Central & Eastern Europe Asia Latin America North America
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| Best M&A deal |
| RWE’s acquisition of Innogy |
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Size: $8.5 billion Date: May 2002 Advisers: Merrill Lynch (RWE) CSFB, Deutsche Bank (Innogy) |
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Innogy and Dietmar Kuhnt of RWE: after a shaky |
It was hardly an auspicious start to a relationship between a German company and its UK target. When executives of UK energy group Innogy arrived at Heathrow airport to meet their counterparts from the German utilities firm RWE they found they’d been assigned a meeting room named after World War II RAF fighter-pilot hero Douglas Bader.
It could have been an ice-breaker but did the executives see the joke? “Er, not really,” confesses one of the bankers involved in the transaction. What made matters worse was that high winds delayed the aircraft carrying RWE CEO Dietmar Kuhnt from Germany, leaving Innogy CEO Brian Count and his team waiting for several hours.
For Count, it must have been an uncomfortable wait. A week earlier he’d taken a phone call from Kuhnt so he knew exactly what was coming. When the RWE contingent finally arrived, the atmosphere was frosty. Kuhnt gave a formal presentation, setting out the rationale of his company’s approach but there was no interaction between the two sides and the body language was distinctly hostile.
Not only did Count feel that the RWE offer of 250p a share was too low but, having just acquired the Yorkshire Group and Northern Electric in the UK, he had his own integration plans to pursue and wasn’t looking to be taken over.
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Dietmar Kuhnt |
Innogy’s advisers deny that there was ever any acrimony around the negotiating table. “The deal was a friendly one from the beginning,” says Roger Aylard head of corporate broking at Deutsche Bank. “Both managements and their advisers got on really well.” What is undeniable, though, is that the deal took some time to get off the ground. In fact, talks didn’t kick off in earnest until news of the potential transaction was leaked to the Sunday Times in mid-February. Each side blames the other for the leak.
What happened next depends on who you ask. RWE’s advisers claim that Innogy tried to drum up a counter-offer by putting itself up for sale. In the days following its announcement that it had received approaches, the potential acquirers – including Suez, EdF, Endesa and Scottish Power – all denied their interest, leaving RWE as the only suitor.
Innogy’s banks, on the other hand, claim that several companies had expressed an interest and that some of these discussions had gone beyond preliminary enquiries. The UK group decided to enter negotiations with RWE because it offered the best prospects for shareholders.
Even after that, talks didn’t go particularly smoothly. One sticking point was over disclosure of information. RWE had already raised its price to 265p but wanted to see detailed numbers before raising the offer any higher. Innogy took the view that a more generous offer should be on the table before it opened its books. There was a relatively long period of due diligence, much of which was focused on the trading book. Because this was the first major electricity company merger after Enron, RWE was keen to get completely comfortable with Innogy’s contracts and risk management practices.
RWE persevered, though, because Kuhnt attached great importance to doing this deal. “Innogy was the final piece in RWE’s transformation from a domestically orientated company,” says Franz Etz, a managing director in the energy and power group at Merrill Lynch. “It is the fourth and last in a series of large international acquisitions.” Previous deals were Thames Water in 2000, and Transgas and American Waterworks, both in 2001.
RWE finally paid 275p a share for Innogy in a deal that closed in May. “This was an extremely important deal for us and for the transformation of the group,” says Andreas Zetzsche, head of the M&A unit at RWE. Its advisers are also keen to point out that RWE still believes that the price it paid for Innogy was a fair one, despite write-downs at German peers such as E.ON, which last year announced an impairment of goodwill related to its purchase of UK electricity company PowerGen.
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Castorama: French DIY chain that proved a |
| Best equity deal |
| Kingfisher |
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Type of deal: rights issue Size: £2 billion Date: July 2002 Lead underwriters: CSFB, UBS Warburg, Goldman Sachs |
If 2001 was all about accelerated placements – with more than 80% of European equity issuance being done overnight – 2002 was the year of the rights issue. Ericsson, Zurich Financial Services and Legal & General are just a few of the names that approached shareholders for a vote of confidence during the year.
