If Hapag-Lloyd's parent company completes its announced acquisition of CP Ships Ltd., the German carrier will become the world's fifth-largest container line, the largest on the trans-Atlantic, and a dominant carrier on several north-south routes between Europe and the U.S. and South America and Australasia. The acquisition also will give Hapag-Lloyd a fleet of medium-sized, 2,000-to-4,000-TEU vessels that could provide a platform for growth on those routes or on Panama Canal services.
However, the merged company will have weak spots in its global coverage. Neither Hapag-Lloyd nor CP Ships are major factors in the fastest growing liner trades on the trans-Pacific. CP Ships also doesn't offer vessels suitable for routes where super-post-Panamax ships of 8,000 TEUs are rapidly becoming the norm. And Hapag-Lloyd's parent, TUI AG, will be paying considerably more per ship or per TEU than A.P. Moller-Maersk did in its recent $2.8 billion acquisition of Royal P&O Nedlloyd.
The unexpected decision by TUI to outbid its rivals in the scramble to buy CP Ships is widely seen as a defensive move. "Hapag-Lloyd was in danger of being marginalized in the world's liner trades," said William J. Coffey, a maritime consultant and former Sea-Land Service executive. "It was not in the top 10 liner companies, and they couldn't position themselves in markets where the consolidation of liner companies was cutting into their share."
Hapag-Lloyd, a Hamburg-based carrier that was formed in 1970 by the merger of the Hamburg-American Line and Nordeutscher Lloyd - both over 100 years old - has long been a major factor in Europe-Asia and trans-Atlantic routes. Acquiring U.K.-based CP Ships, the product of several acquisitions of niche lines under Chief Executive Ray Miles, points the line in a new direction.
"It's a big change for Hapag-Lloyd, because it has never grown by acquisitions before," said Philip Damas, research director at Drewry Shipping Consultants in London. "The surprising thing to me is that Hapag-Lloyd, as a major carrier on the trans-Atlantic, would buy another major carrier on the trans-Atlantic, because most carriers try to complete their networks." He said the trans-Atlantic trades are improving, with freight rates rising and eastbound and westbound volumes coming into better balance.
Damas said the purchase price - $2.3 billion, including the assumption of $316 million in CP Ships debt - would force other potential bidders to raise their bids for CP Ships, whose board has already endorsed TUI's offer.
Coffey said the combination of the two lines will give Hapag-Lloyd more leverage to raise and maintain freight rates on the trans-Atlantic and the north-south routes where CP Ships already has a dominant position.
"Hapag-Lloyd must have decided it should focus on markets where it already had strength, rather than on the trans-Pacific, where it would have had difficulty breaking in," Coffey said. "It makes a lot of sense for them to grow in the areas they are strong in and leave the trans-Pacific alone."
Ship capacity would be a big part of the acquisition, as it was in the recent Maersk-P&O deal. Although the Grand Alliance (of Hapag-Lloyd, NYK Line, Orient Overseas Container Line and Malaysia International Shipping Corp.) has announced plans to increase capacity by 14 percent, or 100,000 TEUs, after P&O Nedlloyd withdraws its ships next February, an open question has been how the remaining members would be able to fulfill that expansion. Presumably, some of CP Ships tonnage would be devoted to the alliance. That would give Hapag-Lloyd much greater leverage within the alliance, which had previously been dominated by P&O Nedlloyd. CP Ships' north-south routes would not play much of a role in the Grand Alliance because the carriers have not integrated those routes.
Hapag-Lloyd also has been struggling to maintain the vessel capacity on its ANS service with NYK from U.S. East Coast ports to the east coast of South America, according to Coffey. "They can't build the 2,000- to 4,000-TEU ships they needed for the service, because all the orders are for the 8,000-TEU ships," he said. "Now they will have the right ships."
The acquisition would also give Hapag-Lloyd a major North American gateway through the Montreal Gateway Terminals, where CP Ships' niche lines, Contship Containerlines and Canada Maritime, account for much of the line's trans-Atlantic volume. It will gain new routes to South America through CP Ships services that have operated under the Lykes Lines and TMM names, and to Australia and New Zealand through ANZDL. The trans-Atlantic is by far the most important part of CP Ships' business, accounting for 52 percent of its volume. Asia accounts for 23 percent; Australasia, 13 percent; and Latin America, 11 percent.
The price that TUI would pay for CP Ships, including acquisition of debt, would be about $29 million per ship for each of CP Ships' current fleet of 79 vessels, or $12,371 per TEU of capacity in its current fleet capacity of 187,203 TEUs. By comparison, the $2.8 billion that A.P. Moller-Maersk paid for Royal P&O Nedlloyd totals about $17 million for each of 162 vessels, or $6,084 per TEU of its current fleet capacity of 460,203 TEUs.
Hapag-Lloyd and CP Ships have concentrated on ocean shipping and intermodal operations. Neither has developed third-party logistics operations like those of the sister companies of carriers Maersk Sealand and APL Ltd.
TUI said it expects to achieve savings of $220 million a year by the third year after the purchase is completed. It said the integration of CP Ships into Hapag-Lloyd will cost $122 million, most of which will hit next year. It projects the acquisition to have a positive impact on earnings after integration is completed by 2008.
CP Ships announced this year that it was abandoning its practice of marketing its services under the names of carriers acquired during the acquisition spree that Miles engineered during the last decade. The company said Lykes, Canada Maritime, TMM, Contship and ANZDL would be rebranded next year. CP's multiple-brand policy extended to some duplication of operations, an arrangement that was criticized as costly.
Hapag-Lloyd and CP Ships currently operate a combined 139 ships (with 17 others on order) that have a capacity of 405,749 TEUs. The merger would boost Hapag-Lloyd into fifth place, behind Maersk Sealand, Mediterranean Shipping Co., Evergreen and CMA CGM in the ranks of the world's largest container lines. The combination of Hapag-Lloyd and CP Ships would have had sales of approximately $7 billion and earnings before interest, taxes, depreciation and amortization of $719 million in 2004.
But the acquisition is not a done deal yet. It must be approved by the shareholders of CP Ships, whose shares are listed on the Toronto and New York stock exchanges, but this is largely a foregone conclusion because it has been endorsed by CP Ships' board. The biggest hurdle to its completion is the possibility that another liner company will up its ante with a still higher bid.
TUI has the right to match any new offer under a deal with CP Ships, but Chief Executive Michael Frenzel has said there is an "upper limit" to what the company would pay. He expressed confidence last week that the acquisition will succeed despite reports that larger rivals were preparing counteroffers.
CMA CGM, the French carrier that earlier had confirmed it was talking with CP Ships when TUI made its bid on Aug. 21, is thought to be the most likely counterbidder, though Geneva-based Mediterranean Shipping Co., the world's second-largest container line, is also said to be in the running. Any bid by MSC would represent a radical change in the Geneva-based line's growth strategy, because, like Hapag-Lloyd, it has never before acquired another container line. Nicola Arena, president of MSC in the U.S., has said that the line prefers to grow organically because of the difficulty of meshing different companies' cultures and retaining customers during the process.
Another carrier that has been reported to be interested in bidding for CP Ships is China Shipping Container Lines. Although it has not confirmed its interest publicly, it is said to be teaming up with CMA CGM to bid jointly for CP Ships. But there remains another hurdle in convincing CP Ships' board to flirt with another suitor. As a public company, it would have to entertain any higher offer counteroffer, but it would incur a penalty of $70 million if the deal with TUI does not go through.