The battle for P&O Princess continues to make waves, as P&O and its suitor Carnival indulge in a public slanging match.
The fight has seen the controversial issues of punitive break fees and dastardly poison pills dusted off for renewed examination. Add in sniping about the regulatory risk inevitable if Brussels is allowed to get its hands on the deal, plus a murky phone call between P&O and Carnival back in September, and you get the dirtiest takeover battle the UK has enjoyed for a while.
Rumours of a tie-up between Herbert Smith client Carnival and P&O have done the rounds for a few years. However, the merger between P&O, advised by Freshfields Bruckhaus Deringer, and Royal Caribbean, advised by Slaughter and May, was the first official offer on the table when it was announced last December.
Aside from these bald facts, what you get depends upon who you talk to. Was the Royal Caribbean merger essentially an unfair defence against an imminent hostile takeover by Carnival? Or is Carnival just trying to break up a merger between its two biggest competitors? For those not privy to the legendary conversation between Carnival and P&O in September, the legal minutiae give few clues.
One of Carnival's bones of contention is break fees. The Royal Caribbean merger includes a provision for reciprocal break fees of about 2 per cent of P&O's market capitalisation, which is more than is allowed by the Takeover Panel.
Introduced in the US to ensure that investment banks got some payment when a deal failed, break fees were traditionally viewed in the UK as financial assistance. This can attract criminal sanctions under the Companies Act. But as US investment banks infiltrated the UK, break fees crept into the country in the 1980s with deals such as SmithKline Beecham.
“It's highly unlikely that anyone would ever choose a DLC just to get around the code”
David Cheyne, Linklaters
Unsurprisingly, one of the biggest advocates for break fees was Freshfields – a firm with a strong US investment bank constituency. Among those that fought hardest against them was Slaughter and May; the line from Basinghall Street was that they were not in the shareholders' best interests.
In 1999, the Takeover Panel announced that break fees were permissible under the code at a cap of 1 per cent. And whatever the lingering legal issues, they have been part of the UK's takeover landscape for some time.
The Royal Caribbean merger is not bound by the code because it uses a dual-listed company (DLC) structure. DLCs have important advantages on share flowback, but in this case the fact that DLCs are not covered by the code had crucial regulatory consequences for both break fees and the P&O-Royal Caribbean joint venture – a new cruise line in Southern Europe – which Carnival sees as a poison pill.
Linklaters' head of corporate David Cheyne, who saw his fair share of DLCs last year, said: “It's highly unlikely that anyone would ever choose a DLC just to get around the code.”
When the merger was announced, Freshfields and Slaughters had lengthy discussions with the Takeover Panel. Although the merger itself is not covered by the code, it would have become a code matter if the directors entered into it with reason to believe that “a bona fide offer might be imminent” from Carnival. The panel must have cleared both the break fees and the joint venture in discussions with the merger parties. Carnival will now have to convince the panel executive that an offer was in fact imminent and that the code should apply. If it cannot, the company could take the matter to appeal.
Carnival and Herbert Smith made a lot of noise on break fees early on, but the issue has now gone quiet. The attention has shifted to poison pills. The P&O/Royal Caribbean Mediterranean joint venture could potentially cost P&O, or Carnival in the event of a successful takeover, up to $500m (£345.88m) to get out of. Poison pills come in all shapes and sizes, but a joint venture need not necessarily fall into that category. As Cheyne said: “The real issue is intent – was the motive behind the joint venture to block the takeover?”
The joint venture is for a new cruise line in southern Europe – not an unreasonable target for the two companies because it is a market currently dominated by Carnival. Equally, it was the ideal market to target in order to scupper a Carnival takeover because what would Carnival want with more resources in southern Europe?
According to the P&O-Royal Caribbean side, it was an essential sweetener for Royal Caribbean, without which the merger could not have been sealed. P&O also points to a clause in the joint venture agreement which would allow the company to terminate unilaterally as of 1 January next year with all its equity returned and no punitive sanctions. This, the company said, leaves Carnival in the perfect position to make a conditional offer for next January and get on with clearing the antitrust hurdles in the meantime.
Sounds straightforward, but Carnival said that it is far from clear that escape would be so easy. Should P&O miss certain benchmarks on the way to next January there could be financial penalties, which, as a successful bidder, Carnival would have to pick up. P&O has not done enough to allay these fears and there have been complaints from representatives of institutional shareholders such as the Association of British Insurers about the threat to shareholder rights.
P&O shareholders have been told that Carnival's bid has dangerous antitrust implications. Both deals would necessitate US filings, but in Europe the Royal Caribbean merger will only require filings in the UK and Germany, while the Carnival takeover would trigger an EU filing.
Reaction to the GE-Honeywell decision has been tinged with hysteria, but corporate lawyers are now pointing to the European Commission's tough line as a significant restraining factor on big mergers and acquisitions last year. P&O shareholders are right to be concerned, just as they are right to be concerned about a much more complex US filing on the Carnival deal.
P&O has now given Carnival until 18 January to indicate whether it is really a serious suitor by bettering its initial offer of 452p a share. Some institutional shareholders, including Jupiter Asset Management, have come out decisively in favour of Royal Caribbean on the grounds of price. When the P&O shareholders vote on 14 February it will not be break fees or poison pills that are important. Cheyne said: “At the end of the day, what really counts for the shareholders is price, particularly the cash offer.” And that is something the lawyers cannot control.