Kingfisher’s £2 billion offer completed in August stands out for several reasons. Not least, it was the largest fully underwritten issue ever done by a UK corporate. BT’s 2001 issue was bigger but did not feature an underwriting facility.
Unlike most other rights issuers last year this was not a distressed company going cap in hand to investors with its survival depending upon it. Rather, the retail group needed to fund an acquisition that made obvious sense – obvious to all but the target company, that is.
Castorama, a French DIY firm already 55% owned by Kingfisher, bitterly resented its approach. “They said that everything was different in France, that we didn’t understand how things worked and that the benefits we were talking about didn’t really exist,” recalls Helen Weir, Kingfisher’s highly regarded finance director. “It was a big challenge convincing our shareholder base that we knew what we were doing.”
Besides taking place in a hostile environment, the deal took almost 12 weeks to complete compared with the usual three to six weeks. This meant higher risk for Kingfisher and its banks. This was due to the arrangement Kingfisher made with Castorama in 1998 when it merged its own DIY subsidiary, B&Q, into the French company in exchange for a 55% stake in the combined business. Despite being a majority owner, Kingfisher only had 50% of the board seats, with an option to assume full control after July 2001, subject to its offer being deemed fair by an independent bank.
According to the terms of the agreement, however, before a bank could be appointed Kingfisher had to put a fully funded, unconditional offer on the table. This meant persuading its banks to agree to stump up £3.1 billion – £2 billion via a rights issue and a £1.1 billion debt facility. For the equity portion, that involved getting the commitment underwritten before Kingfisher made its offer and then maintaining it throughout the process of obtaining shareholder approval, the fairness opinion and executing the rights issue.
“We knew that the banks would have to underwrite the deal for a significant number of weeks, but we didn’t know exactly how long,” says Weir. “We needed to have certain funds and if we hadn’t got that certainty, we wouldn’t have been able to do it.”
To give Kingfisher that guarantee, its banks agreed in May to underwrite a £2 billion issue at a heavily discounted £1 per share with the proviso that these terms would be revised nearer to the time. An unusual fee structure was also used to try to keep costs down for the company. “Early on in the transaction, the highest level of risk was borne by the company. To reflect this, we put into place a progressive fee structure which started at a low level,” says Jim Renwick, joint head of European equity capital markets at UBS Warburg.
After the stand-by underwriting facility had been put in place in May, Kingfisher announced a proposed offer of e67 a share. After shareholders cleared the bid and rights issue, Rothschild was appointed as an independent expert to give its view on the price. From the point at which the offer was made, Kingfisher’s own share price started to slip, along with those of most of its peers, as the market collapsed in May and June. What might have been a two-for-three issue ended up as a one-for-one. “Watching the market move against us through no fault of our own was definitely the low point of the deal,” says Weir.
One of the undisputed high points, she recalls, was Rothschild’s declaration on July 8 that e67 was a fair price. This enabled Kingfisher to launch a formal offer and gave the go-ahead for the banks to reprice and launch the rights issue at 155p a share in a one-for-one offer. During the the issue period, Kingfisher’s shares fell from 234p (the theoretical ex-rights price) to 155p. However, they had recovered to 197p (the actual ex-rights price) by the end of the offer period.
The second victory for Kingfisher was seeing the issue fully subscribed, with 96% of existing shareholders taking up their rights. It had been a long, hard slog in exceptionally difficult markets, with a hostile and uncooperative target and an unusually long period of uncertainty to contend with. “There were a lot of crisis meetings,” admits one banker.
As for Weir, she has no doubts about the significance of the rights issue. “It was absolutely essential to get this transaction done to effect the transformation of the group,” she says. “If we hadn’t done it then we wouldn’t have been able to move ahead.”
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Barclay Knapp, president & CEO of NTL: oversaw |
| Best restructuring deal |
| NTL |
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Size: $25 billion Date: May 2002 Advisers: CSFB, JP Morgan, Morgan Stanley |
Transatlantic air traffic fell markedly last May after cable and wireless communications company NTL reached agreement with creditors on a blueprint for its impending restructuring. With most of the company’s bond investors, many of its lawyers and the CEO based in the US and the CFO, bank lenders and major shareholder France Telecom situated in Europe, there was a lot of toing and froing. “I think we kept Concorde in business for a while,” says one of the bankers who advised NTL during the negotiations.
