Carnival Moves Ahead

Analyst: Quest for Princess will ultimately benefit travel agents

By: Theresa Norton Masek

Carnival Corp. appears to have the upper hand in the battle for P&O Princess Cruises, which could be good news for travel agents.

Carnival, a $13.5 billion company with six brands, made a richer offer for P&O Princess Cruises Plc valued at about $5.4 billion than the one made by Royal Caribbean Cruises Ltd.

The U.S. Federal Trade Commission’s recent decision to allow the offer removed the main obstacle to the once-hostile deal.

But the FTC ruling on Oct. 4 also cleared the friendly $3.7 billion merger proposed for P&O Princess and Royal Caribbean, a two-brand company valued at $2.9 billion.

“Princess has effectively come out and said they are willing to entertain discussions with Carnival, which is a bit of a milestone,” said Jim Winchester, an analyst with Lazard Freres & Co. in New York. “Carnival clearly has deeper pockets, greater financial resources and great flexibility on how the transaction is ultimately structured. To me, that’s pretty compelling right now.”

Another analyst, Peter McMullin, senior managing director of Ryan, Beck & Co. in Boca Raton, Fla., agreed.

“I would think the odds favor Carnival with a bigger balance sheet and better offer, although there are some hurdles to go through,” McMullin said.

Some observers fear that further cruise consolidation would mean fewer choices and higher prices for agents and their clients, but the FTC ruling said neither plan would harm consumers or inhibit competition.

“After either transaction, there still will be two large cruise competitors and a substantial fringe that will compete with the merged entity and could constrain any unilateral attempt by the merged firm to increase price or reduce capacity,” the FTC explained.

Winchester is skeptical that there will be any negative effects on consumers or agents.

“It’s ultimately in the best interest of the agent community to have a couple of players that are financially strong and doing well, rather than having multiple players that are beating each other over the head on a pricing basis,” he said.

Winchester also noted that bigger companies look for new cost efficiencies instead of ways to cut out the main distribution system, at least during the first several years of combined operation.

“The agent is still very, very critical to the distribution process,” he said. “Consolidation shifts the focus of big suppliers away from distribution to operations and execution and where they can combine synergies and economies of scale.”

The dueling deals now are in the hands of P&O Princess shareholders, who will hold a special meeting to make their choice. The earliest a meeting can be scheduled is Nov. 1; the Royal Caribbean-P&O Princess merger plan is scheduled to expire Nov. 16.

Confident Chairman

Other signs that Carnival might be the leading bidder include the confidence of Chairman Micky Arison, the fact that shareholders last sided with Carnival and the board’s public acknowledgement that Carnival’s bid is superior.

“We are very confident that if it goes back to the shareholders, we will own P&O Princess,” Arison said in August.

His confidence might be based in part on the Feb. 14 decision by P&O Princess shareholders to give consideration to Carnival’s bid.

The P&O Princess board has steadfastly supported the RCCL plan over the last 11 months, refusing many times to meet with Carnival executives. Now, however, the board is setting up negotiations with Carnival and even described its offer as “feasible and financially more attractive.”

Still, the board officially endorses the RCCL proposal, which has been described as a “merger of equals” that would increase the company’s value over the long term.

If No. 1 Carnival ends up with No. 3 Princess, it appears likely that Princess will continue operating more or less as it does now.

“Carnival gives their brands a lot of autonomy,” Winchester said. “They like to have strong chief executives at their brands who really run their own shows and bring personality to the brand. What would Holland America Line be without Kirk Lanterman?”

Arison has said he believes the corporate structure is there to help brands grow and prosper. He builds stylish new ships for the brands, helps sharpen their focus and promotes them through a combined marketing entity called World’s Leading Cruise Lines. The Carnival Corp. brands are Carnival Cruise Lines, Costa Cruises, Cunard Line, Holland America Line, Seabourn Cruises and Windstar Cruises.

With No. 2 RCCL, it is less clear how Princess would operate or be positioned. RCCL bested Carnival to acquire Celebrity Cruises in 1997.

But the distinction between the two brands became blurred. Royal Caribbean International is positioned as a mass-market/premium line while Celebrity is a more upscale premium. The two lines sometimes charge almost the same fares, even though Celebrity should command a higher per-diem.

“Celebrity wasn’t that big a step away from the Royal Caribbean International brand anyway,” Winchester said. “I’m not sure there was a big distinction made to establish one identity for Celebrity.” Princess, however, already has a strong identity.

“Princess is a premium brand that has gotten a premium price,” Winchester said. “Princess has historically driven profitability not by pinching pennies in its cost structure. It’s been done really appropriately by promoting the brands to the customer and getting some respect from the customer in return.”