In today’s world of liner shipping scale is everything. And with the industry facing a crisis of overcapacity combined with ruinous losses, it was only a matter of time before the next round of consolidation commenced.
That it features Germany’s leading container line Hapag-Lloyd and Chile’s Compañía Sud Americana de Vapores (CSAV) came as a surprise, given that the former had been in extensive talks with compatriot Hamburg Süd last year. Although these had ended several months earlier without conclusion, there appeared to be hope on both sides that at some point they could be resumed.
However, in December it transpired that far from waiting for the winds to turn fair, Hapag-Lloyd had been busy looking for another company with which to partner, after a German newspaper revealed that merger talks were underway with CSAV. This resulted in CSAV issuing a statement to the Santiago stock exchange confirming that initial, non-binding talks were underway.
That was followed in January by the signing of a memorandum of understanding between the two companies that heralded the beginnings of the due diligence process. This was followed in April by the signing of a binding agreement that leaves only a couple of minor obstacles to the merger taking place.
As this edition of Container Shipping & Trade goes to press, the last remaining CSAV shareholders who had yet to vote on the merger had confirmed their participation. Just 2.7 per cent of the Chilean company’s voting stock objected to the merger. Under its corporate governance rules, if 5 per cent of the stock or more had objected, then it would not have gone ahead. As it is, the dissident minority will have its shares bought up by CSAV.
With that hurdle overcome the only remaining clearance required is the approval of the merger by Hapag-Lloyd’s largest shareholder, the city of Hamburg, and regulatory approval from the European, German and Chilean anti-trust authorities.
Assuming that clearance is obtained – and it is not too much of an assumption to make, given that the City of Hamburg has been looking for a way to reduce its shareholding in Hapag-Lloyd, while the combined company will not have a dominant share in any of the markets it serves – the new deal will probably be completed in the autumn. At this point Hapag-Lloyd will effectively become the world’s fourth largest box carrier in terms of slot capacity operated.
“By integrating CSAV’s container business, Hapag-Lloyd is able to build on its strengths and is therefore in an excellent position for future growth,” said Hapag-Lloyd board chairman Michael Behrendt at the signing of the binding agreement. He added: “This combination will further strengthen our service portfolio and enable us to deliver an even better global service to our clients.”
Within that quote is hidden an important truth that has been shielded from much of the media, but is obvious to anyone with more than a passing acquaintance with the deal. Despite CSAV’s investor relations team billing the deal as a merger, it is very much a take-over – albeit one that protects the investment of CSAV’s main shareholders by transferring their stakes to Hapag-Lloyd.
And CSAV has to pay to play. It will have a 30 per cent stake in Hapag-Lloyd. This means that existing shareholders in the German company will see their stakes reduced. The City of Hamburg will go from the 36.9 per cent that it currently holds to 25.8 per cent. Kuehne Maritime – the holding company that Kuehne + Nagel chairman Klaus-Michael Kuehne set up to invest in Hapag-Lloyd when it was threatened by a hostile takeover from Singapore’s Neptune Orient Lines – owns a 28.2 per cent stake that will be reduced to 19.7 per cent. Travel group TUI will see its shareholding reduced to 15.4 per cent from 22 per cent, while the combined stake owned by minority shareholders will go from a 12.9 per cent shareholding to 9 per cent.
Once the current agreement has closed the new-look Hapag-Lloyd, with CSAV as a 30 per cent shareholder, will head to the capital market to raise 370 million. CSAV is committed to providing 259 million of this, and by doing so will see its stake raised to 34 per cent.
The final stage of the plan will see Hapag-Lloyd undertake an initial public offering, on an as-yet undecided stock exchange, which will be linked to another capital increase of 370 million.
With its finances bolstered in this way, the merged entity should be able to withstand what is likely to be another pair of fallow years for liner companies. Overcapacity continues to blight the industry and the effect on freight rates has been evident for all to see. Both companies made a loss last year as a result.
And therein lies one of the problems with the tie-up. It appears that the driving force behind the deal is the target of saving costs. But will that strategy result in an altogether weaker, if bigger, company? Some analysts ask whether the motivation behind the deal is the right one.
