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.
Size matters a lot in container shipping. While smaller industry players lose money in a downturn, the largest players such as Maersk and CMA can often earn around five to eight times ebitda (earnings before interest, taxation, depreciation and amortisation) even in a downturn.
“If CMA can capitalise on the synergies on an eight times run rate then they can get to an interesting area,” said the adviser.
When combined, the companies will possess 564 vessels, with a combined capacity of 2.4 million TEUs (20-foot equivalent units, the standard container unit used to measure container ship capacity).
Consolidation craze
CMA is understood to have been speaking with NOL and other companies as the major players eye a round of consolidation in the industry. “The senior managers of these companies all know each other and talk to each other all the time,” said the adviser. “They have been trying to figure out who wants to take action.”
The next most likely merger is between Chinese shipping companies China Cosco and China Shipping Group. China’s port operators are considering similar mergers.
The two state-owned companies are in advanced discussions and would create the world’s fourth-largest container shipping line if they merged. Beijing is believed to be likely to approve the consolidation in January.
Other potential consolidations could take place between Korea’s two major shipping companies, Hanjin Shipping Company and Hyundai Merchant Marine, and between Japan’s two largest companies, Nippon Yusen and Mitsui OSK. If that were to occur it could put pressure on other companies currently in alliance with these firms, such as Hong Kong’s OOCL and Hapag Lloyd.
Ailing operations
NOL’s sale appears to have been in the offing for some time. The company most recently reported an annual loss of $96 million in the third quarter of 2015, on the back of a 29% drop in year-on-year revenue.
It appears that Temasek, the Singapore investment company that owns 65% of the company, was unwilling to invest the money required to help turn NOL around and ensure its survival until a market upturn. It unofficially put it up for sale on July 15, but the source said it has been considering a sale well before this calendar year.
The city state shouldn’t practically lose much from CMA’s acquisition. Upon completion of the acquisition, the French company has said it will shift its Asian headquarters from Hong Kong to Singapore, and will retain the American Pacific Line brand under which its ships sail.
“Singapore appears to believe that it is not in its strategic interests to own a shipping line, in the same way the US does,” the adviser said.
It’s a telling sign that NOL’s board unanimously approved and recommended CMA’s bid, and that the shipping company sold off its logistics division APL Logistics to Kintetsu of Japan for $1.2 billion in February.
That deal was entirely separate to this one, bankers said, although the transaction was designed to help maximise the value of APL. Plus it appears to have been no coincidence that reducing NOL’s debt helped to make it a more appealing acquisition target. Its net debt of S$4.07 billion at the end of 2014 dropped to S$2.6 billion after the sale.
Meanwhile, CMA’s willingness to pay all-cash for the acquisition must also have appealed to Temasek. The company said in a press release it aims to deleverage its balance sheet with 18 to 24 months “through synergies and asset sales for an amount of at least $1 billion, with the aim to reduce debt gearing ratio to below 0.8 times.”
BNP Paribas, HSBC and JP Morgan acted as financial advisers to CMA on the sale, while Citi advised NOL.
