Positive Silversea buy

The initial reaction on Wall Street to the news that Royal Caribbean Cruises Ltd. plans to buy a 67% stake in Silversea Cruises was strongly positive.

At the end of trading Thursday, RCCL shares were trading at $113.50, up 5.1% from their close on Wednesday before the deal was announced.

RCCL held an investor call at 8:30 a.m. to explain the logic of the deal to analysts. It has some negatives, including a short-term rise in debt as RCCL calls on its revolving loan agreements to fund the $1 billion purchase price.

As part of the deal, RCCL will assume Silversea’s outstanding debt of about $500 million. CFO Jason Liberty said RCCL expects the acquisition to yield about $50 million in synergies, mostly in cost savings. He said the deal would not immediately contribute to RCCL earnings growth and didn’t offer a date when it would.

In a note to investors, SunTrust Robinson Humphries analyst Patrick Scholes said that RCCL currently has less than 2% of its berths devoted to the luxury segment through Azamara Club Cruises, compared with 4% for Carnival (Cunard Line and Seabourn) and 16% for Norwegian Cruise Line Holdings (Regent Seven Seas and Oceania).

“We see this acquisition as timely given luxury has been the best-performing leisure customer segment as evidenced in our forward-looking cruise and lodging demand checks,” Scholes wrote. “We would attribute much of this to the wealth effect. That said, demand for luxury products can be very cyclical as the wealth effect works the other way when the stock and housing markets are weak.”