One Spa World to Go Public through Merger with Haymaker Acquisition Corp
The cruise industry is sometimes fraught with dangerous waters. But now, investors have a better way to navigate them.
Meet One Spa World (OSW), the dominant health and wellness company that operates spas aboard major cruise lines such as Carnival and Royal Caribbean. The company, which formerly traded as a listed stock called Steiner Leisure will soon re-list after it is acquired by Haymaker Acquisition Corp (ticker: HYAC), a blank-check company or SPAC that raised money to find a target.
OSW is truly unique because it commands a captive audience aboard cruise ships without the risk and expense of owning and operating the vessels. Indeed, cruise lines generally price their tickets to ensure ships are completely full, both in good times and in bad. That can lead to a rough ride for cruise-company investors as customer demand ebbs and flows.
But for OSW, the upshot is a highly-predictable revenue stream. Once onboard, passengers who are confined to a ship for days with limited entertainment options can purchase a range of services from massages to Botox injections to dermal fillers.
As a result, investors should think of OSW as more of a lifestyle and leisure brand like Lululemon than a cruise company. Similar to Lululemon, OSW benefits from a sweeping generational change as millennials make fitness and wellness a bigger priority than their older peers. But unlike Lululemon, OSW faces almost no competition.
History suggests OSW’s dominance is unlikely to be challenged. The company’s heritage goes back to winning the first contract for the Queen Mary and Queen Elizabeth II vessels in the 1960s. Since then the company’s market share has held strong, currently at 84% – with the number two player at a mere 9%.
Why wouldn’t cruise companies operate the spas themselves? The task is incredibly complicated, and the company has built out an infrastructure allowing it to commission staff at over 1,000 ports of call around the world. That helps explain why OSW has decades-long relationships with a renewal rate of 95% among its cruise-company customers.
Another structural advantage: Cruise companies plan their fleet expansion years in advance. That gives OSW visibility into future growth, down to the number of berths on ships in the order pipeline. There’s also plenty of room to expand sales on existing ships. The company only needs to serve roughly 10% of cruise passengers to meet its financial targets. Innovations in spa offerings – which tend to be expensive services like Coolsculpting – could easily help the company exceed its target.
OSW also has modest capital needs because ship owners make the upfront investment in the facilities onboard. In fact, new ships are being designed with features like spas in mind as the services become more popular.
All this adds up to impressive profit growth. The company forecasts 36% annualized growth in net income between 2018 and 2020.
Investors who buy HYAC shares now – at around $10 a share – will pay 19.6 times 2019 expected earnings. Lululemon, meanwhile, trades at 33 times next fiscal year’s consensus earnings. Canada Goose, another premium lifestyle brand, trades at a multiple of 52 times while Ulta Beauty, a cosmetics, skin, and haircare company, trades at 22 times.
Yet another unusual advantage investors shouldn’t over look is OSW’s tax jurisdiction. As a company based in the Bahamas, its effective tax rate is a mere 2%. That, combined with OSW’s minimal capital expenditures, translate into extremely-high cash flow conversion of around 90%.
In a sign of faith in the business and management, current owners will keep a minority stake in the business while HYAC shareholders will own 51% after the transaction closes.
Of course, there is always some risk the deal isn’t approved, in which case investors get their money back at $10 a share. But with so many engines of growth and a clearly-defined downside, investors should consider stepping aboard.
John Jannarone, Editor-in-Chief