This January, Carnival and P&O Princess agreed to form a dual listed company in London and New York. This marks the end of an extraordinary takeover battle and is the undisputed cross-border M&A transaction of the year.
When Carnival chairman Micky Arison stood up to address a P&O Princess extraordinary general meeting early in 2002, he knew that his dreams of controlling the British cruise-liner company depended on it. The EGM had been called by P&O so that shareholders could approve a merger the board had agreed with Royal Caribbean, US company Carnival’s closest competitor. It was Arison’s aim to convince them not to do so.
Feelings were running high at the Grosvenor House Hotel in London. P&O shareholders, many of them long-time retail investors, were concerned about the future of the firm if it was taken over by a US rival. One asked whether a new owner of P&O would allow British troops to use its vessels in the event of another Falklands war, as Lord Sterling, P&O’s chairman had.
Another shareholder, gesticulating towards the Carnival board members, sitting near the front of the conference room, asked: “Why don’t they talk?” At this, Arison stepped onto the stage and approached the P&O directors. Their radio microphones picked up his words as he greeted each by name and asked if they minded him addressing the hall from there.
Arison appealed to the angry investors to listen to his side of the story. “There was a hostile group of shareholders who had been led to believe that we were trying to steal the company,” he says. “We felt they deserved the opportunity to see our offer.”
It was February 14 – St Valentine’s Day – and Carnival was trying to break up the happy couple. It had to persuade the P&O investors to vote against the board’s recommendation to accept Royal Caribbean’s bid and adjourn the EGM so that Carnival could seek regulatory approval.
A bitter pill to swallow
So many shareholders attended the EGM that at 10pm, 12 hours after it had begun, votes were still being counted. At 3.30am the result was announced. The EGM would be adjourned since 63% of the 59% of shareholders present voted in favour.
| View graph. | ||||||
The poison pills Cahill refers to are the mechanisms US company Royal Caribbean used to protect its deal with P&O.
It all started back in September 2001. On September 11, in fact, P&O, Royal Caribbean and their advisers were holed up in Coral Gables in Florida about to begin negotiations. “We didn’t get a whole lot done that day,” says one of the P&O advisers. But, as it became clear that no-one was going anywhere fast, the two sides started to knock around ideas for a possible merger.
Royal Caribbean, with around 25% of the cruise market, was a highly leveraged company and this, together with worries about the impact of the New York attacks, meant it was more flexible than it might have been in better times. “In the end, we were able to enter a transaction giving P&O Princess shareholders 51% of the merged company, even though it was only contributing a third of combined capacity,” says Wendell Brooks, a managing director at SSSB which advised P&O.
By way of a sweetener, however, Royal Caribbean insisted on levels of deal protection that were unprecedented in the UK. These included a break-up fee of $62.5 million, which represented 2% of P&O’s market capitalization – under the UK takeover code the maximum allowed is 1%. There was also a no-shop clause, preventing P&O’s board from talking to any other firm and, most onerous of all, a joint venture that required a $1 billion investment by each side and invoked heavy penalties should there be a change of control.
P&O’s advisers strenuously defend this strategy. “These protection measures gave a period of time in which P&O couldn’t enter negotiations with others and allowed them the space they needed to convince shareholders that the deal made sense,” says Brooks. From the beginning, the team had worked under the assumption that with 40% of the cruise market Carnival would not be able to get regulatory clearance to take over P&O, which had around 15%. But they weren’t taking any chances.
On September 24, Howard Franks, Carnival’s CEO, had made what has became known as the £1.80 phone call – £1.80 was the price at which P&O’s shares were trading at the time. With the shares of both companies depressed as fears of terrorist attacks continued to bite deeply into bookings, Franks called P&O CEO Peter Ratcliffe and suggested they might get together in a friendly takeover. It had long been Carnival chairman Arison’s ambition to snap up P&O Princess. Ratcliffe was non-committal.
On November 20, Carnival realized why. When P&O and Royal Caribbean announced that they had agreed to merge, Carnival’s advisers went into overdrive. “There was a general consensus that as a US firm we couldn’t do a hostile takeover on a UK company with a lord at the helm,” says Arison. “But when this merger was announced we had no choice.” By December 17 they were ready to launch an offer of 457p per P&O share in cash and shares. This offer had several preconditions, including regulatory clearance, additional information from P&O, and clarity on what penalties would be incurred if there were a change of control while the joint venture between P&O and Royal Caribbean was in place. “Because the cruise market is a small part of the overall holiday market we felt there was a chance of persuading the competition authorities,” says Alistair Defriez, managing director at UBS Warburg.
A baffling silence
The problem was that P&O’s board would not talk to Carnival or its advisers. At the time they were baffled by this. It discovered why when information about the proposed merger went out to shareholders. Royal Caribbean had imposed a gagging order on the P&O board as one of the conditions of the deal agreement. “The bleakest moment for us was when the documents detailing P&O’s agreement with Royal Caribbean were posted and we saw how onerous the poison pills were, particularly the joint venture,” says Cahill. “Clearly this was designed as deal protection.”
