Container shipping’s latest slide into red ink is reviving talk about mergers and acquisitions among carriers.
Major ship lines surprised some observers by weathering 2009’s market collapse, which produced more than $15 billion in losses, without consolidation. Things may be different this time, according to Peter Stokes, London-based senior analyst and head of shipping at Lazard.
“I believe that we will finally see a number of non-cash defensive mergers as companies struggle to remain competitive on the major east-west routes or seek to strengthen their position in north-south and intraregional trades,” Stokes told this month’s Marine Money conference in New York.
He predicted carriers would consolidate to cut costs, expand market share and muster resources needed for multibillion-dollar investments in ships and systems. Large new ships for a single service string can cost upward of $1 billion, “and few of the existing players other than A.P. Moller-Maersk can contemplate such a scale of expenditure with equanimity.”
The last consolidation of top-tier liner operators was Maersk’s acquisition of P&O Nedlloyd in 2006. Maersk’s difficulties in integrating the merged companies soured other lines on consolidation. Instead, carriers have pursued cooperation through vessel-sharing alliances.
Contrary to widespread perceptions, the record of recent mergers supports the case for further industry consolidation, Stokes insisted.
The Maersk-P&O Nedlloyd deal eventually solidified the Danish company’s dominance in container shipping, he said, and the acquisitions by Hapag-Lloyd of CP Ships in 2005 and by Neptune Orient Lines of APL in 1997 also produced benefits that outweighed initial difficulties.
“In all of those cases … the immediate post-deal experience for the acquirers was difficult. And yet, all three companies have survived, and all three would say they are in a better strategic position now than they would have been had they not made those acquisitions.”
Stokes said mergers of large container ship lines during the last 15 years have shaved about 3 percent off the merged companies’ operating costs. “Cost savings alone … provide a compelling case for consolidation,” he said.
Philip Damas, director of Drewry Supply Chain Advisors, agreed that past mergers have reduced carrier costs. But he said the impact on revenue usually has been “1 plus 1 equals 1.5,” because shippers who did business with both merged lines have shifted some of their business to third carriers.
That, plus the strained finances of most container lines, makes a new wave of mergers and acquisitions among major carriers “very unlikely,” with the possible exception of Japan’s NYK, MOL and “K” Line, Damas said. The Japanese lines “roughly studied” a possible merger but aren’t currently discussing it, MOL President Koichi Muto told Lloyd’s List.
Damas foresees a “continuing, slow concentration of market share” as smaller, weaker carriers lose market share by failing to match larger lines’ investment, but he predicted container shipping “will remain very fragmented for quite some time.”
Industry consolidation theoretically means higher rates for shippers and higher profitability for carriers, he said, but “this will only happen once you have, say, five or six major carriers per trade lane, as opposed to typically 25 per trade lane today. The industry will not get there for a very long time at the current rate of about four mergers and acquisitions per decade.”
Additional consolidation of container lines won’t be easy, Stokes acknowledged. Damas cited the difficulty in agreeing on valuations, managements’ unwillingness to yield control, and the difficulties in merging large carriers’ staffs, software and company cultures.
But he said containers and certain specialized sectors of shipping might be better candidates for mergers and acquisitions than commoditized bulk shipping companies, which are even more fragmented.
“This is because these are businesses which are much more complex to operate, where greater synergies can be realized and where factors such as market share and long-term customer relationships can be a significant part of value,” he said.
Predatory acquisitions of near-bankrupt carriers are unlikely, Stokes said, because the distressed carriers’ equity is worthless or near-worthless, and banks are reluctant to sell the lines’ senior debt at a discount as long as they hold out hope for recovery.
Private equity investors or hedge funds may find opportunities in distressed companies whose assets are liquidated or whose balance sheets are restructured by wiping out existing equity, converting liabilities to equity, or writing down debt, Stokes said.
“But buyers should beware: These deals are complex and require painstaking due diligence,” he said. “Incautious acquirers may find that all they have bought is a stake in someone else’s problems.”