Corporate Profile: The Peninsular and Oriental Steam Navigation Company - Sterling performance

The Peninsular and Oriental Steam Navigation Company (that's P&O to you) is abandoning the choppy waters of construction and property to concentrate on the business that made its name famous: cruising the ocean waves. And Lord Sterling, the man at the helm, is on a roll
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IT IS perhaps fitting that a company so steeped in the history of British imperialism has set about dismantling its own empire. The Peninsular and Oriental Steam Navigation Company, to give the full title is charting a new course.

Lord Sterling of Plaistow, captain of this particular ship, had steered P&O into new waters, but now he is returning the company to its sailing roots. Only in this era, P&O plans to carry American tourists to exotic destinations, rather than ferry mail or munitions across the oceans of the world.

P&O is splashing out $2bn(pounds 1.3bn) on five new luxury liners, planning to double the size of its cruise business within five years. It will invest heavily in Princess, the US cruise business immortalised by the US hit TV show The Love Boat, and carry more Europeans to far flung places.

By the time the expansion is complete, P&O's cruise fleet will account for three-quarters of group operating profits and more than half its net operating assets.

P&O wants to cash in on a market growing at a great pace of knots. Cruising is no longer the preserve of the blue rinse brigade. These days cruise ships are floating entertainment centres. Tourists can tune in to a virtual reality film-making centre or tone up at a gym before having a meal on their way to an onboard performance of a West End play.

The American baby-boomer generation has money to spend and time to spend it. They prefer to sip a pina colada on the sun deck than wait at an airport terminal. Europeans are looking for more ambitious alternatives to the beach-and-bar package on the Costa del Sol.

The number of people around the world who cruise every year is still only equivalent to the number of tourists to Hawaii but demand is rising fast. Sales are growing by 9 per cent a year in the US and 20 per cent in the UK.

So P&O has staked its future success on the sector, shedding its construction arm and property business, which includes the Earls Court and Olympia exhibition centres to fund the move. This is a defining moment in P&O's illustrious and grandiose history - and a remarkable comeback for Lord Sterling, a man many had written off a few years ago.

P&O was launched when Britannia really did lay claim to ruling the waves. A London shipbroker, Brodie McGhie Wilcox and his colleague Arthur Anderson, a Royal Navy clerk from Shetland, formed a partnership in 1822, shipping anything from guns to giraffes between Britain and the Iberian Peninsular.

By 1835 the partners and a Dublin shipowner, Captain Richard Bourne, had set up a regular mail service to Spain and Portugal. Soon it was shipping silk and dyes to Singapore and Sydney and the Peninsular and Oriental Steam Navigation Company was born.

The name became synonymous with British imperialism - its expansion hand in hand with that of the empire. As wanderlust engulfed the British upper classes, P&O began to create cruises. The novelist William Thackeray famously took his Mediterranean grand tour with P&O in 1844.

But as the empire faded, the company's traditional businesses faded with it. Air travel wiped out many of its established sources of income. In the second half of the 20th century P&O was forced to diversify, investing heavily in bulk shipping and supertankers as well as buying the Bovis homes and construction business. Even so, when Lord Sterling, or plain Jeffrey as he was then, joined P&O in 1983 he had a struggle on his hands to return it to an even keel.

Until then, Jeffrey Sterling's business interests had rested on terra firma. He started out in stockbroking, but his big break came when Sir Isaac Wolfson took the young Sterling under his wing and helped launch his corporate career.

Jeffrey Sterling, now 64, made his name in property. He hit the headlines in the mid-1970s when his Sterling Guarantee Trust, with the help of the Bank of England, rescued property giant Town & City Properties from severe money troubles. Sterling and his management team, led by Sir Bruce MacPhail, nursed the company out of the financial sick ward. The pair have worked together since in one of the most enduring partnerships in modern British corporate history.

When Sterling became chairman of P&O in 1983 the group had lost its way and a collapse in shipping rates threatened its independence. One of his first jobs was to fight off a bid from Trafalgar House - another grand old British shipping and construction name. A testament to Sterling's tenacity is that P&O is still an independent company, and Trafalgar House was swallowed by a Norwegian conglomerate.

Jeffrey Sterling swiftly imposed his authority on the group. Sterling Guarantee Trust, which included the Earls Court & Olympia exhibition centres and a string of Arndale shopping centres, was brought into the P&O fold in 1985. Acquisition of European Ferries extended its maritime portfolio. Sterling also chose to move P&O's head office from the City to the more austere surroundings of Pall Mall, a move that gives an idea of the character of the man.

As a "true blue" businessmen he was also a favourite of Margaret Thatcher. While the company thrived on the back of the Lawson boom years of the 1980s, its chairman enjoyed an extraordinary degree of political patronage from Downing Street. Sterling acted as a special adviser to a succession of Conservative trade and industry secretaries between 1982 and 1990, helping shape government policy as well as benefiting from it.

