Neptune Orient Lines Ltd. market cap as of 29/04/2016: SGD3.346bn (c. USD2.49bn)

In the light of the slump in global trade caused by the economic crisis, the once-profitable container-shipping industry has been subject to a wave of consolidation in an attempt to recover from constant losses of the last five years. In order to do so, shipping companies have been forming alliances and merging with each other. The most recent example of this quest for consolidation is represented by the approved $2.4bn acquisition of Neptune Orient Lines (NOL) by CMA CGM.

Industry Analysis

The container-shipping industry’s revenues are to a great extent bound to the $/TEU rate: they are indeed able to charge a price per carried Twenty-foot Equivalent Unit, being this the main measure for a company’s shipping capacity (1 TEU = 1 20ft-long ISO container). These firms are price takers: the rates they can charge are established according to the China Containerized Freight Index (CCFI) or the Baltic Dry Index (BDI).

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Container-shipping had been highly profitable thanks to the huge amount of global trade, especially in the form of exports and imports in Asia: in this period the CCFI was trading at multiyear highs above $1000/TEU and carriers were exploiting the situation by increasing their capacity, ordering new and larger vessels. However the global financial crisis and the consequent slump in global trade, together with the commodity prices rout, reduced drastically the volumes of freight exchanged around the world.

Another factor that contributed to depressing profits even more is to be traced into the large orders that shipping companies had made when the rates were still high: confident that global trade – and therefore the demand for container-shipping – would continue to grow exponentially, they eventually found themselves with new vessels being delivered to them, thus increasing overcapacity and pushing the $/TEU rates down even further. Recently the index is quoted around $650/TEU and therefore shipping companies tend to sell their services only slightly above – or even below – their average cost.

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Substantially unprofitable for the last 5 years, some of the companies didn’t make it, with one notable example being Hanjin Shipping which, having a D/E ratio of 850%, had to ask for restructuring of debt to its creditors. These firms are now target of specific distressed debt funds. The container-shipping companies however are trying to recover from the crisis by enacting different strategies.

One of the them consists in the so-called “scrapping”: in order to reduce the excess capacity generated by the lack of demand, some shipping companies have decided to dismantle some of their oldest vessels and gain proceeds from the amount of steel they were made of. However this is not viable in the long term, since fleets’ average age is now reduced and scrapping is not possible anymore.

The other way companies are coping with the slump in rates is by replacing smaller vessels with larger ones, carrying more than 14,000 TEU (Ultra large container vessels), like the Triple-E vessel class recently expanded by Maersk. This allows to ship bigger quantities of containers spreading fixed costs and reducing opex/TEU (operating expenses per TEU, the smaller it is the more cost efficient the company).

Perhaps not surprisingly, scale could be the solution to the industry crisis, either through mergers or alliances. Almost every player targets costs reduction and, as in the CMA CGM – NOL case, efficiency and scale advantages are fostered through mergers. In China Cosco Shipping and China Shipping Group merged with the help of the government, freeing the two groups from competing one against the other in the Transpacific route, while Hapag Lloyd and United Arab Shipping Group are still in talks for a potential tie up.

However, since mergers in the industry typically take years and job cuts to generate synergies, companies are exploring the concept of alliances. This allows to reduce the burden of overcapacity, increasing the utilization rate of each vessel by sharing it with other peers in the alliance.

Before the deal between CMA GCM and NOL was approved, the container-shipping industry was split among four major alliances: the first one, holding 28% market share, was 2M (composed by Maersk and MSC); the second one, called G6 and including among the others NOL, held 17% market share; the third one was CKYHE with 16% market share while the last one, with 15% market share, was the alliance including CMA CGM, Ocean3.

Following the approved merger with NOL, CMA CGM has recently announced it will form a new alliance with COSCO Container Lines, Evergreen Line, Orient Overseas Container Line and the newly acquired NOL of course, “to offer competitive products and comprehensive service networks covering the Asia-Europe, Asia-Mediterranean, Asia-Red Sea, Asia-Middle East, Trans-Pacific, Asia-North America East Coast, and Trans-Atlantic trades”. This new alliance is expected to be larger than 2M, thus appropriating more than 30% market share and substantially weakening the other existing alliances.

About CMA CGM

CMA CGM is a privately held shipping group headquartered in Marseille, France. It was founded in 1978 by Jacques R. Saadé who is as of today also the group’s chairman and CEO. The company is present in more than 160 countries, through a network of 765 agencies, and employs more than 22,000 people.

