Drewry Maritime Advisors has released its latest container insight report in which the London-based analysts tell of how it has been almost 10 years since the industry underwent its last short period of major merger and acquisition (M&A) activity and ask: are these latest deals the beginning of another wave of consolidation, or are they one-offs?
The early signs suggest the latter. The first clue comes with the price that CMA CGM will pay for NOL. In Drewry’s previous analysis of this story, they said that the valuation of NOL was a key sticking point and in the end both parties can claim some victories.
Selling at below book value is hardly likely to encourage other owners to rush to sell and neither have NOL’s peers seen any significant uplift in their share valuation, something that usually occurs when further M&A in a sector is anticipated.
The book price multiples were higher in 2005 as those deals followed several years of record profits among carriers.
More recently profits have been thin and carriers still have substantial debt hangovers from the aftershock of the 2009 crash.
NOL’s net debt was $2.62 billion on September 18, 2015, whereas both P&O Nedlloyd and CP Ships had much smaller net debt of around $300 million at the time of their takeovers.
CMA CGM has said that it intends to deleverage its balance sheet within 18 to 24 months after the closing of the deal through synergies and assets sales amounting to at least $1 billion.
CMA CGM has said that it will retain the APL brand but whatever form the combined entity takes on, it will become the third largest carrier in terms of containership fleet and the second in terms of volume shipped.
The coming together of CMA CGM with APL and of Cosco with CSCL will allow these two groups to play catch up with Maersk and MSC at the top of the size rankings and will further concentrate control of the fleet among the leading few carriers.
The new top five carriers will control around 55% of the active fleet and order book as they currently stand.
As well as posing the difficult question to the chasing lines about how best to respond, the latest M&A activity will cause some operational headaches as alliance members face losing a partner.
CMA CGM plans to move APL into the ‘O3’ alliance from the G6 Alliance, while it is not yet known if Cosco/CSCL will reside in the O3 (current home of CSCL) or the CKYHE Alliance (home to Cosco).
Under the terms of the G6 agreement, CMA CGM will need to give a minimum of six months’ notice after the change of ownerships, which based on the initial timeline of the deal, will mean the G6 can stay intact until the end of 2016, unless the relevant parties can reach an earlier settlement.
The Drewry View: Consolidation will not do anything to improve industry profitability in the medium term as it merely shuffles the excess number of ships into fewer hands. Further consolidation is a possibility as other lines decide they cannot keep up with the Jones’ but the challenging outlook will subdue valuations, making them less appealing to potential sellers.