Anatomy of a merger: Carnival foils Royal Caribbean in bid for Princess - Behind The Scenes

Cruise Travel, Sept-Oct, 2003 by M.T. Schwartzman

At the Thanksgiving table, the talk of 2001 was all about the travel industry. "Are we going to lose any more cruise lines?" was one question. "Maybe," I said, "but even more interesting is the merger between Royal Caribbean and Princess."

While the timing was suspiciously close to the events of September 11, the parties involved insisted that the merger was "not a direct response" to the attacks. In fact, they said, talks had been ongoing for more than a decade. But clearly the financial pressures facing the travel industry had given the merger more urgency--the day the financial markets reopened on September 17, the stock of both Royal Caribbean Cruises Ltd. and P&O Princess Cruises plc each lost more than a third of its value.

Little did I know that this proposed "merger of equals," as the two parties called it, was about to become a tug of war. On December 16, I awoke to news that Carnival Corporation had launched a hostile takeover of Princess. At first, Princess spurned the offer, then abruptly did an about-face, announcing that it would auction itself off to the highest bidder. It was such a big story that even the major news media chimed in. Bloomberg news radio, which specializes in nationally syndicated business reporting, devoted a full segment to the possible outcome. In the final analysis, the reporter concluded, a Carnival takeover would have a harder time passing anti-trust review.

New Year's 2002 came and went without much happening behind the scenes, while a public relations battle was waged through the media. CBS MarketWatch, a network business show, aired a story on the merger featuring Royal Caribbean chairman and chief executive officer Richard Fain, who extolled the virtues of the proposed pairing. Local newspapers picked up on the story, from wire services, quoting Carnival chairman and CEO Micky Arison, who questioned Royal Caribbean's suitability as a merger partner. "Since Royal Caribbean has historically underperformed, is there arty reason why they will improve in the future?" Arison asked.

To bolster its argument, Carnival increased its bid. The value of the Carnival offer was now substantially greater than Royal Caribbean's. The management of P&O Princess, for its part, continued to favor the pairing with Royal Caribbean, advising investors through its web site that "the board believes the Royal Caribbean combination offers shareholders the best prospects for long-term value and the best chance of successful completion." Furthermore, the board said, "this is a very natural fit between both companies. Their strengths are complementary rather than competing." The board also noted that the Carnival proposal would not allow P&O to retain its name on the stock exchange.

The next big day was ironically, February 14, 2002--for years known in cruise circles as "Love Boat National Holiday"--when P&O investors gathered in London to consider the fate of their 165-year-old company. On this day, however, not much love was in the air--P&O Princess stockholders voted to adjourn the meeting, effectively rejecting the recommendation of P&O management and allowing more time for the Carnival bid to be considered. Royal Caribbean investors followed suit, adjoining a day later. Who, if anyone, would merge with Princess was still an open question. "We are obviously disappointed at the outcome of these meetings," RCI's Fain said in a formal statement. "Now we will need to consult with our advisors to determine the implication of the votes and their impact on the merger."

The battle then switched from the media to the governmental sectors that would have to approve any merger. Both Carnival and Royal Caribbean petitioned the European Commission, each arguing its case that competition would be maintained, especially on the Continent, where according to Carnival's calculations the market penetration of the European cruise industry as a whole was less than one percent. Meanwhile, the economic backdrop stateside was beginning to change. Recovery seemed to be in sight, and the cruise business reflected the rebound--so much so that on March 15, the stock of both Royal Caribbean Cruises Ltd. and Carnival Corp. shot up due to firming prices and the prospect of increasing yields.

Still, the wheels of bureaucracy turned slowly, and not until three months later, on June 19, did regulators in the United Kingdom approve the pairing of Princess with Royal Caribbean. Even then, the deal was far from done. Approval was yet to come from the U.S. Federal Trade Commission. And lurking in the background was Carnival, which on the eve of the British approval said it would continue to pursue its hostile takeover.

About a month later, on July 24, the European Commission gave its blessing to a Carnival pairing too. Now attention turned across the pond to the United States, where the Federal Trade Commission would review both bids. At this point, a war of faxes erupted. First Royal Caribbean contacted travel agents, who favored a Royal Caribbean takeover by a margin of more than two to one, according to a survey conducted by Travel Weekly, a national newspaper for the agent community. Royal Caribbean urged the agents to write the FTC and express their opinions. Carnival responded with a fax of its own--which prompted a counter-fax from Royal Caribbean, fanning the flames of what was becoming an increasingly contentions debate.