company, a small reinsurer that is being wound down, and a small corporate travel and events company – but the main event is the ten cruise ships acquired during the last 18 months.

     

    These ships are organized into the Majestic America Line, which operates paddle wheelers on America’s Northwestern and Southern rivers, and Windstar Cruises, which operates sail-powered ships in the Caribbean and Mediterranean. 

     

    Here are the capacities, build costs per berth, and AMIE’s purchase cost per berth for each of the ten ships (costs are per berth, and are in thousands of 2007 dollars – I have inflated the build costs at 3% annually from build date, which seems conservative given what has happened to the price of steel):

     

     

     

     

    Build

    Purchase

    Area of

    Ship

    Berths

    Built

    Cost

    Cost

    Operation

    Majestic America Line

     

     

     

     

     

    Queen of the West

    142

    1993

    201

    142

    Northwest rivers

    Columbia Queen

    150

    2000

    397

          58

    Northwest rivers

    Empress of the North

    223

    2003

    293

    142

    Alaska

    Contessa

    48

    1986

     

    52

    Alaska

    American Queen

    436

    1995

    213

    49

    Southern rivers

    Mississippi Queen

    412

    1976

     

    49

    Southern rivers

    Delta Queen

    176

    1926

     

    49

    Southern rivers

     

     

     

     

     

     

    Windstar Line

     

     

     

     

     

    Wind Surf

    312

    1989

     

    164

    Caribbean/Med

    Wind Star

    148

    1986

     

    164

    Caribbean/Med

    Wind Spirit

    148

    1987

     

    164

    Caribbean/Med

    Total

    2,195

     

     

     

     

     

    Frommers has descriptions and reviews of both lines that are great background – see www.frommers.com/trip_ideas/cruise/category.cfm?catcd=ADV.  Both lines are intimate experiences (150-450 berths, rather than thousands) and have highly loyal customer bases.  On my trip on the American Queen this summer, they had a party for repeat passengers.  About 120 passengers of the 340 on board showed up.  Two dozen had been on 5 or more cruises, a dozen on 10 or more, and one man had been on 40.  All talked about coming back to see friends from prior cruises, and to explore additional rivers.  The historical content and laid back atmosphere seem to be big draws.

     

    I haven’t been on the Windstar ships, but they also get strong reviews for their relaxed atmosphere, and ability (due to their small size) to get into hard-to-access ports in interesting places.

     

    The paddle wheelers are also unique in the cruise business because they are US-flagged.  Under US law, cruise ships cannot travel directly between US ports unless they are US-flagged and US-crewed.  This makes it impossible for foreign cruise lines to compete on the rivers that make up most of Majestic America’s itineraries, and is why Majestic America has no competitors (other than a single 198 berth ship run by River Barge Excursions).

     

    Being US-flagged also allows financing of ships with MARAD debt.  We can thank Trent Lott and other southern senators for this ridiculous subsidy by the US government, which provides a federal guarantee of long dated fixed rate borrowings to finance ships built in US shipyards.  As a result, AMIE has $73m of fixed-rate, long term debt at an average interest rate of 5.5%, and this debt is secured by two of the paddle wheelers (American Queen and Empress of the North) with no recourse to AMIE.  If things ever got really bad, AMIE could just hand these two boats back to the US government along with the $73m of debt.

     

    HOW DID AMIE BUY THE SHIPS?

     

    The prior owner of the Northwestern and Alaskan ships was the Oregon Rail Corporation.  Their initial success with Queen of the West (which was operated by the father of David Giersdorf, who now runs AMIE’s cruise business) led them to order a new ship, Empress of the North.  Unfortunately, construction costs came in above budget, and this clobbered their bottom line.

     

    The prior owners of the Southern ships were the Delaware North Company.  They purchased the boats from Sam Zell’s bankrupted American Classic Voyages in October 2001.  Under ACV, the paddle wheelers had made ~$30K of EBITDA per berth from 1995-2000.  Sam used the paddle wheeler cash flow (and MARAD debt) to finance the construction of two huge (1000 berth) cruise ships in Louisiana in order to cruise in Hawaii.  Trent’s shipyards are good at cost-plus Navy contracts but not so good at for-profit business.  Their overruns levered ACV, and it filed for bankruptcy a month after 9/11.

