Outlook: A bitter pill to swallow as P&O repels boarders

Mind the Gap; British Airways
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The Independent Online

Lord Sterling and the rest of the P&O Princess board have done their shareholders a grave disservice by agreeing poison pill arrangements with the company's preferred merger partner, Royal Caribbean. So disadvantageous do the terms seem, that it might reasonably be seen as a breach of fiduciary duty. If the battle ground was in US waters, it almost certainly would be.

Nearly all mergers involving US companies have break fees built into them. If one party decides to walk away from the deal, then it becomes liable to pay the other one off. However, the size of such fees is normally limited to just a couple of percentage points of the value of the deal, so in most cases it would be unlikely to amount to a significant deterrent to rival bidders.

P&O and Royal Caribbean have gone much further. A joint venture has been set up which carries exceptionally heavy penalties if either party decide to terminate it. The joint venture is ostensibly for the purpose of exploiting the cruise market in the Adriatic but, in reality, it seems like no more than a charade with the virtually admitted purpose of deterring a hostile bid for P&O from Micky Arison's Carnival.

According to City estimates, the venture would cost Carnival more than $500m to buy out. Mr Arison reckons it might be $1bn, and although in theory the arrangement comes to an end if certain business targets haven't been met by January next year, the targets are not challenging nor is it entirely clear how the termination would work.

The whole thing amounts to such a clear transfer of value from P&O shareholders to Royal Caribbean's that it is hard to understand how P&O ever came to agree it. On top of everything else, it has emerged that there may be a change of control clause built into P&O's acquisition last year of Aida Cruises as well, a devise that would cost any hostile bidder a further €60m.

P&O would argue that without the poison pill, there could have been no deal with Royal Caribbean, since the dangers of Carnival stepping in to spoil the party were so high. Well, maybe, but have not P&O directors forgotten that their primary duty is to secure the best possible price for their shareholders, not to stitch together a mutually comfortable marriage of convenience?

P&O contends that a tie-up with Carnival carries a higher risk of being blocked by competition regulators than does Royal Caribbean. The Royal Caribbean deal is doable, even if it might be worth less, Lord Sterling argues. The Carnival one is not, and its entry into the fray is no more than a wrecking tactic designed to thwart the creation of a more powerful competitor.

Again, this is at best a disingenuous argument. In the US, both combinations would have roughly the same share of the cruise market, so regulators will either block both of them, or clear both of them. The idea that a combination of the number two and three operators in terms of market capitalisation would create a more powerful competitor to the number one carries no weight at all in US competition case law. Rather the reverse, in fact, since the shrinkage of three powerful players into just two risks creating a cosy duopoly.

The issues in Europe are more complicated, but in substance much the same. Because it meets the turnover threshold, the Carnival proposal will be examined by the European Commission, while the Royal Caribbean one falls to national authorities to vet. In the UK, the market position of both combinations would be roughly similar. In Germany, it's a bit higher in the case of the Carnival proposal, but not so significantly so as to lead the European Commission to a different view on the alternatives to its German counterpart.

If Lord Sterling thought the poison pill arrangement would deter Carnival from entering the fray altogether, and thus improve his chances of regulatory clearance with Royal Caribbean, then he was being naive. No company as successful as Carnival is going to roll over and let its stomach be tickled and, in any battle of the berths, it would always do its utmost to ensure that if Carnival was going to be blocked, then everyone would be blocked. Lord Sterling has got himself into a mess. He's got plenty of explaining to do.

Mind the Gap

Two High street retailers stick out like a sore thumb amid the warm glow of booming Christmas sales – Gap and the much hyped new arrival from Japan, Uniqlo. December sales figures due to be announced today are expected to show a year-on-year slump of nearly a quarter for Gap, while the company that owns Uniqlo, Fast Retailing, saw its share price plummet on the Tokyo stock market yesterday after issuing a profits warning.

In both cases the pain is more to do with what's happening abroad than here. There may seem to be a Gap on every street corner, but in fact only 3 per cent of the group's stores are in the UK. None the less, the story is much the same both here and in the US. Gap has overexpanded and lost its way, and you only have to experience the chaos of a Gap checkout counter once to know that this has become a quite poorly managed company.

Fast back just two years and the picture could hardly have been more different. With its youth appeal, khaki look, affordable prices, well laid out stores and cool advertising, Gap was held up as a shining example of the the modern clothes retailer, living proof of all that was wrong with fusty old Marks & Spencer. What goes round comes round and now the boot seems to be on the other foot again. In terms of fashion, Gap has lost focus and now everyone is doing what Gap used to do best. M&S still has plenty of faults, but at least it's likely to be around for a good many years yet. The way things are going, the same cannot be said of Gap.

British Airways

Two down, one to go. Both the US Justice Department and Congress's official watchdog, the General Accounting Office, have now opined on British Airways' planned alliance with American Airlines. Their assessments make grim reading for Rod Eddington, but at least BA's chief executive has the consolation that neither report is binding. The two airlines now await the big decision from the US Transportation Secretary, Norman Mineta, whose word in the matter is final.

Everything rests on a game of horsetrading to decide how many runway slots at Heathrow BA and AA must surrender in order to satisfy Mr Mineta that rival US airlines will not be disadvantaged. Right now, the two airlines could happily give up as many slots as there are takers because no one is making any money on transatlantic air travel in the wake of 11 September. But assuming that the market eventually recovers, those slots will one day become valuable again, the more so as Heathrow becomes yet more congested.

BA and AA are therefore playing a long game. They cannot afford to wait too long, however, because another important decision is about to be taken. The European Court of Justice is due to rule any time now that Brussels and not member states should have the authority to negotiate air service agreements with countries outside the EU. When that happens, bang will go the UK's chance of agreeing an open skies deal with the US and with it BA's hopes of linking up with AA at any price the regulators might demand.

j.warner@independent.co.uk

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