Container shipping brings significant value to the world, yet delivers little to its investors. It has driven the global economy for the past 25 years; without container shipping and the globalization of supply chains that it enables, worldwide GDP would be reduced by USD 15 trillion. Container shipping has enabled trade that has lifted hundreds of millions out of poverty. Despite these achievements, the industry continues to produce low rates of return.
Mergers and Acquisitions
In the past couple of years, the shipping industry has witnessed a slew of liner consolidations and the market analysis predicts this trend is likely to persist in the shipping industry in 2018. However, whether this applies to liners or other players involved in the immense ocean freight industry is debatable. According to iContainers, the mergers and acquisition activities for shipping lines are likely to lose steam and slow down this year.
Klaus Lysdal, Vice President of Sales & Operations at iContainers said, “In terms of carriers, I doubt, we will see more movements in the near future. I don’t see any major players breaking right now. Any acquisitions that were to take place now would be a purely strategic move, or if an opportunity were to present itself for one of the bigger carriers to buy up a younger or smaller one, or perhaps a niche carrier that fits their strategic plans.”
Due to the prolonged market downturn weighing the economy down in the past few years, many carriers have had to resort to forming alliances and setting agreements on slot purchases. These helped them gain cost-effectiveness by combining their resources without having to face debt risk. Such movements have had their effects, both negative and positive, trickle down to shippers.
Consolidation Accelerated, Not enough to turn Industry around
The industry is experiencing unprecedented consolidation as it responds to the negative environment. The combined fleet capacity of the top five players almost doubled from 2000 to 2017, rising from 35 percent to 67 percent. Ten of the top 20 carriers in 2013 will soon no longer exist as stand-alone companies. Six—APL, CSAV, CSCL, Hamburg Süd, Orient Overseas Container Line (OOCL), and United Arab Shipping Company (UASC)—have merged or will merge with larger peers. One, Hanjin, went bankrupt. The three Japanese carriers are forming a joint venture.
On the other hand, consolidation typically helps performance. Mergers can provide sizable operational synergies and commercial opportunities by combining two complementary businesses. The synergies can save 3 to 6 percent of the combined cost base. For instance, Hamburg Süd and Maersk expect their merger to generate operational synergies of USD 350 million to USD 400 million annually over the first few years. Hapag-Lloyd and UASC expect to generate USD 435 million in cost synergies from 2019. COSCO Shipping and OOCL also expect significant cost synergies, while maintaining separate brands, in the coming years.
Market’s Response to Collaborations
In just the past year so, the top shipping lines have reshuffled to form new alliances. Japan’s top three lines have also announced a merger to battle the falling demand and South Korea’s top liners are also looking to emulate to avoid a repeat of Hanjin. M&A wise, we’ve seen Hapag-Lloyd-UASC, CMACGM-APL, COSCO Shipping-OOCL and Maersk’s purchase of Hamburg Süd.
But now that the market seems to be somewhat bouncing back from this turmoil, any more mergers, acquisitions, or alliances, may not entirely be a ‘do or die’ scenario but a purely beneficial union for growth.
A recent Moody’s report says shipping companies who fail to participate in alliances and engage in slot purchase agreements will lack the cost-efficiency required to be competitive enough. This will probably result in a disadvantage, with the exception of regional firms with a focus on a specific market area and not compete on the main trade lanes. The industry could see the mid- and large-ranged forwarders acquire tech-savvy companies as a shortcut into the digital market, then add additional services to their portfolio. This gives them more of a headstart and a foundation to start from rather than build their own set up from scratch.
Container Lines can use Mergers to Succeed
Lines need to carefully consider their future strategies, which must include a view on mergers and consolidation. Although some liners will acquire other companies, it is highly unlikely that all of the top ten liners can be acquirers. This does not mean that those who are acquired will be any worse off; in many cases, selling delivers higher returns to shareholders than acquiring.
Share-price data from the past 15 years shows that, on average, the acquired company’s stock increases by more than 10 percent in a merger while the acquirer’s loses 3 percent. In negotiations, the acquired company may also be able to win a more significant share of the combined entity or a higher acquisition price if it strategically positions its value. Given these findings, it may make more sense for some lines to focus on improving their company so they will maximize their sale price (as well as current performance).
The Way Ahead for M&A’s
The industry will likely see more mergers. Moody’s anticipates that M&A will continue in the sector given the potential for both revenue and cost synergies resulting from such transactions. The impact of debt-funded M&A on companies’ creditworthiness would depend on a number of factors, including the company’s ability and focus on restoring its metrics to within the rating agency’s guidance over a 12-18 month period. Lines need to decide on their strategy as well as their potential role in the consolidation, and they must build on the experience of others to ensure successful integration while avoiding the mistakes of the past.
(References: McKinsey & Company, iContainers, Reuters, CNN, Moody’s)
Sea News Feature, October 9