     

    The Delaware North people bought the boats thinking that they could persuade Congress to allow them to become casinos.  When this didn’t work, they resorted to discounting in order to fill the boats.  Average per diem rates fell from $290 under Zell to $180-200 under Delaware North.  Plus, many customers were angry that Zell’s bankruptcy had lost them their deposits.

     

    My conversations with people at Oregon Rail and Delaware North suggest that the idea of combining the two operations was obvious due to the ability to cross-market and reduce central overheads, plus pricing power from becoming the only operator of river cruises in the country.  But neither company wanted to be a buyer.

     

    So AMIE bought both lines in early 2006 (plus the Columbia Queen, which ACV had sold to a third party) for the assumption of $73m MARAD debt outstanding on the two ships plus $35m of cash and AMIE shares.

     

    This $108m price was $70K per berth.  To get a sense of the Ueberroths as capital allocaters, note that after four years of looking for something to buy, they managed the following:

     

    And then in April 2007, AMIE bought the Windstar cruise line from Carnival.  Windstar’s profits had been reduced after 9/11 from $40K/berth to $18K/berth in 2006.  Windstar’s demographics are very different from Carnival’s, and the boats were in need of $10-15m of capital upgrades.  AMIE bought them for $100m, or $164K/berth, and financed the deal with $60m of debt and $40m of cash.

     

    The Windstar ships are internationally flagged, which means they cannot easily serve US ports.  But unlike the paddle wheelers, which pay full US tax rates, the Windstar ships pay de minimis taxes – say, 5%.

     

    If you assume that Windstar can be returned to $30K/berth of profit (and it is on track to do $29K/berth during 2007), then the cash-on-cash return on the equity and additional investment that the Ueberroths put into the deal will be >25%.  This is further evidence of great capital allocation and strong contacts within the travel business.

     

    For sake of comparison, recently announced new builds by the Oceania line (purchased this year by Apollo for $414K/berth) are $398K per berth.  Given the historic and unique nature of the Majestic and Windstar ships, and the ability to keep these ships going over time (the American Queen’s engines date from 1932), it looks as though AMIE got a good deal.

     

    SO WHY IS THE STOCK OFF SO MUCH?

     

    The cruise business is all about filling ships to 85-90% occupancy at the highest per diems possible.  Below 85%, it does not pay to have the ship sail.  It is no accident that the mass market for cruising is dominated by Carnival and Royal Caribbean – their ability to spread marketing dollars and agent commissions over a large base enables them to keep the boats full and avoid price wars.

     

    AMIE began 2007 believing that its pricing was at least $100/day below the competition, and made it a key objective is to close this gap.  This was to be accomplished by refitting ships aggressively during 2007, and by shifting more marketing spend to direct mail and internet.  If a $50/day price hike could be implemented and brought to the bottom line, EBITDA per berth would rise by $14K (this assumes 300 sailing days per year, and 90% occupancy).

     

    Also, in 2006 and 2007, Majestic America began the year with 25-30% of its bookings sold.  This resulted in 83% occupancy during 2006, which is not good enough.  So Giersdorf has targeted 60% booking for the beginning of 2008.  By front-loading spending, he is looking to break the cycle of under-booking followed by discounting that plagued Oregon Rail and Delaware North.  This front-loading and more emphasis on direct contact is the strategy employed by his father successfully prior to 2000, and he also has the advantage of cross-marketing between the two companies’ databases.

     

    So AMIE is spending big time during 2007:  $15m on improving the boats’ physical condition, and $20m on marketing (double last year, and forecasted to drop to $12m next year).  Almost all of this is being expensed, and it is hurting current earnings.  But it has rejuvenated the boats’ physical condition – the engineers on the American Queen told me that no major maintenance spending is necessary on any of the paddle wheelers for at least 5 years.  And on the Q2 call, Joe Ueberroth forecasted just $1m of capital spending on the boats during 2008, compared with $13m of depreciation.

     

    The biggest question is whether the big marketing spend will be effective.  In Q2, occupancy rates on Windstar were 93%, and per diems were an excellent $390/day.  So far, 30% of 2008 has been sold, and at prices 10% above 2007.  Windstar looks very well-positioned for 2008.