But, by the early 1990s it was no longer plain sailing and Sterling's star began to wane, with that of his political benefactor, Mrs Thatcher. P&O was hit hard by a recession which brought one of the biggest booms in British post-war history to an end. Sterling's aloof and, some say, arrogant approach may have worked in the swashbuckling, deal making 1980s, but it was a different matter in the caring, sharing 1990s. Sterling and P&O began to lose friends in the City.

He and Bruce MacPhail were criticised for being slow to change, being out of touch with the modern rigours of corporate life. P&O was charged with relying too heavily on its rich heritage. The company came across as being old-fashioned and odds were against the "old school" making it to the end of term. To be fair, many of the problems P&O faced were not of its own making. In an overcrowded market, shipping rates continued to slide and the opening of the Channel Tunnel knocked its cross-channel ferry business for six.

The company was slow to grasp the fact that the weightwatchers' guide to company life was very much to the fore. Sprawling and bloated conglomerates were out. The City (and, of course, fee-hungry City advisers) wanted businesses to shed a few unwanted pounds of turnover and turn themselves into lean, mean corporate machines.

A poll by one national newspaper revealed fund managers had turned against Lord Sterling. And when shareholders start calling for your head then you know things are serious. But Sterling came out fighting. In a bid to placate restless investors, he tried to address two of their main concerns.

He set up a container shipping joint venture with Dutch group Nedlloyd, a move designed to slash costs in a market crying out for consolidation. Then came a deal with arch-ferry rival Stena. In a "If you can't beat them join them" type of operation, they agreed to join forces and take on the might of the Channel Tunnel to salvage some profit from a business struggling to stay afloat.

Sterling did enough to keep his job, although sniping City analysts claimed only a more comprehensive break- up would do. Now they have their wish. Sterling has faced up to the inevitable fact that, however emotionally involved he is with P&O's property business, and however much it acted as ballast to the group's balance sheet in the past, it has little to do with ocean-going travel. "He (Lord Sterling) could be accused of being slow to act, but he is doing the right thing for P&O," said one transport analyst.

Bovis Homes has been sold, and the construction arm will follow shortly, despite a hiccup when the engineering and construction group WS Atkins pulled out of a deal to buy it late last year. The property interests are being sold and P&O Nedlloyd is being lined up for a flotation. Altogether, P&O could raise pounds 2bn, enough to fund its current expansion plans, and more.

"We wanted to concentrate on those businesses with a good level of return and focus on achieving scale with those businesses that have a good degree of synergy," said Peter Smith, P&O's director of corporate affairs.

The City loves the idea. After years of underperformance, the company's share price has been cruising up ever since it signalled its intentions. The shares now stand at 1019p and have more than doubled in a year. All talk of shareholder unrest has been banished. "I must admit I had doubts about P&O and (Lord) Sterling but the share price speaks for itself," said one fund manager.

There are still concerns. This week's abolition of duty-free could hit ferry profits. Competitors are also busily expanding their cruise ship fleets.

Lord Sterling has done his bit to calm troubled waters. He must now ensure that P&O gets a good price for the businesses and a good return on the proceeds. If he can do that, Jeffrey Sterling can retire knowing he has earned the right to be called a true captain of British industry.

Fact File

Market capitalisation: pounds 6.8bn

Turnover in 1998: pounds 5.91bn

Pre-tax profits: pounds 368.9m (down 15 per cent), but underlying pre-tax profits ignoring sales of fixed assets were pounds 415.9m (up 15 per cent)

Main businesses: The Peninsular and Oriental Steam Navigation Company is an international transport group providing ferry, cruise, container and bulk shipping worldwide.

The company is also engaged in construction and property development. Property and related businesses accounted for 46 per cent of 1998 revenues; cruises, ferries and bulk shipping 28 per cent; and ports and logistics, 26 per cent.

Key executives: Lord Sterling of Plaistow, chairman; Sir Bruce MacPhail, managing director.

Number of employees: 68,000.

The Long Voyage Through Rough Seas

1822: A London shipbroker, Brodie McGhie Willcox, and a former Royal Navy clerk, Arthur Anderson, start a business linking Britain and the Iberian Peninsula. Its sailing ships and steamers run routes to Middle and Far East

1974: P&O buys the Bovis construction business

1983: Jeffrey Sterling becomes Chairman on P&O and fights off a bid from rival Trafalgar House

1985: Sterling Guarantee Trust is merged with P&O

1987: P&O buys European Ferries

December 1996: P&O forms a container ship venture with Dutch shipping group Nedlloyd. A year later, Bovis Homes, housebuilding arm of P&O's construction division, is floated on the stock exchange

March 1998: P&O completes the merger of its ferry interests on the short Channel routes with those of Stena Line AB to form P&O Stena Line

March 1999: P&O unveils radical plans to return to its traditional roots by disposing of its property interests, Earls Court and Olympia exhibition centres and construction business

June 1999: P&O orders five new high-tech cruise ships at a total cost of $2bn (pounds 1.3bn)