Battle looms on the high seas as cruise giants forge £4bn merger

P&O Princess ties up with Royal Caribbean but investors hope Carnival will gatecrash the party
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The Independent Online

P&O Princess has leapfrogged its largest rival, Carnival of the US, to become the world's biggest luxury cruise operator in a surprise $6bn (£4.2bn) "merger of equals" with Royal Caribbean Cruise, also of the US.

The move, which will generate annualised cost savings of $100m, will help both companies to ride out a severe downturn in the travel industry. The nil-premium merger will give the new company – tentatively christened RCP Cruise Lines – 41 ships and 75,000 berths.

Shares in P&O Princess, which celebrated its first birthday as an independent company last month, yesterday surged 16 per cent to 368.75p as investors gambled on the prospect of Carnival jumping in to spoil the deal. Both companies insisted the merger was not a reaction to the attacks of 11 September. Richard Fain, the chief executive of Royal Caribbean, who will become chairman and chief executive of the new group, said talks had started 10 years earlier in 1991. In a strange quirk of circumstances, the two parties met, in secret, at Mr Fain's home on the morning of 11 September to set out the terms of the alliance. "We thought this was a phenomenal deal before 11 September and the events of that day have reinforced that and helped us move forward," said Mr Fain.

The two groups will retain listings in London, New York and Oslo. As part of the deal, P&O Princess shareholders would have 50.7 per cent of the equity with Royal Caribbean taking the remaining 49.3 per cent. The new group will retain its brand names in its individual markets such as P&O Cruises in the UK and Arose in Germany.

Peter Ratcliffe, the current chief executive of P&O Princess, who is set to become managing director and chief operating officer of the new group, said the merger would give the new company a "global dimension", with operations in the US, the Caribbean, the UK, Germany and Australia. The two operators also announced the creation of a 50:50 joint venture, effective immediately, to tackle the under-developed southern European markets of Italy, France and Spain. Each side has pledged two ships for the joint venture, with the first arriving in 2003.

Most analysts welcomed the deal, singling out the scale it gave the new company. RCP will control 37 per cent of the global cruise capacity with Carnival in second place with 29 per cent.

Nigel Parson, at WestLB Panmure, saw only benefits for P&O Princess, which moves from the world's third-biggest cruise operator to equal first. "It removes a competitor, reducing the big three to the big two. This is good for the pricing outlook and for restoring the balance between cruise operators and travel agents," he said.

Mark McVicar, an analyst at Dresdner Kleinwort Wasserstein, said: "The question is what has to happen to pricing now. Prices have risen in the past below inflation but costs have increased by even less and this deal is all about driving efficiencies."

The deal's $100m projected savings lie in purchasing efficiencies, combining systems and greater marketing opportunities, not job cuts. "Layoffs are not the story, they won't be a significant issue," pledged Mr Ratcliffe. To counter a 70 per cent fall in US bookings following 11 September, P&O Princess has had to slash prices, discounting by 5 per cent in the third quarter. The outlook for the industry remains uncertain and a clearer picture of demand will not emerge until early next year, when cruise operators have forward second and third-quarter 2002 bookings under their belt.

If all goes to plan, the deal should complete in the second quarter of 2002. The new company should sail through the regulatory approval process in the UK and Germany and should do so in the US as well. Mr Ratcliffe explained: "Precedence in the US accepts the cruise industry as part of the vacation market while in the UK regulatory clearance is easier because the cruise industry isn't seen as part of the UK holiday market."

However, the terms of the deal include a break fee of $62.5m, the equivalent of 6p per P&O Princess share. This could be called upon if Carnival decides to make a play for either party. Dresdner's Mr McVicar sees this as a real risk. "Carnival will obviously be considering its options. They have been the market leader for the last 20 years. But they would have to sell something if they wanted to buy Princess because it would give them over 50 per cent of the North American market and the number one and number two operations in Europe," he said.

Mr Ratcliffe acknowledged that as a UK-listed company his side would make the more tempting prey. However, he sought to rule out a Carnival counter-bid on the grounds that such an alliance would trip at the first hurdle of the European Commission. "This is our choice," he stressed yesterday; gesturing towards Mr Fain of Royal Caribbean, who he said, was a "long-time friend".

What the merger does not address is the industry's short-term overcapacity, which is adding to the current pricing woes. Although about 6 per cent capacity was removed when Renaissance and American Classic Voyages went bust last month, another 12 per cent will be added next year.

Analysts say this represents the industry's long-term expansion prospects of double-digit growth. And demographics are firmly in its favour. In the UK alone, the 45-plus age group is expected to mushroom by a third over the next five years. Another plus is that tougher times and stronger market leaders will raise the barriers to new entrants. At $400m a pop, a new ship costs more than a jumbo jet.

Buoyed by the Seventies series The Love Boat – set on P&O's Pacific Princess – cruising took off in the US 30 years ago. Messers Fain and Ratcliffe are adamant that where our closest ally leads, Britain will follow. "People who take a cruise love it. Someone who has taken one is five times as likely to take a second as someone who has never taken one. Once we have them aboard we own them," said Mr Fain. But the question remains: how to get them to climb aboard?

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