     

    In the Northwest, occupancy rates are 96% on the Columbia River with decent per diems.  But Empress of the North hit a rock in May, and had to have all of her passengers evacuated.  While no one was hurt, AMIE lost $7m in missed sailings and other expenses.

     

    Finally, on the Mississippi, management admitted on the Q2 call that they had underestimated the difficulty of winning back customers after the Zell bankruptcy and Delaware North discounting.  Occupancy on the American Queen is in the mid-70s, and per diems are not strong.  Getting American Queen from loss-making to her historical $14m of EBITDA (last achieved in 2000) requires 90 more passengers a week at decent prices.

               

    The investment thesis boils down to some basic questions.  How likely is AMIE management to be able to return the boats to their 2000 level of profitability?  How long will it take them?  And across how many berths?  Currently the market is assuming that AMIE management is likely to fail.

     

    One final blow to the stock is the announcement this summer that the Delta Queen – the company’s oldest and most authentic paddle wheeler – will have to be retired at the end of 2008.  This ship has an all-wood superstructure, and has operated despite violating Coast Guard regulations for decades due to periodic Congressional exemptions.  Renewal of this exemption at the end of 2008 appears unlikely.  While upsetting to some of her fans, this is an economic non-event.  The boat is just 8% of AMIE’s berth capacity, and over the years has made just $0.5-2m of profit, compared to up to $14m for a larger ship like American Queen, and management guidance for 2008 of cruise EBITDA of $45-50m.  I suspect that AMIE management is secretly relieved, as a fire killing dozens of passengers would have been terrible, and phasing the ship out can now be blamed on Congress.

     

    VALUATION

     

    Free cash flow during 2006 was negative $3.6m, and for the first two quarters of 2007 has been negative $1.1m.  Note that 2006’s results were impacted by discounted bookings made by the prior owners, and 2007’s results are impacted by the spending and Empress grounding discussed above – roughly $30m pretax in total ($15m refurbishment spending on the boats, $8m increased marketing, and $7m lost revenues from the grounding).

     

    Management has repeatedly stated that the paddle wheelers made historical EBITDA of $30K+ per berth, and asking around the cruise industry confirms these numbers.

     

    We can assume three cases for profitability during the 2008-2010 years.  In the low case, AMIE gets EBITDA to half of 2000’s levels of $30K/berth.  In the middle case, AMIE gets to $25K/berth, which is what management has given as 2008 guidance.  In the high case, AMIE uses pricing power and cross-marketing to get to $35K/berth, slightly in excess of 2000’s profitability.

     

    I assume $4m of maintenance cap ex, compared with guidance of $2m for 2008 (Joe’s $1m for the cruise business, and an estimated $1m for the marina business).  I am also backing out of the $22.75 share price the the $3/share of cash (net of customer deposits, which show up as restricted cash) on the balance sheet.  And the Windstar operations are taxed at 5%, whereas everything else is taxed at 38%.  Note that I am also assuming that Mississippi Queen is back in service, and Delta Queen and Contessa have been sold (for no proceeds).

     

    EBITDA / Birth ($K)

     

    15

    25

    35

    Berths

     

    1,971

    1,971

    1,971

    Cruise EBITDA

     

      30

      49

      69

    less:  Maint Cap Ex

     

        (4)

        (4)

        (4)

    less:  Interest Expense on Ship Debt

     

    (4)

    (4)

    (4)

    less:  Interest Expense on Conv Debt

         

    (4)

    (4)

    (4)

    Cruise Pretax Income

     

         18

    37

    57

    plus:  Marina Pretax Income

     

         7

         7

         7

    less:  Taxes

     

    (6)

    (12)

    (17)

    Free Cash Flow

     

    19

    32

    47

    shares out

     

    11.5

    11.5

    11.5

    Total FCF

     

    $1.65

    $2.75

    $4.05

       % FCF yield on $22.75/share

     

    8%

    14%

    21%

     

    Note that Carnival and Royal Caribbean are trading at a 15x p/e, and at maintenance FCF yields (backing out spending on new ships) of 7% and 9%, respectively.  The middle and high cases above would translate to $35-50/share at an 8% FCF yield.

