P&O Princess rejects £3.2bn bid from Carnival of the US

Carnival Corporation has launched an indicative offer of 456p per share for the UK-based P&O Princess Cruises valuing the business at £3.2bn.

The cash and shares offer trumps the proposed $6bn (£4.2bn) nil-premium merger between P&O Princess Cruises and Royal Caribbean which was announced last month. The deal represents a 27 per cent premium to the latest price of P&O Princess Cruises, which closed at 360p on Friday valuing the company at £2.5bn.

Carnival's move would bring together the largest and second largest cruise operators in the world. This could cause problems with competition regulators which would be concerned at the combined group's dominance of the world cruise market.

Carnival said the deal would lead to significant synergies and that its offer faced no greater regulatory risk than that of the proposed P&O Princess-Royal Caribbean merger.

P&O Princess Cruises immediately rejected Carnival's proposal. It said Carnival had approached it at the end of last week about a possible deal but said it was subject to several conditions including regulatory approval and financing. The UK company said the Carnival deal did not have the same "upside potential" as the Royal Caribbean deal as it did not offer an irrevocable commitment to make an offer and would not enable Princess shareholders to retain shares included in the FTSE All Share Index. It said it was subject to "greater regulatory risk in the United States and the European Union."

Peter Radcliffe, chief executive of P&O Princess, said: "Our response to Carnival is based on two clear criteria – value for shareholders and deliverability. Their proposal falls short on both counts. Through our combination with Royal Caribbean, our shareholders will participate in the significant benefits of creating a world leading competitor to rival Carnival."

P&O Princess said it therefore continued to recommend its merger with Royal Caribbean to its shareholders.

Mickey Arison, Carnival's chairman and chief executive, said: "We believe our proposal is clearly more favourable to P&O Princess shareholders than the Royal Caribbean deal. We are offering a substantial premium and we are a much stronger partner for P&O Princess, both financially and operationally."

But Carnival said it had approached Princess several times about a deal including on 24 September, eight weeks before it announced the Royal Caribbean merger. Carnival said it received no response.

Miami-based Carnival already has 29 per cent of the world market. Combining with P&O Princess would give it more than 50 per cent of the North American market while also combining the number one and number two operators in Europe.

The deal would also trigger a $62.5m break-clause signed between P&O Princess and Royal Caribbean. However, Carnival offered to improve its offer if the break fee was reduced.

Carnival's intervention would also upset a 50:50 joint venture between Princess and Royal Caribbean in the underdeveloped markets of France, Italy and Spain. If Carnival does muscle in, it could allow Royal Caribbean to buy out Princess's stake at a discount.

There has been intense speculation Carnival would muscle in on the P&O-Royal Caribbean tie-up which would have created the world number one, a position held by Carnival for the past 20 years.

Under the terms of the Carnival offer Princess shareholders would receive 200p in cash plus 0.1361 in Carnival shares for every share held.

Carnival operates 43 ships across a number of brands including Cunard Line and Windstar Cruises. In the year to 30 November 2000 the group recorded operating profits of $983m on turnover of $3.8bn.

P&O Princess Cruises has 18 ships under brands such as Swan Hellenic and Seetours. In the year to December 2000 it recorded operating profits of $373m on sales of $2.4bn.

Cruises have been increasing in popularity in recent years but the sector has been hit badly by the events of 11 September.