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Copyright © 1995-2001 
Linda Coffman

News from the world of cruising ~
December 16-31, 2001

Proposal to the Board of P&O Princess
Set out below is the full text of the detailed proposal sent by Carnival
to the board of P&O Princess and their advisors on 13 December 2001:

                                             Carnival Corporation
                                             Carnival Place
                                             3655 N.W. 87 Avenue
                                             Miami, Florida 33178-2428
                                             United States
The Board of Directors
P&O Princess Cruises plc
77 New Oxford Street
London WC1A 1PP
United Kingdom

                                             13 December 2001

For the attention of Lord Sterling of Plaistow and Mr Peter Ratcliffe

Dear Sirs:

    I am writing to set out a proposal by Carnival Corporation ("Carnival") to
make an offer for P&O Princess Cruises plc ("P&O Princess") (the "Offer").  We
strongly believe that our proposal has a clear strategic rationale and is a
compelling investment case for the shareholders of both companies, and is
therefore worthy of detailed and serious consideration by you and your
    Our Offer would give P&O Princess shareholders 200p in cash and 0.1361
Carnival Shares for each P&O Princess Ordinary Share.  Based on yesterday's
closing price of $26.55 per Carnival Share, (1837p, converted at an exchange
rate of $1:0.692 pounds), P&O Princess shareholders will receive consideration
with an aggregate value of 450p for each P&O Princess Ordinary Share.
    We believe that our proposal delivers substantially more value to P&O
Princess shareholders than the proposed dual listed company (the "DLC")
transaction with Royal Caribbean Cruises Ltd (the "Royal Caribbean Proposal").
Unlike the Royal Caribbean Proposal, which does not offer a premium to P&O
Princess shareholders, our Offer provides P&O Princess shareholders with a
significant premium for their shares.  Furthermore, our Offer includes a
substantial cash element.
    As you know, we have had discussions over recent years with P&O Princess
and its former parent regarding a possible combination of Carnival and P&O
Princess.  Most recently, on 24 September 2001, Howard Frank, Vice Chairman
and COO of Carnival, called Peter Ratcliffe to say that Carnival wished to
pursue a combination of the two groups.  We have not received a response to
this approach.
    Against this background, we were surprised to see the announcement of the
Royal Caribbean Proposal, as Carnival has the interest and capability to offer
an attractive proposal to your shareholders and had clearly expressed a strong
interest in a combination with P&O Princess.  We have decided that, in the
circumstances, we should write this letter to the board of P&O Princess to
seek to ensure that our proposal receives the attention we believe it
    We ask that, prior to 6pm (UK time) on Sunday, 16 December 2001, you
respond formally to our request for a recommendation of our Offer.  To
demonstrate our commitment to progress the Offer as rapidly as possible, my
senior colleagues and I are keen to meet with you at your earliest
convenience.  I shall be contacting Lord Sterling and Peter Ratcliffe by
telephone, in order to discuss our proposal with them directly.

The Royal Caribbean Proposal
    The proposed transaction between P&O Princess and Royal Caribbean is, in
our view, disadvantageous to P&O Princess' shareholders, as the terms of the
transaction fail to recognize a number of substantive issues:

    *  P&O Princess shareholders do not receive any premium or cash

    *  P&O Princess shareholders will own 50.7% of the combined entity but,
       based on analyst forecasts, P&O Princess is expected to contribute
       significantly more than this to the combined entity's net income before
       synergies.  P&O Princess' contribution, based on publicly available
       selected analysts' forecasts where 2003 estimates are available, is as

                                                        P&O Princess earnings
                                                     contribution pre synergies
                           Date                         2002           2003

    SSSB               29-Nov-01                  64.4%          57.7%
    Bear Stearns   Nov-01, 21-Nov-01        53.0%          57.7%
    MSDW             21-Nov-01                  59.5%          45.7%
    UBSW               5-Dec-01                   65.5%          59.6%
    P&O Princess' proposed share
     of combined earnings                         50.7%          50.7%

    Accordingly, a disproportionate share of the synergy benefits is expected
to accrue to Royal Caribbean's shareholders, in the form of earnings
enhancement, rather than to P&O Princess' shareholders