     

    And the demographic picture for AMIE is brighter than for the big players.  AMIE customers tend to be older, more affluent people.  These are groups that are growing in size.  It is likely that AMIE’s customer base is growing at least 5% annually – the cruise industry talks about growth in the high single digits for all demographics.

     

    WHAT’S THE DOWNSIDE?

     

    Obviously this can be a cyclical business, as the impact of 9/11 shows. 

     

    But AMIE has several levers that it can use to minimize downside:

    1. Restrict supply.  Now that AMIE owns all of the paddle wheelers, it can simply remove capacity from the rivers.  That is why Mississippi Queen is sitting out all the rest of 2007 and 2008 – to restore pricing power on the Mississippi.
    2. Liquid balance sheet.  AMIE’s debt is fixed rate and low cost.  Even if you assume no profitability from the cruise business, a cash flow projection will take you through 2011 before interest and principal payments use up AMIE’s unrestricted cash.
    3. Cash flow generation.  Even with all of the spending and issues in 2007, AMIE is essentially cash flow breakeven.  The company spent $1.5m on share repurchase during Q2, and may spend more.
    4. MARAD debt.  In a crunch, AMIE can cut its debt by 45% by sending the MARAD debt back to the government at the cost of 30% of its berths.  The convertible debt left behind has a 3.75% coupon.

     

    Finally, at $22.75/share, AMIE is trading at half of replacement cost, which is at least $300K/berth given the cost of recent builds and the subsequent rise in the price of steel.  Note that US law requires that ships cruising the US rivers be built in US shipyards, so you can’t shop around for the Korea or China price.

     

    Share Price

    $22.75

    $45.00

    Shares Out

    11.5

    11.5

    Equity Value

    260

    518

    Plus:  Debt at 6/30/07

    169

    169

    Less:  Unrestricted Cash at 6/30/07

    (34)

    (34)

    Enterprise Value

    395

    653

    less:  Value of Marina Business

    (60)

    (60)

    Cruise Enterprise Value

    335

    593

    Berths

    1,971

    1,971

    Cruise Enterprise Value / Berth ($K)

    $170

    $300

     

    Another way to think about downside is that the primary problem in this high fixed cost business is attracting enough demand at good prices to get above 85% occupancy.  It looks as though AMIE’s occupancies are good everywhere but the Mississippi.  2008 will be the farewell year for the Delta Queen, and this is likely to improve demand.  But if demand in 2009 is not strong, AMIE can just leave Mississippi Queen in dry dock, retire Delta Queen, and try to transfer Delta Queen’s business to American Queen.  Moving American Queen’s occupancy from mid 70s to mid 90s will require an additional 87 passengers each cruise, which is just 50% of Delta Queen’s capacity.

     

    If AMIE did this, total berth capacity would fall to 1,607.  If restricting supply got EBITDA to $30K/berth, total cruise EBITDA would be $48m, which is the same as the mid case FCF yield of 14% above.

     

    And it is highly unlikely that restricting supply in this manner would result in new entrants.  Construction costs of $300+K/berth make new entrants unlikely unless they could be assured of at least $30K/berth EBITDA.

     

    POSSIBLE UPSIDE

     

    The Ueberroths may continue to deploy cash on an intelligent basis.  If you do a cash flow model out assuming $30K of EBITDA per berth and cash redeployed at a 15% return, you get $50-60/share in 4-5 years.

     

    THE BIG QUESTION

     

    Will the Ueberroths and David Giersdorf manage to return the cruise operations to historical levels of profitability?  2007 has been a tough year, but a lot of the pain has resulted from spending to maximize results going forward.  And management has several levers to pull to influence the outcome that were unavailable to prior owners (cross-marketing, holding back supply, relationships within the travel business).

     

     

    Catalyst

    Evidence of stronger 2008 bookings
    Solid performance in 2008
    Share repurchases

    Messages


    Subjectquestions
    Entry09/10/2007 12:34 PM
    Memberfinn520
    Thanks for the writeup. I agree that the Ueberroth's seem like ideal business partners, the deals they have made have been excellent, and the long-term trends for this business seem compelling.

