17 January 2002

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

Dear Sirs:

Increased offer of 500 pence per P&O Princess share

I am writing to set out a proposal by Carnival Corporation to make a revised offer for P&O Princess, which further improves the already superior offer to P&O Princess shareholders made by us on 16 December 2001.

Subject to the terms of this letter, Carnival is prepared to make an improved offer consisting of 250p in cash and 0.1380 Carnival shares per P&O Princess ordinary share. The revised offer values each P&O Princess ordinary share at 500p (Based on a Carnival share price of $26.06 (being the price at the close of business on 16 January 2002) and an exchange rate of $1:0.695 pounds.) and values the entire existing ordinary share capital of P&O Princess at approximately 3.5 billion pounds sterling. This represents an increase of 12% over Carnival's existing offer.

Conditions precedent to the Offer

Our willingness to improve our current offer is based on the assumption that P&O Princess can ensure that the Joint Venture can be terminated in 2003 without cost or liability, as you have indicated. We therefore continue to require clarity as to how this will be achieved in practice.

We envisage that our offer will have the following principal conditions precedent:
* the regulatory consents and related financing condition, as per our previous proposal; and
* the Royal Caribbean Proposal not having been approved by P&O Princess shareholders.

Deliverability

You have publicly recognised that the definition of the appropriate market in which to evaluate the competitive effects of either transaction is the wider vacation market and, on that basis, it follows that both our offer and the Royal Caribbean Proposal face the same antitrust issues. We therefore firmly believe, and have been so advised, that there is no material difference between the regulatory conditions attached to our offer and the Royal Caribbean Proposal.

We remain open to exploring with you the prospects of offering an alternative structure to your shareholders which retains all of the perceived benefits of the proposed DLC structure with Royal Caribbean.

However, having taken legal advice, we are concerned that the DLC structure which you have proposed to your shareholders is defective. In analysing the DLC structure proposed by yourselves and Royal Caribbean, our tax advisers believe that there is a significant risk that the DLC structure will lose its Section 883 tax exemption for a significant portion of the combined companies' income, and that the amounts involved would be material.

We note that the failure of P&O Princess and Royal Caribbean to identify this tax risk may be attributable to the fact that the offering circulars issued by both companies misquote the key provision of the proposed US tax regulation on which they are explicitly relying. We attach, as an appendix, a memorandum from our legal advisers describing this issue in greater detail.

Next steps

We firmly believe that our revised offer is a Superior Proposal to the Royal Caribbean Proposal. In the absence of your prompt confirmation that our offer is superior, we will be urging your shareholders to vote to adjourn the 14 February 2002 EGM or, failing such adjournment being achieved, to vote against the existing DLC proposal with Royal Caribbean.

Yours faithfully

I'm no longer going to pretend that I understand, so can someone translate the current situation into layman's terms?

For example what is 'Section 883 tax exemption'?

[ 01-17-2002: Message edited by: Malcolm ]

1. Royal Caribbean and P&O Princess want to merge operations, but maintain separate stock listings. Carnival is arguing that this will result in higher taxes for the income of the company than previously disclosed by RCI and POP.

2. CCL want to maintain their status as the larges cruise company in the world, and it is no secret that they have wanted to add Princess to their group for some time. If the RCI merger goes through CCL will be dethroned.

3. The Princess reply to the CCL offer indicates that if they were to break the agreement to merge with RCI there would be a severe penalty ("poison pill")- because they have agreed to form a joint parntership and start a new cruise line in southern europe with RCI. Pulling out of this partnership would cost so much that the superior offer from CCL will actually be more costly, and therefore unattractive to P&O Princess share holders. CCL says this is nonsense.

4. It is clear that the management of P&O Princess does not want to become part of CCL, and would much rather work with RCI despite CCL's higher offer. THerefore, CCL is going around the managment and appealing to the share holders- saying that their deal is superior and will make them more money. They are asking P&O Princess share holders to vote down the RCI merger and force the management to accept the CCL deal [AKA, hostile takeover].

The P&O in Princess P&O...

Carnival is only pushing the bid up to the point where it might cause some division among P&O shareholders, not decisively win them over. If there were a mortal threat to Carnival, they would be going to war right now. They are talking more about how RCI’s bid can not, or should not work, then they offer details about how their bid would be better. That is not how you fight if you truly must have, or have a deep desire to own the Princess brand. Arison publicly talks of how slim the chance of winning is. He does not speak of how Princess would flourish under Carnival, or how Carnival wants or needs to develop with the brand.

The only way Carnival wins this war is if they manage to keep RCI and P&O apart. If they somehow did wind up having to take Princess over, they will suffer in the eyes of the financial markets. If RCI and Princess merge their holding company, Carnival loses the initiative in the industry. It is in that, which Carnival feels a threat, as well it should.

Looking at things in the larger picture, RCI/Princess/Celebrity are three brands that mesh well from one to the next. In the hands of a capable administration, the gains that can be realized are huge. From negotiating new building, to dealing with travel agents, to pure marketing, and logistics, RCI/P&O (or whatever the main holding company is named) would gain huge clout.

Also, I think that ego has no small part in what is going on right now. Mickey Arison did not like losing RCCL when it slipped from his grasp years ago. He wants to retain the title of the worlds “largest cruise company.”

I think Sept. 11 might have tipped some of these things into place. Yet even so, much of this had to have been planned well before RCI and P&O went public. To which I have to think Carnival was basically caught off-guard and flat-footed. I somehow expect they are planning a move on another cruise line, and may have since before this latest fight broke out. They may actually want Princess, in some vague, ambivalent kind of way. However they may have wanted to buy the assets of American Classic Voyages, or maybe NCL, and they do not want to risk the money that would take, on a gambit to actually succeed in taking Princess. I don’t know their finances well enough to be able to see where their assets might be.