With a young and diversified fleet of 471 vessels and 200 shipping lines, CMA serves 420 of the world’s 521 commercial ports and holds the 3rd position in the shipping line market by capacity. Its fleet boasts 1.8m TEU capacity in 2015, behind the Danish industry leader Maersk Group (c. 3m TEU) and Mediterranean Shipping Company (c. 2.6m TEU). In 2015 CMA CGM transported an estimated volume of 13m TEUs, achieving a 6.3% growth with respect to the previous year.

As of FYE2015, CMA reported revenues of $15.6bn, showing a 6.3% decrease compared to the previous year; however the revenues 5-years CAGR is positive with a value of 1.1%. Compared to FY2014, the company has experienced an abrupt 44% decline in cash & equivalents, but thanks to the purchase of new securities and a decline in total debt, the group’s net debt has decreased by 7.2%, reaching $2.9bn.

About NOL

Neptune Orient Lines (NOL) is a Singaporean shipping company founded in December 1968 as national shipping line in order to foster the economic development of the newly-born Republic of Singapore. Wholly owned by the government at the moment of its foundation, NOL was listed on the Singapore Exchange in 1981: the Singapore government now owns c. 66% of the company through its investment arm Temasek Holdings, while the rest is split among several institutional investors.

In 1997, NOL acquired APL – an American shipping company which was eventually adopted as the major container shipping brand for customers. In this way, the Singapore-based company was able to broaden its geographical scope and thus to compete with other well-established global competitors. Furthermore, this merger also gave NOL the access to key terminal hubs in Asia and North America. As of today, Neptune Orient Lines owns 88 vessels with an average age of 9 years and an overall capacity of 0.5m TEUs.

In FY2015, Neptune Orient Lines made a net profit of c. $707m after numerous years of net loss evident from a 5-year revenue-based CAGR of -8.06%. Although a net profit after years of net loss could be seen as a good sign of recovery for the company, this was actually caused by the disposal of APL Logistics (sold to the Japanese airfreight forwarding company Kintetsu World Express Inc.), which made NOL earn $888m. Excluding this one-time gain, NOL incurred a full year net loss of US$181m (an improvement of 30% over FY2014 though!).

 

Deal structure and rationale

On December 7, 2015 CMA CGM announced a pre-conditional voluntary general cash offer for Neptune Orient Lines (NOL) that has been unanimously approved and recommended by NOL’s Board. Upon approval of China, EU and US, CMA will launch a tender offer at the price of SGD 1.30 per NOL share, representing a total amount of approximately $2.4bn and a 33% premium to NOL’s 3 month volume-weighted average share price (VWAP) to July 16, 2015. On April 29, 2016 the EU antitrust authority approved the deal, explaining that “the takeover will not lead to price increases for the many EU companies using these container shipping services”. After the conclusion of the integration process, the intention of the buyer is to delist NOL from the Singapore Exchange and to keep it as a fully owned subsidiary.

The proposed acquisition, which would have a strong impact on CMA’s financial figures, is expected to be financed via a combination of $1.65bn bank loans and $750m of the Group’s own cash. The company’s revenues would top $22bn and the EBITDA would grow by 29% to $1.6bn. However, due to an exponential appreciation in net debt, the Pro-Forma Net Debt/EBITDA would skyrocket from 2x – CMA CGM’s net debt/EBITDA as of FYE2015 – to 4x.

The resulting entity would be endowed with 563 vessels, a fleet capacity of 2.4m TEUs (26% growth with respect to CMA’s current value) and a yearly carried volume of 18m TEUs (38% growth). After the deal, CMA CGM would hold a market share of 11.5% (vs the current 8.8% for CMA and 2.7% for NOL), thus reinforcing its position in the container shipping industry. Other strategic considerations that support the deal are the significant operational synergies, the creation of scale to enhance competitiveness and the complementary geographical strengths. However, if the acquisition of NOL is successful, CMA’s leverage will increase significantly (as it will have to take on also the $2.65bn net debt of NOL) and the company plans to pare down its debt through asset sales over the next two years, also required to obtain regulatory approval for the deal.

The rationale of the deal is mainly linked with the quest for more efficiency, which could allow the two companies to survive in the low rates environment. Furthermore, it is also important to note that CMA CGM will gain more influence in the Asia Pacific region and will have a better control on its operations in the area by opening a new regional office in Singapore. For what concerns the sell-side party Temasek Holdings, which owned 66% of NOL, this could be the chance to exit the troubled shipping market, investing in more profitable assets.

 

Financial advisors

CMA CGM was advised by JP Morgan, HSBC and BNP Paribas while NOL’s designated advisor was Citigroup.

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