    Given your extensive research, I am interested in hearing your views on the following:

    1) Your "low estimates" for 2008-2010 seem pretty high. The Mississippi River has been very weak post-Katrina. American Queen is at low 70%'s occupancy at cut-rates, and it appears the outlook has gotten worse recently (Q1 - mgt said Missippi Queen would be in service in March, 2008, Q2 - said she wouldn't return until 2009). I am worried that the weakness is less due to recovering from poor past management and more due to a downturn in New Orleans tourism, which potentially could be longer-term. Counting on full-occupancies for both American Queen and Mississippi Queen (current occupancies are about 40% of that goal) as a low case seems pretty bullish. Thoughts on a slow comeback/continued downturn in New Orleans and the affect on the business?

    2) Conceptually, why should these boats have such a large D&A pickup? I struggled with breaking down the expense vs. capex, but it sure seems like the overall spend numbers are pretty high. I know management is guiding a $12 million pickup in 2008, but why should that last long-term? 5 years without significant capex seems very optimistic. These are aging, floating hotels/restaurants/entertainment venues charging $400/day for tourism dollars. It seems that recurring investment is inevitable. Is there a precedent for a D&A pickup at other cruise companies?

    3) Empress of the North has now run aground 4 times in the past 5 years. Do you have any insight into what has happened to AMIE's insurance rates as a result? These are expensive incidents given the costs of both boat repair and business interuption coverage.

    4) One other note is that David Giersdorf used to be in charge of operations for Windstar in the late 1990's/early 2000's at Carnival, so he knows these assets well.

    Thanks.

    Subjectfinn
    Entry09/10/2007 01:08 PM
    Memberthistle933
    Thanks for the questions.

    1. I agree that demand on the Mississippi has been weak. It is hard to tell whether cause is prior discounting or Katrina - it is probably both. Given that the French Quarter was not hurt, seems to me that tourism is likely to grow in New Orleans over time from depressed levels (there is something irrepressible about New Orleans). But we don't need that to do well with AMIE. The "low low" case is to leave MQ in dry dock indefinitely even after DQ retires. Shifting just 1/2 of DQ's guests to AQ takes AQ to 95% occupancy. If you move 90 guests to AQ at a profit per guest of $250/day (how much does it really cost to feed them and turn down the sheets?), that is $7m of EBITDA. And tighther capacity that raises prices $30/day on 450 AQ guests is another $4m. I'll bet that AQ is b/e at best right now. The operating leverage here is very high, and AMIE controls the supply.

    2. I agree that next year's $12m is too much pickup to be sustained. Repeated questioning of senior management and the AQ and DQ engineers suggests maintenance cost of $1m a boat, of which 1/2 is expensed. There are 8 boats going forward. My EBITDA numbers include $4m of expensed maintenance, and you could assume $4m of capitalized maintenance for the cruise lines, plus another $1m for marina, for a total of $5m capitalized. I've used $4m rather than $5m because AMIE has lavished the boats with $ during 2006 and 2007. The AQ and DQ engineers say no major work is necessary for another 10 years. Maybe they are exaggerating a bit, but I feel comfortable reducing cap ex by $1m for the next several years to account for all of the money that has gone in (engine parts, LCD TVs, high thread count sheets, new paint, etc.)

    3. Agreed that EoN needs to stop running aground, though I was only aware of a minor 2006 incident in addition to May's debacle. In May, they gave the wheel to a guy on his second day out of the merchant marine. They are very embarrassed by this, and say it won't happen again. An issue with this investment is that these are boats, and things happen to boats.

    4. David seems very smart, and you are right that he used to run Windstar.

    SubjectThistle - Thanks for the idea
    Entry09/10/2007 10:18 PM
    Membercanuck272
    Thistle -
    Thanks for the idea.
    Can you tell me more about the Carnival experience with Windstar? Why was Windstar in decline for the past several years, which have been generally good years for Carnival and the cruise industry? How do the demographics differ between the two?
    From your write-up, looks like Windstar had $10 million of 2006 EBITDA, down from around $23-24 million at the peak. What specifically is the game plan to get profitability back up?
    Thanks in advance for your answers.

