CMA CGM, the world’s third-largest container shipping company, has made a pre-conditional cash offer of $2.4 billion for Singapore-based rival Neptune Orient Lines marking another major milestone in the consolidation of global shipping.
The France-headquartered firm fended off interest from rivals such as Denmark’s Moller-Maersk, Germany’s Hapag-Lloyd, Orient Overseas Container Line of Hong Kong, and Korea’s Hyundai Merchant Marine to announce the purchase on Monday.
The deal will proceed pending antitrust authority approval in Europe, the US, and China and comes at a time when earnings from shipping are being squeezed globally due to excess capacity and shrinking trade. NOL has not made a profit in the past two years.
The Baltic Dry Index, a widely followed measure of global shipping rates that is traded in London and is a forward indicator of global activity, remains depressed, having touched a 30-year low in late November.
CMA bid S$1.30 ($0.93) per NOL share, representing a 49% premium to NOL’s share price before suspension and a 33% premium to its three-month volume-weighted average price to July 16.
The offer values NOL at about 0.96 times book value. One adviser familiar with the deal said CMA had paid a decent valuation given that the shipping industry is in a cyclical slowdown.
The nature of the shipping cycle means that when it is in an upswing they make enormous amounts of money, and when it’s in a down-cycle they lose a lot of money. Because of this investors tend to value the industry on a price-to-book basis and acquisitions tend to be above par during an uptrend and during a downturn they are valued less than the book value,” the adviser said.
However, a second source close to the transaction said the valuation seemed fair, taking into account other shipping mergers, such as Hapak-Lloyd’s merger with CSAV in December 2014.
“If you look at Hapak-Lloyd’s purchase of CSAV, the effective purchase price was well above one times book, so this is a good multiple for CMA to pay,” he said. “At the same time, this is almost book value on a company that hasn’t generated a profit for nearly three years.”
Size matters
The adviser said the French company was willing to pay up to secure the acquisition because it is a relatively rare business opportunity. Most shipping companies in the world are either state- or family-owned.
It is also relying on economies of scale. While CMA declined to offer any detail on the synergies it believes it can achieve, Hapak-Lloyd’s merger with CSAV offers some pointers, the sources familiar with the deal said.
Germany's Hapak-Lloyd and Chile's CSAV targeted annual cost synergies of at least $300 million, or roughly 4% to 5% to transaction value. The second source said this was a rough industry standard for sizeable container shipping companies.
Hapag Lloyd returned to profit following the merger, a year after reporting a loss.
The second source added that the NOL acquisition makes similar sense for CMA because it offers greater flexibility in terms of trade routes and an ability to reduce some overheads, although the two companies have relatively little overlap in terms of favoured trade lanes.
“CMA sees a tremendous opportunity with NOL because its route structure is very complimentary,” the source said.
“CMA is strong in Europe to Africa and transatlantic, while NOL is stronger in intra-Asia and trans-Pacific. They are complementary and sales force-driven, and when you put them together there should be good cost synergies.”
One example is the ability of the combined company to place large vessels on the busy Europe-Asia loop, and then shift the existing ships to loops with lower requirements, better utilising overall resources.