But no-one expected the largest high-yield bond restructuring ever done to be straightforward. NTL was a big, sprawling company with operations in the UK, US, Switzerland and Ireland. “There were 33 separate issues of debt and preferred on this company’s balance sheet,” says Jill Greenthal, a managing director in the media group at CSFB. “Restructuring this company was an intense balancing act.”
Despite this, the company stuck to a breakneck timetable. Discussions between the various stakeholders began in earnest in January after the sale of NTL’s broadcast towers business to France Telecom fell through and it became clear that no cash was coming in. Also looming over the business was an interest payment of $134 million due to bondholders in April.
February and March were spent negotiating with potential acquirers – including John Malone of Liberty Media – as well as bondholders, and getting waivers from the banks to proceed with the restructuring plans. By April the bond investors had come to the forefront, propelled to the negotiating table by the thought that an acquirer could impose less favourable conditions than they would achieve in an agreed restructuring.
By May, NTL was able to announce an agreement in principle with banks and bondholders. This plan involved splitting NTL into two companies – NTL UK & Ireland and NTL Euroco – with bondholders receiving 100% of the equity of the UK & Ireland division and 86.5% of Euroco’s initial equity.
Shareholders – including France Telecom, whose presence threw a spanner in the works because it refused to accept that its 24% stake was worth so little – were given a package of rights and warrants. Holders of preferred stock were given the entitlement to acquire around 23.6% of initial equity in the company and common shareholders were allocated the rights to 8.9% of primary equity.
“To go from a kick-off in early January to an agreement in May was pretty exceptional,” says John Gilbert, a managing director at JPMorgan. “Most people thought that the group wouldn’t be able to do it at all, or at least not until the third quarter.”
One of the reasons this was possible, say bankers, is that NTL executives faced up to unpleasant facts early on. “Even though they still had liquidity at the end of 2001 and even the beginning of 2002, they realized that the markets weren’t going to bounce back and that they had to work on a comprehensive restructuring,” says Phil Jacob, head of CSFB’s restructuring group.
Because of the willingness to jump rather than wait to be pushed, he says, every constituent in the capital structure ended up getting some recovery. “When a company starts the restructuring process before it has a gun to its head then it’s easier to argue that the junior stakeholders should get something,” Jacob explains.
In January this year, NTL emerged from chapter 11 bankruptcy in the US having swapped $10.9 billion of debt for equity. It also secured $500 million of new funding from existing bondholders.
Significantly, it had succeeded in escaping UK bankruptcy proceedings. This was one of the key aims throughout the process – because creditors have more rights under UK law, going into receivership there could wipe out the bondholders investments’ overnight.
It was a precarious process until the end. “All it would have taken was a couple of banks or bondholders to pull the whole deal down,” says Gilbert at JPMorgan. Luckily for NTL and its investors, enough of them believed that the company was worth saving to share the pain and make concessions to get the restructuring done.
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Aloïs Michielsen, |
| Best structured finance deal |
| Solvay |
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Type of deal: monetization of put option Size: e800 million Date: May 2002 Arranger: Deutsche Bank |
Solvay’s predicament will be familiar to many firms. Towards the end of 2001 the Belgian pharmaceuticals and chemicals group began negotiations with Italian company Montedison to buy its Ausimont subsidiary for a total consideration of e1.3 billion. “We had more or less e500 million in cash but we had to find the rest,” recalls Christian Trochet, head of the treasury department at Solvay.
The company had several credit lines that it could have used or it might have approached the debt markets. However, neither of these solutions was ideal for it. Rating agencies were generally nervous about liquidity levels and the credit markets were looking decidedly shaky.
Solvay was keen to find another method of financing the purchase that would not adversely affect its credit rating or expose it to the vagaries of the capital markets and would allow it to keep its bank lines intact.