Tan Hua Joo, executive consultant at Alphaliner, says: “The merger appears to be driven by all the wrong reasons, namely [CSAV shareholder] Quiñenco’s desire to cut its losses on a spectacularly disastrous investment, TUI’s need for an earlier exit path from an unwanted shareholding position, and Kuehne and the City of Hamburg’s need for a new equity partner willing to cough up more money for an under-capitalised company that is struggling to turn a profit.”
The recent history of CSAV is almost a microcosm of how the liner industry misjudged the depth and severity of the recession. It mistook the 2010 mini-rebound in volumes – when US and European retailers had driven stock levels as low as they would go and had to re-order – as a genuine economic recovery. It gambled on a fleet expansion programme, through charter agreements, that saw its cellular capacity in 2011 reach a level that was almost double what it had operated in mid 2009. When volumes plateaued and rates began to collapse in 2011 it was left high and dry and posted a huge US$1.25 billion loss for that year.
It was also the year in which Quiñenco, controlled by the Luksic family - the richest family in Chile – took control of the company, and its reconstruction began. Two capital increases came in, at US$4,98 million and US$1.2 billion, and were accompanied by the sale of the company’s port operating division SAAM.
New management and a new strategy saw it largely leave the troubled Asia-Europe trade and focus on its core north-south trades – from South America to Asia, North America and Europe. By the end of the year some 76.98 per cent of its revenues were generated in these trades. Things got successively better in 2012 and 2013, when it posted net losses of US$313.6 million and US$169 million respectively.
CSAV has also changed its fleet strategy, looking to shift away from the charter market and invest in new tonnage. It has seven 9,300 teu vessels, specially designed for the trades into Latin America, under construction at Samsung Heavy Industries in South Korea. These are expected to be delivered this year and next. To help fund these newbuildings the company had first to raise US$200 million, which has largely been completed.
“This means that we will have a young and cost-efficient fleet. The use of optimum tonnage in the trades is one of the key prerequisites for successful operations in the face of international competition,” says CSAV chief executive officer Oscar Hasbún.
With bunker costs contributing to the liner industry’s losses, fuel consumption is a primary concern. However, cutting corporate costs is the key driver of the deal. Both companies believe that by combining forces they will eventually save US$300 million per year as a result of the synergies created.
It will, however, take a number of years for these to come into effect. In an investor presentation to explain the deal, CSAV said that the merger would probably lead to US$63 million in increased costs in 2014, a saving of US$42 million in 2015, a saving of US$245 million in 2016 and, finally, a saving of US$293 million in 2017, as the full benefits of rationalising the two companies’ vessel fleets, container fleets, terminal agreements, IT platforms and – the most contentious of all - the respective headcounts, appear. CSAV currently employs 4,200 people worldwide and Hapag-Lloyd just over 7,000.
While Hapag-Lloyd, as the larger of the two, is clearly in the driving seat, it is also under pressure. Last year it booked a 97 million net loss, as it was hit by flat-lining freight rate levels and high bunker prices. Its own fleet expansion programme, which has seen it order 10 13,200 teu vessels, is almost complete and it is scheduled to take delivery of the last of them as this issue goes to press.
The combined entity would boast a vessel capacity of 1 million teu, and on current volumes would be expected to carry around 7.5 million teu per year, with annual revenue of US$12 billion. Based on current trading patterns, the combined company would be dominated by the trades out of Latin America. Hapag-Lloyd carried around 1.2 million teu to and from the region last year which, added to CSAV’s volume of 1.4 million teu, would represent 36 per cent of the merged entity’s volumes and clearly make it the market leader. Ironically this would provide intense competition for the other major player in the trade, Hamburg Süd.
Of its remaining trades, the transatlantic would amount to 1.1 million teu annually, representing 15 per cent of its liftings. Asia-Europe – where CSAV is still present through slot-charter arrangements – would amount to 1.5 million teu, a 21 per cent share of liftings; the transpacific trade would be 1.2 million teu, equating to 17 per cent of volumes; and intra-Asia, including the routes to Australasia, would generate 700,000 teu and be equivalent to 10 per cent of volumes. CSAV’s early inroads into the Latin America-Africa trades are worth 100,000 teu per year, or 1 per cent of the combined company’s volumes. CST