Breakingviews: Cruise-ship IPO bets the rich will always float

High-end cruise line Viking is riding a grey wave. The California-based firm has filed to go public in New York, at a potential price of $10.8 billion, higher in relative valuation terms than its much larger peers Carnival and Royal Caribbean. In its favor is a reliance on older, richer customers. That is fuel for rapid growth, though investors will be subject to the whims of the fortunate few, in more ways than one.

Viking is not shy about targeting a fairly narrow demographic for its fleet of nearly 100 boats. CEO Torstein Hagen, who also founded the company almost three decades ago, has set his sights on the over-55 set. There are no casinos on board, beer and wine are included in the package, and children under 18 are strictly not invited. In other words, the company styles itself and its customers as being more selective.

That explains one of Viking’s selling points: its potential profitability. The cruise line generates $180 in EBITDA per passenger, twice that of Carnival. It’s also less burdened by debt, with net borrowings of 3.8 times EBITDA at the end of 2023, compared with 6.7 times at its larger rival. If it prices at the top of its IPO range, Viking’s enterprise value would be 13.5 times last year’s EBITDA, higher than the roughly 12 times that Carnival and Royal Caribbean command.

There’s plenty of rough that comes with the smooth. While Viking gets more EBITDA per customer than its rivals, it’s less profitable overall in terms of its operating margins. And there are some other unwelcome quirks. A dual-class share structure will leave 87% of the votes in the hands of Hagen and his trust. Viking says it is still working through some “material weaknesses” in its financial controls.

One question – besides whether investors want to ride a ship whose founder has such a grip on the wheel – is what happens to Viking’s target demographic. They’re certainly getting more numerous. Around 11,200 Americans retire each day, up from 10,000 a decade ago, according to the Alliance for Lifetime Income. On the other hand, older passengers are more vulnerable to certain shocks: Viking was the first cruise line to shut down during Covid-19. Viking is sailing swiftly, but its generous valuation only makes sense in calm waters.