Royal Caribbean, Princess to Merge

Amid a deep industry slump and an oversupply of ships, P&O; Princess Cruises and Royal Caribbean Cruises Ltd. have agreed to a $2.89-billion merger to become the world’s largest cruise line company.

The merger would produce a company with 41 ships, about 40,000 employees and more than $5 billion in annual revenue, making it larger than longtime market leader Carnival Corp. of Miami. Company officials said no significant job cuts are expected.

The combined company would take on a new name, tentatively RCP Cruises, and would be based in Miami, the current headquarters of Royal Caribbean. Shareholders of London-based P&O; Princess would own 50.7% of the new company, with Royal taking 49.3%.

Princess Cruises, P&O;’s North American line, is based in Santa Clarita.

Royal and P&O; Princess said they could save $100 million annually within a year of the merger by combining marketing, reservation and operating services.

Royal Caribbean Chairman and Chief Executive Richard Fain said a merger of the companies had been mulled over for more than a decade, and the two sides were talking Sept. 11. But Fain suggested that the deepening slump in travel after the terrorist attacks accelerated the deal.

“The events of Sept. 11 make this even more valuable,” said Fain, who would retain his posts at the merged company. Peter Ratcliffe, P&O; Princess chief executive, would be managing director and chief operating officer of the combined company.

“Being the biggest matters in this industry,” said Cruise Line International Assn. President Jim Godsman. “By merging, they’re going to reduce costs, which will put them in a much better position when the economy improves. It’ll be impossible to ignore their presence.”

Shares of Royal Caribbean rose as much as 17% on the New York Stock Exchange before closing at $16.10, up $1.09, or 7%. P&O; Princess shares rose 16% to $5.74 on the London Stock Exchange.

Although the merger would create a cruise powerhouse with 75,000 berths, analysts said the combination probably wouldn’t bring any immediate big changes for consumers or the industry, which has been roiled by the events of Sept. 11. Occupancy on many ships fell about 50% in the immediate aftermath of the attacks, largely because cruise travel often requires air flights.

Fain said Royal Caribbean lost more than $20 million in the week after Sept. 11. Business at Royal and other cruise lines has improved since then, but the companies have been forced to reroute ships and sharply reduce fares to entice wary travelers.

“There won’t be any immediate reduction in industry supply or any big price improvement,” said Jason Ader, a Bear Stearns & Co. analyst. “But what the [merger] does is create a powerful entity that will be ready to take advantage of an improved environment once we get there.”

Analysts said the biggest problem facing cruise lines since Sept.11 is handling growing inventory in a continued slump. Together, Princess and Royal Caribbean have 14 new ships on order, which would bring the number of berths to more than 100,000 in the next three years.

The combined company also would be weighed down by heavy debts, with Royal carrying $4.4 billion in debt and P&O; with $1.4 billion as of Sept. 30.

Still, the merger would bring some advantages. Royal’s strong routes in the Caribbean would complement P&O;’s 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 companies.

“Putting the two together will give them a better regional presence to face up to Carnival,” said Paul Sheehan of Jupiter Asset Management, which holds P&O; Princess shares. “It’s a sensible merger to get their coverage right.”

Judy Stein, a travel agent specializing in cruises at Montrose Travel, welcomes the merger--especially after seeing two smaller cruise lines fold since Sept. 11.

The first was Renaissance Cruises, followed by American Classic Voyages; both were among the 25% of the market not taken by Carnival, Royal Caribbean and Princess.

Officials at Carnival could not be reached for comment Tuesday, but industry experts said they would have to retool their marketing strategy in light of the merger.

Carnival sails 44 ships under six brand names and has 14 ships under contract to be built by December 2004. Carnival’s stock was off 21 cents to $25.90 on the NYSE.

Under the Royal-P&O; Princess deal, each Royal Caribbean share would be worth 3.46 shares in P&O; Princess.

The merger is expected to be completed by June and would require approval from regulatory bodies in the United States and Britain.