    Subjectquestions
    Entry09/11/2007 12:45 AM
    Memberdj927
    I haven't looked into this yet, but I was wondering, conceptually, is their any barrier to entry in this business or could I go ahead and start a competing cruise line, and if so wouldn't a liquidation analysis be the only one necessary in determining the value of the business? I mean it sounds like they have some goodwill with their repeat customers, but as a value investor I'd love to get that for free. Which leads me to my second question, what, in your opinion is the liquidation value of the business in a controlled liquidation? I realize you talked about the build costs, but those numbers could be very different from the market value of the ships, especially as the economy doesn't look to hunky-dorrey at the moment. Thanks for the interesting write up.

    Subjectcanuck
    Entry09/11/2007 09:37 AM
    Memberthistle933
    The three Windstar ships were built in 1986-90. They are pretty unique in the cruising world. Wind Surf appears to be the largest sailing ship built in the last century, and the only sail-oriented cruise competitor is Windjammer, a much lower end experience. I haven't been on the boats, but I am told by someone who has that the experience is very relaxing (no engine noise for much of the time) and that there are lots of repeat customers. Demographics are 40s and 50s, and quite affluent.

    Windstar had strong performance during the 1990s. Asking around has suggested $20-25m EBITDA. But the combination of aging boats and 9/11 crushed profitability.

    Carnival marketing materials advertised extensive renovations of the three ships during 2003. And then Carnival spent $12m to refurbish Wind Surf during 2006. And AMIE is spending $10m to refurbish the other two during 2007 (Wind Spirit during the spring, and Wind Star this fall).

    The 2003 renovations, and the 2006 spending on Wind Surf, seem to have been effective. The three ships did $7m of EBITDA in 2005, and $11m in 2006 (representing 12K and 18K per berth). For 2007, AMIE is forecasting $15m of EBITDA for the Q2-Q4, based on bookings which are in the bag. When you add the $2.7m of EBITDA the ships did in Q1 (the purchase closed in April), you get to $18m of EBITDA for 2007, or 29K/berth.

    So the renovations seem to be a key lever to increase profitability.

    From a demographic perspective, there is a boom in cruise demand from affluent passengers. Oceania, Seabourne, Silversea, and SeaDream are able to charge per diems in the $500-700 range. And they are building new ships - Silversea has a new ship coming in 2009, and Seabourne has two new ships coming in 2009 and 2010, at a per berth cost of $600K. Oceania has three new builds coming at $390K per berth (Oceania is not quite as premium priced).

    Joe Ueberroth and David Giersdorf believe that Windstar can be moved up in price point - they takl about a $100-300/day differential, and their determination to close the gap. Read the Feb 28 07 conf call.

    So the game plan is to use the renovations and the high prices of competitors to move Windstar's per diems up from ~400 to something higher. Their ability to do this is unclear - I worry about alienating repeat customers who have been very loyal to Windstar. But the economics of getting a $50 improvement to the bottom line are big. And AMIE says that bookings for 2008 are at a 10% premium to 2007 levels. Maybe this is working. I think betting against the Ueberroth family in travel over the long term is not smart.

    Another worry is that Carnival has held on to Seabourne while selling Windstar. From their perspective, they were selling a cruise line on track to do $18m of EBITDA for $110m ($100m sale price plus avoidance of $10m renovation ofthe two boats) - a 6x multiple. Maybe Carnival's focus on Seabourne will hurt demand for Windstar.

    I'm comforted by the fact that Carnival's marketing engine is so focused on the middle income cruise customer - they have 144K berths to fill at $200 or less, and it is easy to see how a 608 berth line at higher price points could get lost within the larger entity. Windstar passengers paying $390/night to go sailing are different from people looking for tequila shots and the water slide on a "Fun Ship".

    Subjectdj
    Entry09/11/2007 10:17 AM
    Memberthistle933
    To start a competing cruise line, you would have to have US-built river boats. US-built, because the Jones Act prohibits transport of passengers between US ports by non-US-flagged (or non-US-manned) ships. River boats, because the rivers are shallow, and every other day you pull up to the river bank in the middle of nowhere, tie ropes to trees (I am not kidding - you need big trees), and let your passengers off to see a Civil War battlefield, or a working cotton plantation.

    It's not a conceit that these boats are paddle wheelers. A paddle wheel allows the boat to draw just 6-7 feet, and get clsoe to the river bank to drop one of those gangways across. And the Jones Act means that you can't get the China price.