    *  Royal Caribbean is highly geared and currently has a sub-investment
       grade rating. The terrorist events of September 11 have had a
       significant negative impact on the cruise industry and such an event
       could happen again. Given these uncertain times, as well as the
       significant capital commitments that Royal Caribbean and P&O Princess
       have made, prudent management practice makes it incumbent that a strong
       and flexible balance sheet be maintained. P&O Princess' credit rating
       has already been downgraded in anticipation of the Royal Caribbean
       Proposal. Despite this, the Royal Caribbean Proposal does not
       compensate P&O Princess' shareholders for the extra financial risk they
       would bear if the transaction were to be consummated

    *  the most senior management position in the combined group has been
       awarded to the Royal Caribbean Chairman and CEO. P&O Princess' return
       on capital has been superior to that of Royal Caribbean, which has
       lagged both Carnival and P&O Princess. P&O Princess and its
       shareholders should consider whether the decision to appoint
       Royal Caribbean's Chairman and CEO to the same position in the combined
       group is in the company's best interests

    *  the DLC structure in the Royal Caribbean Proposal may constrain P&O
       Princess' ability to raise capital, make acquisitions and engage in
       other corporate activity. Furthermore, there can be no assurance that
       P&O Princess will not trade at a discount to Royal Caribbean after the
       DLC structure has been implemented.

    In summary, we believe the Royal Caribbean Proposal will leave P&O
Princess shareholders with an investment in a less attractive entity with
greater financial risk and on terms which give Royal Caribbean a greater
proportion of the ownership of the combined group than is merited by its
contribution to the combined group's net income.

The "poison pills"
    We are particularly concerned that certain details of the Royal Caribbean
Proposal, namely the Southern European joint venture (the "Joint Venture") and
the $62.5 million break fee (the "Break Fee"), both entered into without
shareholder approval, appear to have been constructed as "poison pills",
designed to deter or thwart any counterproposal to P&O Princess shareholders.
    Carnival has reviewed the publicly available information on the Joint
Venture and Break Fee and makes the following observations:

    * no substantive commercial reason has been advanced for the immediate
       need to conclude the Joint Venture agreement, with its associated costs
       on a change of control, particularly when the Joint Venture itself is
       not intended to commence cruise operations until 2003. Indeed, we
       believe the Joint Venture company's aims could be achieved solely
       through the DLC. The main, if not sole, effect of the Joint Venture
       is, in our opinion, to make P&O Princess less attractive and less
       vulnerable to a third party offeror, as it seriously disadvantages
       P&O Princess if there is a change of control of P&O Princess. This is
       clearly contrary to the interests of P&O Princess shareholders

    * the Break Fee is significantly in excess of the UK market norm. On 19
       November 2001, P&O Princess' market capitalization was approximately
       $3.1 billion and, therefore, the size of the Break Fee greatly exceeds
       the maximum that would have been permitted under the City Code on
       Takeovers and Mergers (the "Takeover Code", which is recognized in the
       UK as best practice) of 1% or approximately $31 million.

Why Carnival is the best partner for P&O Princess
    The board of Carnival firmly believes that Carnival is the best partner
for P&O Princess.  Set out below are a number of key historic measures that
compare the financial and operating performance of Royal Caribbean and
Carnival.  These data reinforce our belief that Carnival's management team has
a stronger track record, clearly focused on enhancing shareholder value, which
will be critical in rapidly delivering the synergies a combination should

    *  Carnival's shareholder returns have consistently outperformed those of
       Royal Caribbean

    Total shareholder returns to
     12 December 2001(1)                        Carnival    Royal Caribbean
    last 12 months                                    0.2%          (27.9%)
    last 5 years                                       87.5%           38.3%

    (1) Source: Datastream

    *  Carnival's operational measures are consistently and significantly
       better than those of Royal Caribbean

    EBITDA per available berth day ($) (1)           Carnival     Caribbean
    2000                                                          80             64
    1995 - 2000 average                                     81             57

    EBITDA margin (1)                                     Carnival      Caribbean
    2000                                                      33.6%          27.9%
    1995 - 2000 average                                 34.5%          24.8%

    ROIC (1) (2)                                             Carnival     Caribbean
    2000                                                       12.9%           9.0%
    1995 - 2000 average                                  15.0%           9.6%

    (1) Source: Public filings
    (2) ROIC is (taxed EBIT / Average opening and closing total debt plus
        equity balances)

    *  Carnival has significantly greater balance sheet strength and
       flexibility than Royal Caribbean

    Net debt at year end/EBITDA (1)                 Carnival      Caribbean
    2000                                                        1.7x           4.0x
    1995 - 2000 average                                  1.4x           4.0x