Earlier that year, the company had signed a joint venture agreement with oil company BP. As part of that deal, Solvay was granted a put option over its half of the joint venture that could be triggered from 2004. Trochet and his team came up with the idea of using this highly valuable option to raise money right away. After all, in three years’ time they might not need it.
Trochet approached several banks to come up with possible structures for the deal. A number of important considerations had to be met. Solvay was adamant that the joint venture itself should not be adversely affected and was not prepared to negotiate any changes with BP. “What we wanted to monetize was not a right to the joint venture but to the proceeds of the put option,” says Trochet. There were also accounting constraints. An off-balance-sheet vehicle was out of the question. And the structure had to avoid any additional tax risks.
Deutsche Bank proposed a transaction that involved transferring BP’s credit risk in respect of the put option to the financing syndicate that would be put together. “All of those who took part in the financing had to take on the credit risk of BP,” explains Colin Greene of Deutsche’s strategic equities transactions group. “If BP defaults, the only recourse of the financing banks is to Solvay’s half of the joint venture and not to Solvay itself.”
To achieve this risk transfer, a subsidiary, Solvay Jersey, issued shares to the syndicate of banks. Debt was not used as that would have implied an obligation on Solvay itself to pay. Solvay did however grant a contingent put option to the syndicate in case it did not exercise the put option against BP for example.
An additional complication was that the acquisition of Ausimont was likely to take some time to pass through the regulatory process but, when the deal was cleared, Solvay would need the money within two weeks. This meant that the syndication process had to be done at breakneck pace in May when the purchase went through, to avoid Solvay having to pay out for a bridge loan.
Selling the deal to the banks in the syndicate was hard work, recalls Green. Whereas normally a fax and a telephone call to discuss the finer points would do, with such a highly tailored transaction face-to-face meetings were necessary to bring the loan origination teams up to speed and get them comfortable with the structure. “It is unusual to raise financing from a bespoke M&A derivative or to transfer third-party credit risk in a financing or to syndicate a highly structured transaction. This deal involved all three,” says Greene.
There was a lot of work needed too to explain to the rating agencies how the deal worked. Trochet remembers how relieved he was when, just after Solvay signed the agreement to acquire Ausimont, both Moody’s and Standard & Poor’s confirmed the company’s rating. “Up until the day before the announcement I had calls from the rating agencies seeking clarifications,” he says.
Trochet has no doubt that the deal was an unquestionable success for Solvay. “This was certainly the optimal way to finance this transaction,” he says. “There were other ways to do it but these would have involved consuming too many of our resources.”
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Milan cathedral: The Region of Lombardy impressed |
| Best high-grade bond |
| Region of Lombardy |
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Size: $1 billion 30-year notes Date: October 2002 Lead arrangers: Merrill Lynch, UBS Warburg |
When the Italian region of Lombardy came to market in October with a $1 billion 30-year bond issue, some market participants thought it would never manage to get it done. Apart from the fact that Lombardy had never tapped the capital markets before, 30 years was a tricky maturity to get right. To go the whole hog in this currency and duration seemed a risky strategy.
“There was a little scepticism initially in the market because this type of transaction had never been seen before,” says Nazarro Angelini, a managing director at Merrill Lynch. “There hadn’t been much issuance in the 30-year sector; the US treasury had stopped, agencies had been avoiding it and few corporates had tapped the market in this area until then.”
But few had counted on Lombardy having such a compelling credit story. The fact that it boasted a higher rating than the Republic of Italy got it off to a good start with investors. While the sovereign rating was Aa2/AA, Lombardy was rated AA+ by Standard & Poor’s and earlier in the year it had succeeded in persuading Moody’s to award it Aa1. This made it the first regional authority issuer to go through the sovereign ceiling (the City of Venice had done so previously).
Lombardy has a higher GDP than either Sweden, Austria, Denmark or Finland, has very low unemployment at 3.7% compared with a national average of 9.5%, and low debt levels. Its total indebtedness is only a little higher than the amount it was seeking to raise, e400 million of which was to refinance expensive loans and e600 million for new capital investments.
The deal also had great rarity value. Lombardy made it clear it would not be tapping the capital markets again in the near future so this was a unique opportunity to own its paper.
