You can make money in shipping

You can make money in shipping

The Washington-based private equity firm Carlyle Group disproved in spectacular fashion last week the old adage that you can't make money in shipping. It announced the sale of Horizon Lines LLC, the domestic-shipping unit of the former Sea-Land Service Inc., for $650 million, after paying $315 million to buy it from CSX Corp. in February 2003. Carlyle said it will sell Horizon to another private equity firm, New York-based Castle Harlan, which runs investment partnerships that have included taking ownership positions in such companies as Ethan Allen Interiors and the steakhouse chains Morton's Restaurant Group and McCormick & Schmick.

Charles Raymond, Horizon's chief executive, said Horizon's ability to do well during recessionary times, as it has over the past few years, contributed to the enhanced value of the company, as did structural changes in key Jones Act markets. Chief among those was the 2002 withdrawal from the mainland-Puerto Rico trades of Navieras NPR Inc., which ended a multi-year rate war that was a drain on the performance of all the players in that trade lane.

"To a large extent, the improvement in the company's performance has been getting rid of the losses in Puerto Rico and bringing it back to break even," Raymond said in an interview.

But that wasn't all. Raymond said the company was attractive because it operates in stable markets such as the U.S. mainland to Hawaii, Alaska and Guam, which generate a steady stream of cargo dominated by staples rather than cyclical consumer goods.

Another factor is efficiency. Backed by well-regarded information technology whose origins go back to Sea-Land, Horizon is a leader in encouraging customers to use the Internet. That means it is able to process transactions at a lower cost than its competitors. "We're handling 5,000 to 6,000 container loads per week, and when you do those electronically, it's a lot cheaper," Raymond said. He has said that after the Navieras bankruptcy, Horizon's market share in Puerto Rich went from 23 percent to 35 percent, and that the company absorbed the business at its Dallas processing center without adding staff.

Yet another factor, unmentioned in Carlyle's announcement, is the permanency of the Jones Act, which requires shipments between U.S. points to move in U.S-flag ships owned, built and crew-ed by U.S. citizens. Implicit in a deal of this size is confidence that the law faces no serious challenge in Washington.

Yet Standard & Poor's Ratings Services said it placed Horizon's debt, including its BB- corporate credit rating, on S&P's CreditWatch list with negative implications until it can meet with management to find out whether the deal will be financed with substantial debt. S&P said its ratings reflect the carrier's "high debt leverage, participating in the capital-intensive and competitive shipping industry and relatively older fleet," but that these risks are somewhat offset by the barriers to entry afforded by the Jones Act and stable demand from a diverse customer base.

"It does not mean in any way that the company is at risk. It simply means that the rating of its debt, used to price bonds and other debt, will be reviewed," Raymond said.

Indeed, a persistent story line with Horizon has been its vessels, the oldest of which date to the 1960s, with the newest ones deployed in 1987. Yet Raymond staunchly defended his fleet. "We have a fleet that we think is second to none. We're not at the point where we need to replace those ships right now," he said.

The reason, he said, boils down to technology. "My view is that if you look at a container ship today, they are largely the same as they were when I first went aboard one in 1963 as a cadet. The methods of loading and discharging are the same; the container sizes internationally are the same, and the speed is the same," he said. "I'm not interested in tying our company up with 2004-model assets for the next 25 to 45 years, when I firmly believe we are going to see significant technological advances in propulsion, hull forms and fuels."

He cited two developments at the government level as examples of the change he's seeing. One is the Navy's Seabasing initiative and the other is the Austral design, which envisions 40-knot catamaran vessels. "When our Defense Department focuses on things, it does transition over to the private sector eventually," Raymond said. "The thing that has to happen is technological change, and we are on the verge of that."