French container line CMA CGM has offered to acquire Singapore-based Neptune Orient Lines for about S$3.4bn ($2.4bn) in cash, enhancing its position on strategic trades such as the US, intra-Asia and Japan, and forming a larger entity with the world’s third-largest container shipping fleet.
CMA CGM offered to pay S$1.30 for each NOL share, the companies said in a joint statement. The transaction was unanimously approved by the NOL board and fully supported by NOL’s majority shareholders, the statement said.
CMA CGM and APL’s combined fleet will have an 11.5% share of the world’s capacity, making the merged entity the third-largest container shipping line following AP Moller-Maersk and Mediterranean Shipping Co. The acquisition will result in a combined turnover of $22bn with a fleet size of 563 vessels. CMA CGM said it will establish its regional head office in Singapore and intends to retain and develop the APL brand.
“At a time when the shipping industry is facing strong headwinds, scale is more critical than ever to capitalise on synergies and capture growth opportunities wherever they arise,” CMA CGM vice-chairman Rodolphe Saade said in the statement.
CMA has a leading position on the Asia-Europe, Asia-Mediterranean, Africa and Latin America routes while APL is strong along the transpacific, intra-Asia and Indian subcontinent shipping routes, the companies said. Following the transaction, the combined group will hold market shares from 7% to 19% on the routes on which it operates.
“This is a welcome move. The industry needs consolidation,” Drewry Maritime Equity Research director Rahul Kapoor said. Still, Mr Kapoor said that it is unlikely that the industry will embark on a “merger frenzy.” The “valuations remain depressed and M&A remains challenging from both buyer’s and seller’s perspective.”
The offer price represents a 5.7% premium based on NOL’s last closing share price of S$1.23 on December 4. The Singapore company suspended trading of its shares today. The shares have surged 46% since the beginning of the year amid speculation that the carrier’s assets would be sold off.
The boards of NOL and CMA CGM have unanimously approved the terms of the proposed transaction which is still subject to the approval of the relevant anti-trust authorities. The approval is expected by mid-2016.
CMA CGM said it intends to de-leverage its balance sheet within 18 to 24 months “through synergies and asset sales” for an amount of at least $1bn to bring its debt gearing ratio to below 0.8 times. The transaction, which will be funded by a combination of available cash and bank financing, is valuing NOL at a price to book ratio of 0.96 times.
The deal looks like a good one for CMA CGM, giving it complementary assets and significantly expanded presence in the transpacific arena. CMA CGM will gain 34 vessels which are less than three years old, the result of NOL’s long-standing fleet renewal programme for APL.
These will include six 14,000 teu ships, well suited for the transpacific loop, as well as 10 ships of nearly 11,000 teu that will able to transit the widened Panama Canal when that opens next May. CMA CGM will also gain 12 9,000 teu-9,500 teu ships that will serve well for Asia-Latin America trades.
“If CMA CGM wanted to buy these assets individually they probably wouldn’t spend a great deal less,” said Andy Lane, an analyst for Singapore consultancy CTI.
Tan Chong Lee, head portfolio management at Temasek, majority holder of NOL shares stated, “We are supportive of this transaction as it presents NOL with an opportunity to join a leading player with an extensive global presence and solid operational track record.”
The merger is unfolding at a time when container shipping rates are at record lows on key routes. With overcapacity in the global container fleet, rates, particularly on Asia-Europe routes, are expected to stay below operating costs for some time.
Savings from economies of scale will undoubtedly be a major factor in this merger. CMA CGM chief financial officer Michel Sirat said in a press conference that post-merger, the combined company will seek asset sales of at least $1bn. He said the sales would follow a “strategic review of assets of the combined group,” and added that the sales could include containerships and terminals.
Economies of scale will also become available through staff reduction. CMA CGM employs a total of 22,000, while NOL employs about 7,400, both at land and sea. Mr Ng confirmed at the press conference that “there will be a process of rationalisation and some employees will be affected.”
However, he said that the rationalisation would be mitigated by CMA CGM’s intention to retain the APL brand, and of the decision to set up regional headquarters in Singapore.
Maersk recently announced cuts of about 4,000 by 2017 from its current 23,000 land-based workforce. Maersk also downgraded its earnings expectations for the year by $600m in November, a reflection of the depressed market.
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