    EBITDA cash interest expense (1)                Carnival      Caribbean
    2000                                                     15.4x           4.0x
    1995 - 2000 average                                11.6x           3.7x

    (1) Source: Public filings

    Credit ratings                                   Carnival (1)      Caribbean(2)
                                                  Investment grade    Non-investment
    S&P                                                    A                    BB+
    Outlook                                         Negative             Negative

    Moody's                                              A2                   Ba2
    Outlook                                         Negative              Stable

    (1) Current
    (2) Prior to the announcement of the Royal Caribbean Proposal

    Based on Carnival's performance as outlined above, we believe that P&O
Princess shareholders would be better served through a combination with
Carnival than with Royal Caribbean, particularly where such a combination
includes a premium valuation of P&O Princess' business.

Benefits of the proposed combination of Carnival and P&O Princess
    We believe that a combination of Carnival and P&O Princess has a strong
strategic rationale and represents a compelling investment case that,
particularly in the current economic climate, would be well received by the
shareholders of both our companies.
    We believe that this proposed combination:

    *  generates significant synergies to the benefit of both shareholders and
       customers. These savings are expected to come from leveraging the best
       practice of the two best management teams in the industry to achieve
       efficiencies from, inter alia, purchasing, marketing and information
       systems, and also from rationalizing support operations in locations
       served by both companies. We hope to identify substantial additional
       benefits when we are provided with access to P&O Princess' detailed
       financial and operational data

    *  benefits from the financial flexibility of the combined group's strong
       balance sheet and cash flow. We believe that the terms of the Offer
       would ensure that the proposed combination of Carnival and P&O Princess
       would retain a strong financial position with an investment grade

    *  creates a broader and more complementary portfolio of brands operating
       in the US and Europe, thereby enhancing the combined group's ability to
       attract more customers away from land-based vacations to cruise
       vacations, and creates a wider range of vacation choices for our
       combined customer base

Carnival's proposal

Offer structure
    Carnival is prepared to make the Offer on the following basis:

    for each P&O Princess Share 200p in cash and 0.1361 Carnival Shares

    On the basis of a Carnival Share price of $26.55 (being the price at the
close of business yesterday), and an exchange rate of $1:0.692 pounds, the
Offer values each P&O Princess Ordinary Share at 450p (equivalent to $26.01
per ADR) (consisting of 200p in cash and 250p in Carnival Shares) and values
the entire existing ordinary share capital of P&O Princess at approximately
3.1 billion pounds. This represents:

    *  a premium of 42.0% to the closing middle market price of 317p per
       P&O Princess Ordinary Share on 19 November 2001, the last business day
       prior to the announcement of the Royal Caribbean Proposal

    *  a premium of 22.6% to the closing middle market price of 367p per
       P&O Princess Ordinary Share on 12 December 2001, the last business day
       prior to this letter

    *  a premium of 13.4% to the highest closing middle market price of 397p
       per P&O Princess Ordinary Share at which P&O Princess has traded since
       its demerger.

    It is Carnival's intention that the cash element of the Offer be provided
under a mix and match structure such that shareholders have an element of
choice to take shares or cash.
    Carnival intends to seek a listing for its shares on the London Stock
Exchange to facilitate and encourage the continuing participation by P&O
Princess' shareholders in the combined group.
    It is intended that the cash consideration for the Offer amounting to
$2.0 billion be financed through existing resources of Carnival and new
facilities.  Currently Carnival has cash and undrawn facilities totalling
approximately $2.4 billion.

Potential for Increased Consideration
    If P&O Princess is able to reduce or eliminate the costs to Carnival of
the poison pills, Carnival is prepared to increase the value of the Offer.

Alternative Transaction Structures
    Carnival is prepared to discuss alternative transaction structures with
P&O Princess including, inter alia, a dual listed company. In such a 
scenario, Carnival envisages that the economic interests of each party under
such a structure would reflect the valuation of P&O Princess as set out in the
proposal above. Such a structure would enable P&O Princess to retain all of
perceived benefits of the proposed DLC structure with Royal Caribbean whilst
allowing P&O Princess shareholders to benefit from our premium economic
proposal and stronger financial position.

