DUBAI/LONDON, 28 January 2006 — A bidding war for UK ports and ferries group P&O broke out on Thursday after it agreed to a 3.9 billion pound ($6.96 billion) takeover bid from Gulf state-backed Dubai Ports World, trumping an earlier offer from Singapore’s PSA International.

Dubai Ports upped its cash offer for P&O to 520 pence-per-share late Thursday, toppling a rival offer for 470p, or 3.5 billion pounds, from PSA earlier in the day.

The city states of Singapore and Dubai are wrestling for control of P&O’s key container ports in Asia, Europe, and the Americas. A successful bid by Dubai Ports would create the world’s third-largest ports group.

P&O said in a statement it had agreed not to adjourn shareholder meetings scheduled next month to vote on the bid unless a third party made an offer of more than 546p.

Dubai Ports’ Chairman Sultan Ahmed ibn Sulayem told Reuters that P&O shareholders would vote on the Dubai Ports bid on Feb. 13.

Asked if he was willing to top any further counter bids by PSA, Sulayem said: “We don’t want to speculate. We always go on real issues.”

PSA executives were taken by surprise at Dubai Ports’ quick response and were in urgent talks to determine their next move, a source familiar with the situation said. It was still unclear whether it would raise its offer.

“It is the commencement of a battle. I suspect DP World are not going to sit on their hands and do nothing. Shareholders will get more at the end of the day,” Investec Securities analyst John Lawson said before Dubai Ports upped its bid.

Shares in P&O, a 165-year-old maritime icon formed at the height of Britain’s sea power, closed at 522 pence.

The stock, which has doubled in value in the past two years, has traded at a premium to the expected PSA bid in recent weeks in anticipation of a bidding war.

Speculation about a counterbid for P&O has been growing since Dubai announced its 443p offer at the end of November and reached fever pitch when PSA, wholly owned by Temasek Holdings, began buying shares in P&O.

Shipping experts say the deal is strategic for both bidders, which want access to P&O’s 29 container terminals in key ports in Europe, North America, Australia, India, China and other parts of Asia.

A successful bid by PSA would create the world’s largest ports group.

PSA needs to strengthen its position in India where P&O owns three ports, while Dubai Ports, aiming to become a global player, has also set its sights on the subcontinent.

Dubai Ports, whose bid has been cleared by key regulators, has launched a lobbying campaign behind the scenes to convince politicians PSA’s bid was anti-competitive because of its close ties with Hutchison Whampoa.

“PSA have said they do not see that as a significant issue,” P&O Finance Director Nick Luff earlier told reporters on a conference call.

P&O Chairman John Parker said earlier the UK ports group had recommended PSA’s offer on price alone.

A bid battle would be the second major contest between PSA and Dubai Ports in recent years. Dubai won the first in 2004 when it paid $1.15 billion for the global port assets of U.S. firm CSX Corp. PSA reportedly bid $1 billion.

Should Dubai’s bid succeed, it will become the world’s number-three port operator after Hutchison and Temasek.

Dubai Ports and other government-backed firms from the world’s biggest oil exporting region have earned a reputation for aggressive bidding as they look for opportunities to invest their windfalls from record oil prices.

P&O, whose full name is Peninsular & Oriental Steam Navigation Co., earns 70 percent of its profits from ports. It still owns a cross-Channel ferries business operating between Britain and France that has been scaled back in the past year.

UBS and Goldman Sachs are advising PSA, Citigroup is advising P&O while Deutsche Bank is advising Dubai Ports.