Description

OneSpaWorld (OSW) operates spas on cruise ships.  The company has a $650 million enterprise value, or roughly 11X pre-COVID EBITDA.

The travel industry is one of the areas of the economy hardest hit by the Coronavirus.  The cruise segment has essentially stopped functioning.  As a provider of spa services. OSW cannot easily function in a world that requires social distancing.

OneSpaWorld was founded in the 1960s and provided traditional spa services such as massages and manicures on high-end ocean liners (such as the Queen Mary). The business has evolved over time to provide an array of services such as BOTOX and Restylane.  OSW is the dominant player in this niche and at the end of 2019 had 170 centers on ships and 69 spas in resorts.  The shipboard spas were on the major cruise lines: Carnival (47%), Royal Caribbean (23%) and NCL (15%).  A majority of the resort spas were in Asia (Maldives (14), Vietnam (14), Malaysia(11).

In 2015, the business was acquired by private equity firm L. Catterton. In March of 2019, the business went public by merging with a SPAC.  Steiner Leisure, the original owner retained partial ownership through the LBO and held a 14% ownership after the public offering.  The sponsors also got a grant of 6.6 million shares that vest if the stock trades above $20.  There are also 24.5 million public warrants with a strike price of $11.50.

Following the outbreak of the coronavirus pandemic, OSW closed all of its spas and repatriated most of its 4300 employees.

In March, OSW also drew down the entire balance of its $20 million revolving credit facility, bringing total debt to $247.5 million.  On April 30, OSW announced that Steiner Leisure, and other investors had agreed to contribute $75 million to OSW in return for 18.8 million shares and 5 million warrants with a $5.75 strike price.  This contribution will presumably enable OSW to repay its revolving credit facility and buy time until the cruise industry resumes operations.

Assuming the Steiner Leisure deal is approved by shareholders, OSW would have an enterprise value of around $650 million, (80 million shares @ $6, plus $173 million of net debt).  In addition, OSW will continue to bear costs without any meaningful revenue until the cruise industry returns.

Interest expense is running around $13.5 million per year on the $227 million of first and second lien loans. Administrative expense is roughly $16.5 million per year.  While this burn rate should be tolerable assuming the Steiner Leisure transaction is approved, the real question is what will this business be worth once it resumes operations.

Over the past 3 years, OSW grew adjusted EBITDA from $46 to $58 million.   Even assuming that EBITDA recovers to 2017 levels, the company would be trading at 14X EBITDA.  I view this as close to a best-case scenario.  A more realistic scenario would be for EBITDA to get back to 50% of 2019’s high water mark.  A 10X multiple on $29 million of EBITDA results in an equity value below $2 per share.  In an extended shutdown of the cruise industry, OSW would have virtually no revenues, and a burn rate of $30 million plus per year.

Risks

While I believe it is unlikely, a treatment for the Coronavirus could be found and people could suddenly decide to return to cruising.  

Management could decide to take the company private again, although since they already have control of both operations and most of the financial upside, I view this as unlikely.

Catalyst

Earnings for Q1 will be announced in the next two weeks.

Continued delays in resumption of cruises.