Princess Cruises Considers Bids by Royal Caribbean, Carnival

Call it the Princess’ prerogative.

After spurning Carnival Corp.’s aggressive courting for more than a year in favor of another, P&O; Princess Cruises may now want to change its mind.

On Friday, U.S. regulators cleared the way for both Carnival, the world’s biggest cruise line, and No. 2 Royal Caribbean Cruises to pursue their respective bids for the No. 3 company, and the sought-after Princess quickly considered making the most of either deal, saying Carnival’s didn’t look so bad after all.

“She’s the crown jewel, considering all of her options,” said Mike Driscoll, senior editor of Wilmington, N.C.-based Cruise Week.

London-based Princess indicated a willingness to enter into talks this week with Carnival, whose $5.4-billion offer of cash and stock already is favored by Wall Street.

Until now, Princess had expressed a preference for Royal Caribbean’s deal, which would allow the firms to remain separate, with individual stock listings in New York and London. Carnival has said it is open to making a dual-listing transaction, which prompted Princess Chief Executive Peter Ratcliffe to say Friday that a deal with Carnival “is both feasible and financially more attractive.”

Whatever the final coupling, a merger would create the world’s largest cruise company, with more than 40% of the market, at a time when travel remains in a worldwide slump, revenue is flat after more than a year of deep discounting to get passengers on board, and years of expansion have loaded the industry with debt and an oversupply of luxury vessels.

Although both U.S. and European regulators said that neither a Princess-Carnival nor Princess-Royal Caribbean pairing would be anti-competitive, some see the consolidation as a remedy for an industry with too much capacity and too little room to raise prices.

“Over the long term, I would expect them [the merged companies] to have more pricing power,” said Paul Keung, an analyst for CIBC World Markets in New York. “In the short term, I doubt there’d be much change, given the uncertainty of the industry right now.”

A Princess-Royal deal would combine 75,000 berths and control of 42% of the North American market. A Princess-Carnival pairing would blend 88,000 berths and command 49% of the market.

The United States now has 20 ports of call, compared with four less than a decade ago. Cruise operators will launch 11 new cruises out of New York alone in 2003--four more than last year.

In Southern California, Carnival’s Mexico cruises has become so popular that it operates a $40-million terminal in Long Beach next to the Queen Mary. The cruise line has two L.A.-based ships that carry about 4,000 passengers, while Princess and Royal each have one.

Carnival and Royal--which are both based in Miami--have said jobs would not be cut as a result of a merger with Princess, and that new hiring would likely take place in South Florida. Princess has about 12,000 employees, including 750 based at the company’s local headquarters in Santa Clarita.

It was the post-Sept. 11 travel drop that led Princess and Royal to propose a marriage last fall, which they touted would be a merger of equals that would save $100 million annually. A month later, Carnival stepped in with an unsolicited $4.5-billion bid that has since been raised to $5.4 billion.

Most cruise lines last year had to offer cut-rate prices to fill the floating resorts, and at least two lines--Renaissance Cruises and American Classic Voyages--folded last year as bookings dropped 50%.

But by adjusting itineraries to keep passengers from having to travel overseas, along with rates that were slashed to 20-year lows, travelers were lured back more quickly than expected. The International Council of Cruise Lines said the $20-billion cruise industry would end 2002 with a record 7.4 million North American passengers.

“Consumer confidence in the cruise industry helped it rebound beyond anyone’s expectations of last September,” said Michael Crye, president of the council.

By the second quarter, cruise rates had inched back up to within 7% of 2000 prices, Driscoll said. Cruise bookings through summer were up 25% over the same time last year.

But as the industry now moves into its off-season, rates have already begun to fall again, he said, noting that a seven-night Caribbean cruise on Holland America this fall is selling for $399 a person.

Some analysts said such uncertainty would prevent a newly merged cruise company from raising prices, particularly because they generally come down after mergers because of greater efficiencies in purchasing and distribution.

“There’s a very real opportunity here for consumers to really benefit from either merger,” said Jim Winchester, an analyst for Lazard Freres & Co. in New York.

“And with the significant increase in capacity coming on over the next few years, cruise companies will be required to be very competitive,” he said.

Even with U.S. regulators’ go-ahead, Carnival would still have to win the votes of a majority of Princess shareholders to make it work.

Princess management had consistently backed its original deal with Royal, saying Royal’s strong routes in the Caribbean would better complement Princess’ routes in Europe, Australia and Alaska. In addition, the average age of its ships would be 6 years, making it the most modern fleet of the major cruise lines.

“They’d definitely have a better regional presence to face up to Carnival,” said Paul Sheehan of Jupiter Asset Management, which holds Princess shares.

Sheehan said with a Royal deal, Princess also would retain an independent listing on the London Stock Exchange, autonomy that is particularly appealing to its management.

But Carnival executives are betting that their cash and stock offer will be more attractive than Royal’s because it comes with less risk and a bigger premium to Princess shareholders. And now Princess finally is warming up to the idea.

A bidding war is unlikely, however. Analysts said Royal, which is carrying about $4.4 billion in debt compared with Princess’ $1.4 billion, has probably already offered its best hand. And Carnival has a debt-equity ratio that is well below Royal’s at $3.1 billion--or 26% of its $12 billion in equity--so it has little reason to sweeten its deal any further.

Royal Caribbean’s chairman and chief executive, Richard Fain, issued a statement expressing disappointment that Carnival’s bid received antitrust clearance but said, “We have no doubt that our agreed merger represents a compelling opportunity to create significant value for both P&O; Princess shareholders and Royal Caribbean shareholders.”

On Friday, the Federal Trade Commission, in a 3-2 vote, closed its 10-month investigation of both proposed mergers, saying neither deal would adversely affect consumers. The announcement was made after markets closed.

In New York Stock Exchange trading, Carnival stock fell 45 cents to $23.68, and Royal lost 18 cents to $15.87.