Royal Caribbean-P&O-Carnival love triangle: the inside story

This year Valentines Day set up a titanic three-way battle between Royal Caribbean, P&O Princess and Carnival. P&O shareholders voted with their wallets to consider Carnival's hostile bid for P&O, leaving the three marriage partners and their lawyers to fight it out in front of regulators in three countries.
The EU battleground has proved the most interesting so far, with a campaign characterised by leaks and public posturing. The Federal Trade Commission (FTC) has yet to rule on the US fight, but judgments in the UK and then last Wednesday (24 July) by the European Commission (first revealed on www.thelawyer.com/ lawyernews) have given Carnival and its lawyers at Herbert Smith a clear lead.
Last Winter, Royal Caribbean and P&O Princess agreed a merger of their cruise lines, but Carnival, the third important player in the sector, countered with a hostile bid for P&O. P&O automatically plumped for its UK corporate adviser Freshfields Bruckhaus Deringer. Slaughter and May also scored a good client win when US best friend Davis Polk & Wardwell sent Royal Caribbean the firm's way. Last to join the party was Herbert Smith on the back of a growing reputation among US corporates following M&A deals such as AOL-Time Warner and Time Inc.
Valentines Day saw a public showdown at a P&O extraordinary general meeting (EGM). What preceded it was a public slanging match. While the bankers usually take the heat and the glory in public M&A, this time the spotlight fell firmly on the lawyers as the deal turned on a large break fee, a poison pill and a dual-listed company structure. The first two are seen by many as dastardly foreign inventions, an angle played in the press by Carnival and its advisers.
Both sides played the game with aplomb, and uninvolved lawyers, who last year might have spent the time actually doing public M&A, were free in the downturn to fill the press with comments on the Carnival/P&O Princess/Royal Caribbean love triangle.
On the advice of Herbert Smith, Carnival's general counsel Arnaldo Perez instructed Shearman & Sterling to give a legal opinion on whether P&O shareholders could delay their decision on the Royal Caribbean merger without triggering payment of the break fee. Shearman's opinion was handed out to every shareholder attending the EGM and the vote went Carnival's way.
The Valentines Day vote threw the matter over to the regulators. Up stepped Slaughters partners Malcolm Nicholson and Philippe Chappatte, Freshfields partners Rachel Brandenburger and Allen Ryan and Herbert Smith partners Stephen Kinsella and Craig Pouncey. The cruise companies had to fight on two fronts, as on
11 April the European Commission refused to comply with the UK Competition Commission's request to send back the Carnival/P&O tie-up so it could examine both deals.
At first, things went Royal Caribbean's way. The Euro-pean Commission looked hard at the Carnival deal, with Royal Caribbean and several smaller cruise companies, including Festival and Star Cruises, opposing the deal as intervenors. Slaughters' client was by far the most active. As adviser for P&O Freshfields was paid observer, because P&O had a duty to shareholders to consider the Carnival offer and cooperate with the commission where required.
The regulator decided to proceed to a second-phase investigation on 11 April. Carnival received a tough statement of objections and it looked as though the commission might force it to get rid of its most prized assets in return for passing the takeover. The intervenors focused on the problems of the combination of P&O's UK assets, Cunard, Zee Tours and Costa in Germany. Slaughters submitted a pricing analysis based on a very narrow market for luxury cruises. The commission's statement of objections reflected their views.
And Slaughters' client was not just winning the legal battle, it was also winning the PR one. Royal Caribbean fuelled press speculation that the bid would be turned down. A lawyer on the other side claimed: "We didn't want a fight against the commission, but we had to deal with Royal Caribbean when it made selective leaks that gave the impression that the commission was about to block the deal."
The commission, which at the beginning of inquiry notified both parties that it did not expect the saga to be played out in the papers, subsequently reprimanded Royal Caribbean for leaks. The regulator later received a written apology from Slaughters on behalf of the client. However, one competition lawyer said: "Everyone does this sort of thing, its just that Royal Caribbean got caught."
The tide was already turning. In June, the Competition Commission in the UK cleared the Royal Caribbean/P&O deal unconditionally. Meanwhile in Europe, there was no oral hearing. Slaughters requested one, but could not force the issue under EU law and Carnival made a tactical decision not to have one. A source close to Carnival said: "We didn't want to give the others a forum to air their complaints."
It was now Royal Caribbean's turn to feel aggrieved. One source said: "Our chief executive officer Richard Fain was called in for a meeting on 15 July with Mario Monti. As he left we learned that it had been leaked to the press that the deal was going through unconditionally."
The source told The Lawyer: "The decision was made on the basis of new evidence given to the commission. We didn't get to see the evidence so we weren't even in a position to comment." He added: "Another big surprise was that the decision came a month early - there was unseemly haste from the commission to push out the decision before the summer holiday period."
Fain, like Jack Welch this time last year, is apoplectic, and Royal Caribbean may consider an appeal. Ironically, an appeal on an Airtours case won by his lawyers at Slaughters did not help his case. Although there is no suggestion of conflict or impropriety, Slaughters' magnificent performance on the Airtours appeal led the European Court of First Instance to fire a warning shot across Competition Commissioner Monti's bows. The commission was criticised harshly for its procedural and legal assessment of the rejected Airtours merger, which may have made Monti more reticent on Carnival.
The indications last Friday were that an appeal was being seriously discussed. Another lawyer involved paid Herbert Smith a back-handed compliment over the speed with which the firm snatched victory from the jaws of defeat. The source said: "Over the past 10 years people have learned to work the system and the commission is now finding it hard to work within the timetable, particularly in the period between the statement of objections and the final decision."
The consensus is that Slaughters has also fought a very shrewd fight for a difficult client, and given the firm's recent success before the court, Royal Caribbean will feel safe in its hands should it choose to appeal. If not, the battle will move towards endgame at the FTC and a shareholder vote. While the outcome of the regulatory process has often seemed in doubt, P&O's shareholders have a straightforward choice. Their board says that the Royal Caribbean deal is better value, but Carnival is offering cash. The cry from the EGM will surely be: "Show me the money."