Shareholders could boost cruise merger

Posted: Thursday, February 14, 2002

LONDON -- P&O Princess Cruises PLC faces a possible mutiny Thursday when it asks shareholders to approve a friendly merger that would create a new world leader in the cruise ship business.

Investors are likely to ignore management's advice to approve a union with Royal Caribbean Cruises Ltd. and instead delay a decision until they can better assess a takeover bid by Carnival Corp., industry analysts said Wednesday.

Industry leader Carnival, which has sweetened its offer three times, said last week that it had 29 percent support among Princess' shareholders for a delay in the vote on a merger with Royal Caribbean.

Miami-based Carnival needs a simple majority of shareholders to win a delay and gain the breathing room it needs to try to persuade more investors of the merits of its $5.4 billion cash and stock offer.

Felicia Kantor, a leisure industry analyst at Lehman Bros. in New York, said there's a ''decent chance'' that enough investors will vote to delay the merger decision.

''If I'm a Princess shareholder, I don't have anything to lose. I want to hear all the information,'' she said.

Princess says Carnival's bid is unlikely to win regulatory approval and accuses the U.S. company of wanting only to sink the planned merger.

Carnival insists its interest in a buyout is genuine, though it still hasn't made a formal, written offer. It says it can satisfy any concerns of competition authorities, suggesting that it might sell off its luxury Cunard brand, if necessary, as the price of approval.

For investors, the advantage in postponing a merger decision at Thursday's meeting would be to see if Carnival can indeed sail past the regulatory obstacles.

Approval from the U.S. Federal Trade Commission would be vital, both for Princess' proposed merger and the Carnival buyout.

''I think there's a strong risk that the regulators won't clear either deal,'' said David Liston, a leisure industry analyst at London brokerage Gerrard.

The proposed merger would create a competitive duopoly in the cruise industry, while the buyout would give Carnival a virtual monopoly, he said.

Carnival's 43 ships give it a 29 percent share of the global market. By buying Princess, it would scupper the competitive threat of a merger and become the industry's unassailable leader.

No. 2 Royal Caribbean, also headquartered in Miami, has 23 ships and a 23 percent market share. Princess ranks third with a 10 percent share of the global market and 18 vessels.

In spite of its smaller size, Princess has an exclusive niche. It is especially strong in specialty cruises to Alaska, while its American rivals focus more on a mass-market business in the Caribbean, said Steven Bowen, a transport analyst at BNP Paribas in London.

Business for all three companies foundered after the Sept. 11 terrorist attacks, and each is determined to cut costs and boost profits as a result.

Carnival launched its original bid for Princess after the London-based business announced plans to unite with Royal Caribbean. Princess would own 50.7 percent of the new group, with Royal Caribbean taking the remaining 49.3 percent.

Kantor of Lehman Bros. estimates the Royal Caribbean merger to be worth $3.7 billion for Princess shareholders.

Carnival has made shareholders a richer offer, but it denies them any potential to profit from future growth in the business, analysts said. The reason is that many institutional shareholders in Britain are limited to owning shares in British companies, and they would likely sell any Carnival stock they received in exchange for their Princess shares.

Under the proposed merger with Royal Caribbean, both partners would continue operating independently, with Princess's shares still traded in London and Royal Caribbean's stock traded in New York.

Royal Caribbean chairman Richard Fain warned last week that he wouldn't wait around if Princess shareholders voted to delay a decision. Fain's company would have to pay a $62.5 million penalty to Princess if it walked away from their planned deal.

If investors do delay the merger decision, Carnival could always surprise them by withdrawing its informal offer.

However, Liston said it's unlikely that either Royal Caribbean or Carnival would leave the table.

''I think P&O Princess is the prize in all this,'' he said. Princess has the most modern fleet of the three companies, he said, and its business held up well during the autumn downturn.

The likeliest losers in this three-way struggle appear to be customers.

Either combination should result in lower operating costs, but Bowen said he'd be ''very surprised'' if any savings found their way to customers as cheaper tickets.

In fact, cruise vacations would probably end up costing more. As Kantor explained, ''Operators would have more pricing power than they do today.''

In trading Wednesday, Princess' U.S.-traded shares fell 20 cents to close at $23.10 on the New York Stock Exchange, where Royal Caribbean shares rose $1.09 to close at $18.23, and Carnival shares finished at $26.48, up 93 cents.

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