Outstanding Issues
    Before proceeding with the Offer, we would require the following issues to
be resolved:

    (i)   Carnival having received all information which was provided by P&O
          Princess to Royal Caribbean in connection with the Royal Caribbean
          Proposal, as would be supplied if Rule 20.2 of the Takeover Code had

    (ii)  the board of P&O Princess either not convening the EGM for the
          approval of the Royal Caribbean Proposal, or, if it is under an
          obligation to convene such meeting, recommending that shareholders
          vote against the Royal Caribbean Proposal

    (iii) appropriate regulatory clearances being obtained in a form
          satisfactory to Carnival (see below)

    (iv)  Carnival being satisfied that the cost to P&O Princess of
          terminating the Joint Venture in the event of the Offer becoming
          wholly unconditional will not be in excess of $200 million

    (v)   The board of P&O Princess undertaking that in the period from the
          date of this letter until the Offer becomes wholly unconditional,
          P&O Princess will not declare or pay dividends in excess of 3 US
          cents per P&O Princess Ordinary Share each quarter

    (vi)  Carnival having arranged funding for the Offer on terms satisfactory
          to it.

    We would envisage that items (i), (ii), (iv) and (v) would be resolved
prior to announcing the Offer.  Carnival is willing to secure the relevant
funding prior to announcement if it is necessary to secure the Board's
recommendation.  On this basis, the making of the Offer would be subject only
to regulatory approval.

Regulatory Approvals
    Our proposal is subject to clearance from the relevant antitrust
authorities, in particular those in the EU and US.  We have examined the
requirements for approval and have received advice from our external antitrust
advisors that the likelihood of Carnival receiving a favorable outcome is no
less than that of the Royal Caribbean Proposal.

    *  We believe, as Royal Caribbean and P&O Princess have stated, that we
       compete in a broad vacation market rather than simply a cruise market.
       Carnival and Royal Caribbean are similarly situated in that market.
       Both companies undertake substantial efforts to attract consumers from
       other vacation options. That analysis should result in a view that
       there are no significant antitrust issues for either transaction

    *  in Europe, our proposal would be subject to the centralized EU merger
       control process, rather than the independent review of certain EU
       member states as we understand is the case for the Royal Caribbean
       Proposal. We believe that Carnival's antitrust process would be
       completed within a similar timeframe to that of the Royal Caribbean
       Proposal, and would not face greater regulatory hurdles than the Royal
       Caribbean Proposal

    *  in the US, our proposal would be subject to the Hart-Scott-Rodino
       process, which will not differ significantly in timing or substantive
       issues from the FTC review of the Royal Caribbean Proposal.  In fact,
       Royal Caribbean and Carnival's comparable brands are very similar in
       size and scope, as shown below:

    Carnival brands            Berths        Royal Caribbean brands    Berths
    Carnival Cruise Lines     33,246        Royal Caribbean Intl        33,046
    HAL                           13,348         Celebrity Cruises           14,332
                                     ------                                          ------
                                    46,594                                          47,378

    As a result, whilst we believe that there should be no significant
antitrust issues in the US, if there were to be such issues, they would be
substantially the same for both the Royal Caribbean and Carnival proposals.

Board, Management and Employees
    The combination of Carnival and P&O Princess will offer P&O Princess
employees exciting career prospects for the future. P&O Princess' management
and employees will benefit under our proposal from a larger operating platform
and a business of greater international size and scope.
    Carnival operates its various cruise businesses on a decentralized basis,
whilst optimizing the cost base through shared services.  We envisage
extending this approach to the businesses of P&O Princess.
    We are prepared to offer members of P&O Princess' senior executive
management important and influential positions in the enlarged group,
including as appropriate, at Carnival board level.

Other Matters
    Neither our interest in P&O Princess nor the contents of this letter may
be disclosed by P&O Princess to any person, other than your professional
advisors, without our prior written consent. Carnival reserves the right to
terminate discussions immediately and without any obligation on its part
    This letter is intended only to convey Carnival's interest in a possible
transaction with P&O Princess. For the avoidance of doubt, this letter should
not be construed in any regard as constituting an offer, evincing an intention
to make an offer or otherwise giving rise to legal relations and in
particular, does not constitute a firm intention to make an offer for the
purposes of Rule 2.2 of the Takeover Code.
    We should like to reiterate our strong interest in acquiring P&O Princess
and our ability to move speedily to an announcement. We believe that our
proposal is significantly more attractive to P&O Princess and its shareholders
than the Royal Caribbean Proposal.  We look forward to your response to this
letter which in any event should be received prior to 6pm (UK time) on Sunday,
16 December 2001.

 Yours sincerely
 M. Arison
 Chairman and CEO
SOURCE Carnival Corporation

Unless otherwise noted, all news items are sourced by individual cruise lines, cruise-related industries, and their agents.