Consolidation Cooking in European Short Sea Shipping

Shipping lines on the busy North Sea and Baltic routes are jostling for position ahead of another round of consolidation as the private equity funds and buyout firms that rushed into the market during the boom days of easily available capital and debt finance and strong traffic growth are bowing out.

Germany’s Allianz Capital and 3i, the UK private equity fund, are readying the sale of German ferry line Scandlines, which could fetch up to $1.8 billion. Montague Private Equity, another UK fund, is said to be mulling options for Denmark’s Unifeeder, including a sale of the leading feeder ship operator that could command between $580 million and $650 million.

These industry outsiders have left their mark on the sector by pushing through urgently needed consolidation of a fragmented market that seemed to elude the insiders.

Scandlines’ co-owners made it a more manageable and potentially more profitable outfit by selling off its sizeable freight business — ferrying more than 800,000 trucks a year — and some ships to Swedish carriers Stena Line and Sweden Orient Line in the past year.

Unifeeder, with a fleet of 37 ships, has consolidated its leading short sea market share and expanded its geographical reach under Montague’s wing, mostly through organic growth plumped up with strategic acquisitions. It bought IMCL, the leading feeder line in Poland and the Baltic States, in 2010; beefed up its UK presence with the purchase of Feederlink from Irish Continental Group in 2012; and moved into the Mediterranean in the same year, launching services between Spain, Algeria and Tunisia.

The insiders’ biggest move was DFDS’s $425 million acquisition of Norfolkline from A.P. Moller-Maersk in 2010, which left the Maersk Line parent with a 31.4 percent stake in the Copenhagen-based buyer.

A year earlier, DFDS itself was targeted by DSV, Scandinavia’s biggest trucking and logistics group, but the deal was pulled when European Union regulators began an in-depth investigation. And the regulators could yet scotch potential bids for Scandlines and Unifeeder if it’s put on the block.

There are relatively few potential bidders for the two companies. A.P. Moller-Maersk has no need for Unifeeder, as it has been running its own intra-European feeder operation, Seago, since 2011. The line, which also caters to third-party customers alongside Mearsk Line, deploys a fleet of 50 ships with a combined capacity of about 90,000 20-foot-equivalent units across a network that stretches from the Baltic states to Morocco. Stena is still digesting its recent acquisition of Scandlines freight routes. Grimaldi moved out its Mediterranean base to take control of Finnlines, but its energy-sapping restructuring of the Finnish carrier may have dulled the Italian group’s appetite for fresh northern forays.

This leaves DFDS as the most likely industry bidder — regulators permitting. The Danish company, buoyed by the successful integration of Norfolkline, is continually on the lookout for acquisitions to expand its network. “We foresee opportunities to strengthen DFDS’s long-term market position through acquisitions in the years ahead, and our highest priority is, therefore, to continue pursuing our growth strategy,” said CEO Niels Smedegaard even as he announced an 80 percent slump in pre-tax profit to around $27 million on $2 billion revenue for 2012, when the market was wracked by falling cargo volumes and fierce competition. The company acquired three routes from France’s LD Lines, including one in the Mediterranean, last year, as well as a terminal in Gothenburg, Sweden’s largest port. But it needs a big deal to keep growing.

Scandlines might remain under non-industry ownership as trade buyers are too preoccupied trying to make a profit in a flatlining market to take on even more tonnage. Private equity group Nordic Capital, which specializes in the Nordic region and Germany, and which has raised $2.2 billion in its latest fund and expects to reach its $4 billion target by the summer, is being tipped as a likely bidder. Whoever takes over, it’s unlikely Scandlines will return to the freight market any time soon, if ever.

At first glance, short sea shipping in north European waters does not appear to be attractive acquisition target. Cargo volumes are declining, or stalling at best, from the Irish Sea and the English Channel to the North Sea, with growth limited to a few Baltic routes. And with the eurozone and the UK set to be the slowest growing region in the world through 2013 and most likely well into 2014, there’s scant chance of an uptick in traffic.

The attraction is Russia. While intra-European traffic stalls and slumping imports from Asia depress feeder volumes, Russia’s trade is soaring as it sucks in consumer imports via European ports. Hamburg, Europe’s second largest box port, saw container traffic dip 1.7 percent in 2012 as its key Asian trade fell 8.6 percent. Traffic with Russia, by contrast, rose 13.3 percent to 675,000 TEUs, making it the German port’s second largest customer.

There’s more to come. “The Russian market continues to grow much faster than the global container market and is even outperforming other high growth markets such as India, Brazil and China,” says Kim Fejfer, chief executive of APM Terminals, which paid $860 million for a 37.5 percent stake in Global Ports, Russia’s biggest container terminal operator, in September.

An added bonus for European short sea shipping lines is that Russia, just like the U.S., relies on foreign carriers to transport its foreign trade.

Contact Bruce Barnard at brucebarnard47@hotmail.com

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