All of the bankers involved in the deal praise the high levels of professionalism shown by the Lombardy officials, who were completely new to the concept of presenting their story to investors. This really helped the deal fly. “Issuers and fund managers sometimes don’t gel but this was like watching a hot knife go through butter,” says one.
During a gruelling three-week roadshow, regional finance minister Romano Colozzi and the president of the regional government, Roberto Formigoni, proved expert at conveying their commitment to and enthusiasm for the region to potential investors. They attended every presentation and talked of Lombardy’s cultural, culinary and tourist attractions, as well as its economic strengths.
As a result of all of these elements, Lombardy’s inaugural transaction proved to be a runaway success, with one fund manager even going so far as to call it “the crown jewels”. It was able to capture an enormous amount of pent-up demand for long-dated paper that had not been satisfied by the few issuers that had come to market with 30-year deals in 2002. And it achieved truly global distribution. Around 50% of the paper was placed in the US – all but one of the 19 investors who saw the presentation signed up. This is highly unusual for non-US deals, which usually manage only 25% to 30% according to bankers.
“Because this was a global issue this enabled us to capture an element of price tension,” says Fabio Lisanti, head of Italian debt capital markets at UBS Warburg. “The European investors knew it wasn’t just them setting the price.”
After initial price talk of 73 to 75 basis points over treasuries, Lombardy was able to price at 73bp over, putting it in the same league as Fannie Mae and Freddie Mac, both of which trade in the high 60s over treasuries. “Many orders were switches from agencies to get the yield pick-up,” says Niccolo Ragnini, head of local authority issuance for UBS Warburg in Italy.
Last month S&P revised its outlook on the Republic of Italy to negative from stable. At the same time, it reaffirmed Lombardy’s AA long-term rating, confirming that the region now is seen as an issuer on a European scale rather than an Italian one.
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E.ON headquarters: the German utility can now boast |
In early April, German energy group E.ON held an extraordinary beauty parade. Sixteen banks were invited to pitch for the company’s inaugural bond deal of between e5 billion and e7.5 billion and each got precisely one and a half hours. One bank allegedly lost the mandate because its team turned up late, another because during its presentation bankers swigged water out of litre bottles rather than glasses.
E.ON’s approach to choosing its banks was typical of the meticulous care and attention it devoted to every stage of the deal, according to bankers involved. The board left nothing to chance and from beginning to end its execution was virtually flawless.
In May when the bond was launched, the credit markets were extremely volatile, with deals being pulled or postponed, including that for Spanish utility Endesa. Issuers who did brave the market, such as Deutsche Telekom, got an extremely rough ride. Moody’s downgraded DT halfway through the book-building process after it released earnings figures that were worse than the markets had been expecting.
Despite such bad vibes in the credit markets, E.ON sailed calmly through the stormy waters without even having to widen its initial offer price. “Big does not always mean beautiful but this deal managed to hit a sweet spot in the market,” says Justin May, global head of corporate debt capital markets at ABN Amro.
The size and success of the deal was all the more impressive for a corporate that had not tapped the capital markets before. E.ON was formed from a merger of Veba and Viag in 1992 so there had not even been an initial public offering in E.ON shares. “To see this company come to the markets and absolutely nail it was fantastic,” says John Winter, head of debt capital markets at Barclays Capital.
Much of this can be attributed to E.ON’s commitment to transparency. It made it clear to potential investors that this was its one and only issue of 2002 and undertook an exhaustive marketing campaign with a roadshow lasting seven business days – on four of which there were two teams operating – covering nine countries and 14 cities. “E.ON took care to address every concern investors might have,” says Winter. It didn’t shirk, for example, from the issue of its impending rating downgrade but told fund managers about its long-term priority of keeping ratings high as it made further acquisitions, particularly in the US, as well as disposals.
Given the issuer’s rarity value, some market participants have said that success was always assured. That’s a charge Sean Park, head of debt syndicate at Dresdner Kleinwort Wasserstein, disputes. “At the beginning, it was far from obvious that a e7 billion plus deal could get done,” he says. “Jumbo deals have virtually disappeared because of nervousness in the markets. Even if investors like the company, there’s often a fear that they’ll be swamped by too much supply.”
