What's behind Royal Caribbean's 'highly surprising' push into Sandals vacation resorts

By Bill Peters

Royal Caribbean plans to take a 50% stake in Sandals, a move that gives the cruise line access to wealthier customers

Analysts see Royal Caribbean making a push for wealthier consumers as it takes a stake in Sandals.

As Royal Caribbean plans to make a massive investment in the Sandals Resorts chain, some analysts are wondering whether the costs of the deal outweigh the benefits.

Bernstein analysts said the move by the cruise line (RCL) to take a roughly $3 billion, 50% stake in Sandals was "highly surprising." They noted that while it might help Royal Caribbean gain more access to a wealthier customer less affected by inflation, it also looked expensive, and they wondered how it fit in with Royal Caribbean's broader family focus.

"Overall, the price looks high but Sandals is a premium asset in a supply constrained market," the Bernstein analysts said. If Royal Caribbean "can show there are also strategic synergies, the deal could have merit."

The deal was announced early Wednesday. The Financial Times reported on the transaction on Tuesday, prompting some analyst reactions in advance of the official announcement.

Investors aren't buying into the story just yet. Shares of Royal Caribbean were down 3.4% on Wednesday, adding to losses they took a day earlier.

The move will make Royal Caribbean a bigger player in the broader vacation market and allow both companies to help travelers discover new destinations, management said in the announcement. The cruise-ship operator said it had gotten debt financing from Morgan Stanley to pay for the investment. The deal is expected to close early next year.

Royal Caribbean's tie-up with Sandals comes as the Iran war keeps fuel costs high, posing deeper complications for travelers as well as the airline and cruise industries.

The Bernstein analysts said the investment would give Royal Caribbean more ways to grow, particularly with higher-income consumers, in the face of tighter cruise-ship capacity and higher costs related to the ships themselves. Adding land-based resorts to the mix would give Royal Caribbean something else to sell to its roughly 9 million customers, they said.

"Royal Caribbean is seeing better yield trends for higher-end customers, and likely wants more access to this customer, but this is hard to achieve in cruise given supply constraints," the analysts said.

The analysts also said that the investment could help Royal Caribbean stand out from the competition, noting its past investments in beach clubs in Santorini and hotels in Patagonia. They also noted that the deal gives it more access to airports and other Caribbean infrastructure.

But they said that while Sandals has been adding new resorts, it is largely an "adults-only brand," with only three of its resorts allowing children.

"This feels a more odd bedfellow with the family-focused Royal Caribbean brand," they said. "They could change this strategy but would risk losing brand equity."

They also said that Sandals resorts are largely in the eastern Caribbean, where Royal Caribbean already has a presence, and that the deal wouldn't help the cruise line expand its business in the western Caribbean. Sandals has 20 resorts on eight islands in the Caribbean, they said.

They also estimated that Sandals had around 6,500 rooms, which is about twice the size of a big Royal Caribbean ship, translating to only a modest expansion in Royal Caribbean's overall room capacity but at a higher cost.

Elsewhere, Truist analysts were more optimistic about a bigger collaboration between Royal Caribbean and Sandals.

"In our conversations the executives see strong crossover potential between the two customer bases though of course this all depends on strong execution," they said.

When it comes to execution, Royal Caribbean has "one of the top management teams" of the companies the Truist team covers, the analysts added.

Royal Caribbean's stock is down 18.4% so far this year. Shares were trading at around $230, off highs of more than $360 reached roughly a year ago.

-Bill Peters

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09-23-26 1624ET

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