Can Princess consummate Royal marriage?

The British cruise line has rejected Carnival's higher bid. We answer the questions on a three-way takeover tussle
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The Independent Online

The US cruise giant Carnival Corporation vowed yesterday to take its £3.5bn hostile bid for P&O Princess Cruises direct to shareholders after the UK cruise operator formally rejected its improved offer.

Peter Ratcliffe, Princess's chief executive, said Carnival's revised 500p-per-share offer had failed to win over the executive board on the grounds of value and deliverability. He urged shareholders to back Princess's pre-arranged £4.8bn merger with Royal Caribbean. With the clock ticking to Princess's 14 February extraordinary general meeting, shareholders must question the claims and counter claims in this bid battle.

Why is P&O Princess so keen on merging with Royal Caribbean?

As RCP Cruise Lines, the combined company would rule the seas with 37 per cent of the global cruise capacity to Carnival's 29 per cent. More important, say Princess's directors, is the merger's "value-creation story". This lies in the pair's strategic unity, their global compatibility and their ability to achieve projected cost savings of at least $100m (£70m).

Why does Princess think the deal with Royal Caribbean is worth more than Carnival's 500p-per-share offer?

Princess's claim that the merger is more "favourable financially" lies in the stock's potential upside – to anything north of 450p, depending on the scale of cost savings. Under the favoured merger, Princess's shareholders would reap these; under the Carnival takeover they would not. Hostile bids generally command a 20 to 30 per cent premium, which leaves Carnival scope to up its bid. The uncertainty attached to Carnival's offer also demands a higher premium, Princess has said.

What is the "poison pill"?

Branded a "poison pill" by Carnival's chief executive Mickey Arison, the term refers to the penalty fee payable by any rival bidder. This covers the expense of breaking up a southern European joint venture set up between Princess and Royal Caribbean to exploit the Adriatic – estimated at between $484m and $1bn. Carnival's ability to sidestep this penalty depends on its deal closing after 1 January 2003 and on the joint venture's bookings representing less than 15 per cent of capacity for the August to December 2003 season.

Why won't Princess talk to Carnival?

The nuptial contract struck with Royal Caribbean forbids Princess's directors from soliciting a higher offer. Thus they may only meet Carnival's board if they deem its 500p-per-share proposal to be "superior" – which they don't. Otherwise Royal may legally walk away.

What are the regulatory obstacles for Royal Caribbean/Princess?

RCP Cruise Lines needs to add clearance from UK and US authorities to that already received from those in Germany. While Princess claims the regulatory risks are markedly higher for the Carnival deal, clearance in all quarters depends on how the authorities view the cruise market. If it is regarded as distinct from the wider travel market, both deals are certain to be scuppered.

How do they differ from those facing Carnival's takeover?

Both combinations have a roughly equal share of the US cruise market (just over 50 per cent) so the Federal Trade Commission will either clear both or block both. In Europe the situation is more complicated. Bears point to the EU's stance on the Airtours/First Choice bid, which Brussels blocked on the grounds that it wanted four operators in the market. If viewed as separate markets, the Carnival-Princess's greatest stumbling block will be Germany, where it has a larger market share.

Is Carnival seriously interested in bidding for Princess?

Carnival says yes, Princess and Royal Caribbean say no, and observers are split down the middle. Carnival did increase its offer proposal from around 450p to 500p per share. However, the pre-conditions to it actually tabling a full bid remain onerous, which opponents say proves the US cruise giant is toying with Princess's affections. And Carnival has gained a reputation as a "spoiler". In 1995, it toyed with buying the Norwegian group Kloster, only to later walk, while in 1996, Carnival forced Royal Caribbean to ratchet up its initial offer for Celebrity Cruise Lines by entering the bidding fray, only for Celebrity's investors to back Royal on familiar grounds of greater certainty.

What is the point of Princess's St Valentine's Day EGM?

The EGM on 14 February will be the last chance for shareholders to either accept or reject the merger. Princess needs approval from 75 per cent of votes cast to consummate its marriage with Royal. Shareholders may, if they have 10 per cent backing, propose any other resolution, which could be passed with a simple majority.

What options are left to Carnival after this latest rejection by Princess's board?

Carnival can, as it has pledged to do, take its offer direct to Princess shareholders. However, because the bid requires US anti-trust clearance, the offer must remain pre-conditional. Royal needs 10 working days to consider a rival offer – Carnival could again increase its bid. It could also reduce the conditionality of its offer by, say, agreeing to swallow the $500m joint venture penalty fee. Or it could offer a show of intent of, say, 40p per share, in the event of a regulatory block. It could also stomach the loss of prestige from losing its investment grade rating by pre-arranging the necessary financing.

How likely is Royal Caribbean to abandon the deal?

Despite heavy posturing from the Royal camp, observers reckon it is unlikely to jump ship.

What could Princess's shareholders do?

They could take the gamble that Royal is unlikely to walk and Carnival is serious and pass a resolution to adjourn the EGM, allowing both deals to run on the same regulatory timetable. Or, they could play safe and back the nascent RCP Cruise Lines with the caveat that this, too, is conditional on regulatory approval.

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