P&O scuppers £400m Festival merger

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The Independent Online

P&O, the shipping company, has pulled out of a £400m merger deal with Festival Cruises, saying it was discouraged by poor valuations of cruise companies in the United States.

P&O, the shipping company, has pulled out of a £400m merger deal with Festival Cruises, saying it was discouraged by poor valuations of cruise companies in the United States.

Two months ago the companies revealed plans to merge their cruise businesses but yesterday P&O said it had abandoned talks with the privately-owned Festival.

However, it will press ahead with its own demerger in October to split its cruise businesses from its shipping and ports arm.

"Taking everything into account, we both arrived at the conclusion that this was probably not the best time to take the step of joining forces," P&O's chairman Lord Sterling said.

The market welcomed the news of P&O's withdrawal, with shares rising 20p to close at 570p.

Ralph Kent, an analyst at Morgan Stanley Dean Witter, said the deal had looked increasingly expensive for P&O. "The demerger does not jeopardise the business in the same way," he said.

The planned acquisition of Festival followed in the wake of consolidation begun by the US-based world leader Carnival and Malaysia's Star Cruises, which together bought the Norwegian group NCL earlier this year.

P&O, which runs Princess Cruises in the US, plus Aida and Seetours in Germany, saw Festival as a route into French, Spanish and Italian-speaking markets.

However, stocks in cruising companies have continued to fall since May, with shares in Carnival, dropping by nearly 60 per cent this year.

Peter Smith, a spokesman for P&O, confirmed that the £400m deal, comprising $400m of P&O shares and 300m euros of debt, plus the costs of buying new vessels, had fallen apart because of a low valuation of shares.

"The price, market and timing have proved to conspire against us," he said. "We think our shares are undervalued at the moment and to push out more shares frankly made no sense."

He said the withdrawal would not limit P&O's expansion plans for its cruise businesses. "In the UK and Germany we are looking at a potential market of more than 100 million people, yet last year only 3,000 Germans took a cruise. It's a derisory number, and the opportunities are exciting."

Damian Brewer, an analyst at HSBC Securities, said: "It still seems like the demerger is on course and if anything P&O have had too many things to do."

He added: "It's hard to say anything of a positive nature that could uplift the cruising sector. In the rump business there's potentially a lot of value but that has to shine through, which won't occur until after the demerger."

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