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Cruise giant Carnival Corp. is pressing its case directly to P&O Princess shareholders, after the London-based company’s board rejected Carnival’s second and sweeter takeover bid this week, said Carnival chief operating officer Howard Frank. With an intransigent Princess board and a Feb. 14 Princess shareholder meeting looming, Miami-based Carnival is moving quickly to persuade individual shareholders to vote against the merger between Miami-based Royal Caribbean Cruise Line and Princess. That combination would bring together the world’s No. 2 and No. 3 cruise companies in a new entity that would dethrone Carnival as the world’s largest. Carnival executives and their legal counsel will be heading to London in the near future to meet with Princess shareholders, Frank said in an interview Wednesday. He declined to say when the trip would be made. He added that Carnival’s outreach efforts to the shareholders have already been met with some positive response. But Frank declined to name any of the shareholders and would not say how many had been contacted. He said Carnival executives planned to meet with any shareholder that would listen. “We will be talking to all investors,” Frank said. “In private conversation we have gotten favorable responses.” He said the Carnival strategy is aimed at getting shareholders to vote to adjourn the Feb. 14 meeting right away, and if that fails, Carnival will try to defeat the merger proposal outright if it comes to a vote. Frank concedes that defeating the merger will be an uphill fight with several distinct obstacles. Cultural differences between U.K. and U.S. shareholders would be a significant obstacle to overcome in blocking the deal, he said. “Eighty percent of Princess’ shareholders are in the U.K. and U.K. shareholders are generally very passive,” Frank said. “They usually vote with management.” The notion was echoed by analysts Wednesday. “It’s uncommon for shareholders to so blatantly vote against management,” said Bear Stearns analyst Glen Reid. And Princess management has stonewalled Carnival every step of the way. Carnival launched the dramatic hostile takeover bid last month in an effort to win Princess. Twice, Carnival has offered to buy the prized cruise line — offering as much as $5 billion in cash and stock — but twice the Princess board of directors has quickly rejected Carnival’s offers. Analysts have warned Carnival against increasing its bid again. The pride of being No. 1 aside, Frank said there are many real-world business benefits if Carnival is able to spoil the Royal Caribbean-Princess marriage. “We’d rather be more valuable than bigger,” Frank said. “[But] a merger between us and Princess would be a perfect fit. Our Carnival brand is strong in the mass market and our Holland America brand is strong in the premium market. The Princess brand would fit right in between.” There are potential geographic benefits as well, he said. “In addition, they have a large presence in Germany and the U.K., and we have a strong presence in southern Europe,” Frank said. “In a merger between Princess and Carnival there would be virtually no overlap.” Yet, Princess is now prepared to merge with Royal Caribbean — a deal that Frank contends will hurt Princess. It’s one of the sales points he is trying to use in the campaign with the Princess line’s shareholders. “Royal Caribbean is highly leveraged, a merger with Royal Caribbean will result in Princess’ credit-worthiness going down,” Frank said. “A merger with Royal Caribbean is a bad deal for Princess.” But Frank said the merger would be a real coup for Royal Caribbean. “Princess was way out-negotiated. Royal Caribbean made fools of Princess management,” he said. “Princess shareholders get nothing out of this deal. There is a lot more value in Princess than Royal Caribbean is paying.” JEWEL IN ANY CROWN Analysts have said Princess would be a gem for either company. It carries very little debt, owns a sizable and new fleet and owns a solid brand. Royal Caribbean and Princess executives did not return calls seeking comment. Carnival has been courting Princess for years, and Frank said he has discussed a possible merger with Princess executives before. “I am totally mystified why they will not meet with us,” he said. “We have always had a cordial relationship. We’re competitive with each other but there has never been any animosity.” Nevertheless, there is hope for Carnival, said Dean Gianoukos, an equity analyst at J.P. Morgan who follows the cruise industry. He said it is not a foregone conclusion that Princess shareholders will approve the deal at the Feb. 14 shareholder meeting. And there already has been some indication that shareholders want the Carnival deal to get a fair shake. In Gianoukos’ view, Carnival has made a superior offer for Princess. Because Princess needs at least 75 percent of the shareholders to vote for the merger, and because Royal Caribbean’s offer will not go away if the merger is voted down, Gianoukos said, “the vote could be very close.” SURPRISE Frank said he was surprised by the proposed Royal Caribbean-Princess merger. “I was absolutely blown away,” Frank said about hearing the news on Nov. 20. In September, Frank spoke with Princess CEO Peter Ratcliffe, to ask — yet again — if Princess was interested in a merger. “Two weeks after Sept. 11, I telephoned Peter and we spoke long enough to talk about the merger,” Frank said. “We at Carnival thought the timing was right for a merger. Peter would play a major role reporting to [Carnival Chairman and CEO] Micky Arison. “Peter said he thought it was an interesting proposal. He said the board was soon meeting and he would mention it,” Frank said. “I did not hear back from Peter, but since we had discussed the merger before, in 1999, I didn’t think much of the fact I had not heard from him.” On Nov. 20, he found out why. According to Frank, the companies also discussed a potential merger in 1999 around the time that Carnival sought to buy Norwegian Cruise Lines, the fourth-largest cruise line in the world. Carnival eventually withdrew after it was outflanked by Malaysia-based Star Cruises PLC. It was an embarrassing defeat, and Frank is trying to avoid a repeat with Princess. Another obstacle to Carnival’s bid is a sizable “poison pill” insulating the deal from competing offers. It would make it costly for either company to pull out of the deal. Reportedly, as much as $500 million in break-up fees would have to be paid out by the company that withdraws from the proposed Royal Caribbean-Princess deal. Frank, however, said the poison pill could cost either company as much as $1 billion in fees. “The joint-venture is set up to keep us out,” Frank said. “It is a brilliantly conceived concept.” In addition to being costly, the poison pill prevents Carnival’s offer from being analyzed on equal footing with Royal Caribbean’s, because of the added cost to Princess if it were to accept the Carnival offer. The deal is fraught with complicated legal concepts. “The size of the deal is not the issue, but the complicated structure of the deal is,” Frank said. Indeed, he said, Carnival still does not completely understand all that is included in the Royal Caribbean-Princess deal. Despite the odds, Frank said, Carnival is forced to press on: “We think we have a shot.”

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