    AMIE now owns all of the paddle wheelers in operation on US rivers (I may be leaving out a couple of small ones doing day trips, and there are some that are used as floating restaurants, but I am talking about boats with Coast Guard certification to carry 100s of passengers). So you can't easily buy up available river boats.

    There is a cruise company called Cruise West that operates seven US-flagged and manned small ships sailing in and around Alaska, Central America and the Mediterranean. Some of these itineraries cruise on the Columbia River. But these ships are designed for deeper water cruising, and can't cover the same river itineraries. They are also tiny (70-100 berths).

    So barriers to entry are (i) Jones Act, (ii) need for shallow draft, (iii) repeat customer loyalty.

    As for value in a controlled liquidation - we have seen what values fall to when there are three owners, and all of them are sellers. AMIE owns all the boats and has liquidity to withstand zero profitability in the cruise operations for 3-4 years, giving it time to figure out the right balance of demand and supply.

    Ultimately, a controlled liquidation would be priced off of the profitability of the boats. Buyers might be another travel company, or private equity once the markets clear. There would be a premium for buying all of the river boats at once, in order to minimize competition.

    But there is no margin of safety from selling the boats relative to their scrap value or other asset value. You make or lose money from this idea based on the ability of management to make these boats profitable, not liquidate them, controlled or not.

    Subjectreturn on capital
    Entry09/11/2007 02:45 PM
    Memberthistle933
    It's interesting to do the math on return on capital. Assume a single berth costing $300K, and finance $200K with 5% MARAD debt. So interest is $10K. Capitalized maintenance is $2K. If you assume $30K of EBITDA, and a 38% tax rate, that leaves $11K after tax on $100K of equity, or an 11% return. Is that enough? Maybe - but you might want scale and a customer base before proceeding.

    SubjectMSNBC review
    Entry10/03/2007 10:59 AM
    Memberthistle933
    Anyone following this should go on one of the boats, but this is a review just posted on the web: http://www.msnbc.msn.com/id/21085986/

    SubjectHigh Short Interest
    Entry10/03/2007 06:22 PM
    Memberengrm842
    Thanks for the idea. Do you have a sense of what the short thesis could be on this company?


    Subjectre: high short interest
    Entry10/03/2007 07:12 PM
    Memberthistle933
    It's a high fixed cost business, and 2007 is a washout due to management goofs, upfront cap ex, and mishaps. Plus we may be heading into a recession.

    The shorts probably are saying "these boats didn't make money under the prior owners, so why should it be different under AMIE?"

    What the shorts are missing is that three owners discounting against each other (and all by 2005 looking to exit the business - or going bankrupt again, in the case of the owner of Columbia Queen) is very different from one owner owning 90%+ of the capacity.

    And that when you make all of your profits from the last 10-20% of passengers embarked, it is very advantageous to control so much supply.


    Subjectother background
    Entry10/03/2007 10:53 PM
    Memberthistle933
    Looks like there is an effort building to save the DQ. Hard to say if it will succeed, but it is interesting to read as background, and to give a sense of how loyal the customers are.

    http://www.save-the-delta-queen.org/

    Subjectfinn
    Entry10/12/2007 02:31 PM
    Memberthistle933
    If you are still looking at this idea, and wondering about New Orleans tourism, I came across this yesterday.

    http://www.usatoday.com/news/nation/2007-10-11-tourism_N.htm

    SubjectDavid Giesdorf departure
    Entry10/26/2007 10:58 AM
    Memberrand914
    Thanks for an interesting and well-researched idea. Any idea why David Giesdorf left? Do you have an opinion on whether his departure is good or bad for the company? thanks.

    Subjectrand
    Entry10/26/2007 12:02 PM
    Memberthistle933
    Giersdorf was a champion of buying Contessa, and of buying Windstar before the paddleboats were made solidly profitable. He was an advocate of making Ambassadors into a multi-brand luxury cruise line roll-up.

    That's not what they need just now. So it's not entirely surprising to see him go.

    The two promoted EVPs are talented, and we'll see how they do. And it will be interesting to see how Joe presents this on the earnings call.