A series of complex put and call options meant that Carnival would be forced to buy out Royal Caribbean’s half of the venture if it bought P&O at a cost of around 30% of the smaller company’s market cap. “When we realised that this could cost us up to $1 billion to unwind, we started to consider whether it was worth the risk,” says Arison.
“This was only possible because P&O and Royal Caribbean were proposing a dual-listed firm in London and New York and such structures then fell outside of the UK takeover code,” says UBS Warburg’s Defriez.
Faced with a silent board and deterrents of this magnitude, Carnival changed tack. Because P&O’s advisers seemed to be using the argument that Carnival’s bid would not get regulatory approval as an excuse not to take the offer seriously, it decided to focus on getting past the competition authorities. “We felt that if we could pass the regulators that would put us in a strong position,” says Arison.
But with P&O’s EGM in just a few weeks, Carnival had to win shareholder support quickly. “Their initial response was positive but they wanted a higher headline price. And some UK institutions wanted a dual-listed structure, still with a premium, so that they could keep their equity exposure,” says Philip Yates, European head of investment banking at Merrill Lynch. “But they wanted to see more money on the table as well as a cash offer for European shareholders who could not hold US stock.” But before Carnival agreed to raise its price, it wanted a commitment from shareholders that they would be willing to vote to adjourn the EGM.
Not so fast, said the UK Takeover Panel, which deemed that Carnival could not approach shareholders to seek support before the offer was publicly announced, for fear of a leak. “We decided to make the increase to 550p preconditional on getting over 15% of shareholders to vote for adjournment of the EGM against the recommendation of the board,” says Defriez.
One step at a time
Before the epic shareholder meeting, Carnival won letters of support from 23 of P&O’s top 29 shareholders, in spite of warnings from the P&O board that shareholders risked ending up with no offers on the table if they didn’t approve the merger with Royal Caribbean. On July 24 2002 European competition authorities cleared a tie-up between Carnival and P&O. Then, that summer, Carnival got another lucky break when the UK takeover code was changed. In future, it was ruled, proposals to create a dual-listed company would be treated in the same way as any other M&A proposal.
The Takeover Panel deemed that this ruling could not apply retrospectively, however. “It was like taking one step forward and two back,” recalls Defriez. “We’d won the moral argument but it didn’t change anything.”
Finally, on October 4, the US Federal Trade Commission approved the deal. Just hours later, the board of P&O agreed to meet Carnival and its advisers. During a weekend of meetings in New York, P&O CEO Ratcliffe told Arison that if he could restructure the cash-and-share offer into a dual-listed company structure instead, as Royal Caribbean had proposed, the board would switch its recommendation. “We convinced Carnival to alter their terms one last time to allow UK institutions to participate through owning shares, rather than having to take the cash,” says Brooks.
It seemed that victory was near. However, Carnival had already made a public offer in cash and shares that had just been cleared by the competition authorities. A nerve-wracking wait ensued until, after further negotiations with the takeover panel, it was agreed that because shareholders had confirmed that they would prefer a dual-listed company structure, Carnival could, exceptionally, withdraw its offer.
But there was still the issue of the joint venture. On October 24, Carnival announced a proposal to enter a dual-listed company with P&O. At the same time, Royal Caribbean announced it had agreed to split up, upon payment of the break-up fee, but not to dissolve the joint venture.
Carnival’s advisers estimated that it was looking at a bill of $388 million to $484 million to get P&O off this particular hook, in addition to any additional liabilities it might incur. Finally, though, P&O revealed that there was a get-out clause. If bookings were below 20% by the year-end the venture could be dissolved. P&O was under no obligation to publicize the cruises or accept reservations but chose not to clarify this until the eleventh hour.
P&O’s advisers say the escape hatch was intentional. “We purposefully crafted the joint venture so another buyer could show up and if they paid the price and cleared the regulatory hurdles then the competing transaction would be available to shareholders,” says Peter Tague, managing director at SSSB. But it’s difficult to understand why the advisers put so many barriers in Carnival’s path. “We created hurdles not barriers,” insists Tague. “We needed to make sure that Carnival was for real.”
Early last month, P&O signed an implementation agreement with Carnival. The result is the first ever dual-listed company between companies in the S&P500 and the FTSE 100 and the first time this structure has been used to effect a takeover. “P&O and Royal Caribbean announced this as a done deal so we knew there were going to be challenges,” says Arison. “But never in our wildest dreams did we imagine it was going to take 18 months to achieve.”
Not least among the challenges was a board that seemed more concerned with protecting its own deal than getting the best value for its shareholders and advisers to the target focused on tripping up new bidders rather than starting a competitive auction. Added to this was a putative gagging order on the board and a dubious joint-venture contract that seemingly disappeared overnight.
In the end they got a good deal. But in the post-Enron, post-WorldCom era, P&O shareholders might well wonder whether this was by luck or design and just who was looking after their interests.