To prevent this, says Park, “we kept a tight lid on the specifics of the deal, which forced investors to focus on the credit story.” It clearly worked. E.ON attracted e9 billion-worth of orders from more than 600 investors, enabling it to set the record for the biggest-ever bond deal by a European utility. Particularly popular was the seven-year tranche, which formed the keystone of the deal and was one-and-a-half times oversubscribed.
E.ON’s results in the sterling market were equally impressive. Following its purchase of PowerGen in 2002, the company was keen to get sterling-denominated funding. This it achieved via a 10-year tranche, 20% of which was placed outside the UK, and a 30-year tranche that was scaled up from £850 million to £975 million during the book-building. E.ON can now also boast of having done the largest ever 30-year bond in sterling by a non-UK domiciled corporate.
When the deal was launched many in the markets speculated that E.ON would rely heavily on the support of German investors to get the paper placed. But when a company seeks to raise this much money, it cannot lean excessively on its domestic market. With 80% of this bond being placed outside Germany, E.ON can hardly be accused of having done that.
| Best loan deal |
| Madison Dearborn buyout of Jefferson Smurfit |
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Type of deal : e5.7 billion leveraged buyout, using e2.65 billion leveraged loan Date: June 2002 Lead managers: Merrill Lynch, Deutsche Bank |
Ian Gilday, a managing director in debt capital markets at Merrill Lynch, clearly remembers a meeting with the bank’s financial sponsor coverage group to discuss financing Madison Dearborn’s buyout of Jefferson Smurfit at the end of 2001. “We knew how much Kappa had raised a few months before and since then there had been more bank consolidation and the withdrawal of certain banks from the leveraged market. This was going to be e700 million to e800 million of senior debt more,” he recalls.
Not only had this size not been attempted before, but Madison Dearborn was an unknown name in Europe at the beginning of 2002. Its target was in a highly cyclical sector – in the middle of an industry downturn and with 20% of its revenue coming from Latin America. “Selling all that to European bank investors was going to be an interesting challenge,” says Gilday.
Because the e3.8 billion of financing that Madison Dearborn needed was to do a public to private transaction, under Irish and SEC takeover rules the two lead banks would have to commit certain funds before the deal was signed. However, they couldn’t syndicate it, or even test the waters to determine market sentiment towards the company, until the transaction was closed.
Merrill and Deutsche Bank reassured themselves with the thought that Jefferson Smurfit was a good credit and had an excellent management team. Above all, since the buyouts of such companies as Messer Greisheim, Yell and Cognis in 2001, the leveraged loan market had been quiet. The relative lack of paper would, they thought, help this deal fly.
If only they’d known that the market was about to pick up. The second and third quarters of 2002 saw a record number of jumbo buyouts by financial sponsors such as Legrand, Haarman & Reimer and Elis. Between e16 billion and e17 billion of debt facilities were signed in the course of three months and suddenly the loan market pipeline was full to bursting point, with issuers jostling to get to the front of the queue.
By the time the leads went out to syndicate the Madison Dearborn loan in June, the Wendel consortium had already made its e5 billion offer for Legrand. This, along with the fact that everyone knew the size of the lead banks’ commitment to the company and how much it needed a successful syndication, meant that there was enormous pressure on Deutsche and Merrill to increase the fees, which they eventually did by 10 basis points.
Against all of these odds, Madison Dearborn got its money from the market – e2.6 billion as senior debt and e905 million of high-yield bonds – and the deal was an unmitigated success, with the senior facilities oversubscribed. A total of 67 investors, banks and institutions signed up, with around e400 million going to institutions. “There have only been one or two European leveraged loan where so much has gone to institutions,” says Gilday.
The financing also included an additional facility of e125 million, which Madison Dearborn was able to use to bolster its equity contribution of e732 million. This was achieved by spinning off some of the non-core assets on Jefferson Smurfit’s balance sheet, such as corporate jets, properties and artwork, into an off-balance-sheet vehicle.
Best cross-border M&A deal of the year
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Carnival and Princess deal is undisputed cross-border M&A transaction of the year |
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.
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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.