    Subjectamie
    Entry11/07/2007 12:30 PM
    Memberjoe661
    Hi Thistle,

    They're showing increasing occupancy % in q3 and increased bookings as well. Do these numbers go along with your thesis? Any feeling on how much it cost in marketing dollars to increase their pre-bookings as they have? Is the market being short sighted here?

    Subjectjoe
    Entry11/07/2007 10:11 PM
    Memberthistle933
    The call did not conflict with my thesis, though per diems during 2007 for majestic were limp, not surprising given the discounting this summer, but an uphill battle to wean customers away from. Not too well-received by the market. This will be a bumpy ride...not for the faint of heart.

    Subjectvships
    Entry11/21/2007 10:20 AM
    Memberthistle933
    The VShips announcement takes away a lot of the uncertainty. Management can now focus on yield management, and leave operations to Vships, which does this well already for Windstar (as well as other high end, small ship lines like Seabourne).

    (Note that MARAD's approval depends on the crew remaining US citizens, which they will. The crew will just become Vships employees).

    And a review from yesterday of Windstar: http://www.tripso.com/2007/11/windsurf.php?page=all

    Subjectladera
    Entry01/11/2008 02:14 PM
    Memberthistle933
    Someone sold a million share block before the open. Buyer was Thomas Weisel, and seller may have been Morgan Stanley. It appears as though Weisel has distributed all of the stock successfully, despite some worries this morning.

    Ueberroth family says that they wanted to buy it (or have the company buy it), but that they were in blackout period, which stretches for AMIE from 2 days before end of quarter to 2 days after earnings release.

    Note that I have it from excellent sources that Ueberroths offered to buy 1 million shares from large shareholder in November...

    This is a little higher beta than Comcast...but is looking very cheap barring a 9/11 or bone-crushing recession.

    SubjectRE: RE: RE: thistle
    Entry03/12/2008 04:07 PM
    Memberthistle933
    I think that there is minimal risk, given the ability of the company to give back the Marad debt, and the low coupon on the convert.

    Plus they can borrow against the Windstar ships, which are currently unlevered.

    Remember also that they spent $20m on layup costs for Majestic and Windstar that won't recur. It looks as though FCF was negative $17m, so even with everything bad that has happened, this business arguably generated cash on a normalized basis last year.

    You can run your own 9/11 scenario...but I think they would just give the MAL boats back and hunker down.

    SubjectQuestions
    Entry04/21/2008 10:43 AM
    Membersea946
    Enjoyed your writeup and think this is an interesting opportunity. As I've done some work, a few questions have come up:

    1) Liquidity risk from $97mn convert? The 10-K states that, "Holders of the Notes may require the Company to purchase all or a portion of the Notes, in cash ... upon the occurrence of specified fundamental changes (as defined in the purchase agreement dated March 28, 2007)." Is the company at risk of triggering this provision? Given the $56 conversion price and 3.75% interest rate, I assume the convert holders would be all too eager to put the convert back to AMIE.

    2) Purchase cost of ships: It looks like a couple of the ships were basically bought for $1 plus assumption of debt, and Contessa was bought for only $2mn. Given the market deterioration since those purchases, what gives you confidence that the ships' market value would cover the associated debt?

    3) MLF Investments, which owned close to 20% of AMIE at yearend, has sold some shares recently. Taking a look at MLF's 13Fs suggests that they may be a forced seller due to poor performance of some of their other holdings. Any thoughts on this potential overhang?

    Thanks in advance.

    SubjectRE: Questions
    Entry04/21/2008 02:23 PM
    Memberthistle933
    1. On the converts, you can easily read the holders' rights if you get the prospectus. I don't see any ability on their part to put because they don't like the share price.

    2. On the MARAD debt, you may have missed the part about it being secured by two ships and guaranteed by the federal government. AMIE doesn't need a seller - all they have to do is put the ships back to MARAD, and the debt goes with them. Aren't subsidies wonderful?

    3. Matt is indeed selling. That plus uncertainty over Majestic's fate is a good explanation for the share price. I think that it is likely that Matt will have to liquidate his fund, which is a massive overhang.

    Valuation here is an exercise of placing a value on Windstar and the marina business, less the convert, plus some sort of option value for Majestic. So far the Ueberroths have delivered very poor performance. But I still think that they are rational...although am less sure every quarter that they are competent.
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