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French carrier to keep APL brand and establish regional head office in Singapore

FRENCH container line CMA CGM has offered to acquire Singapore-based Neptune Orient Lines for S$3.4bn ($2.4bn) in cash, enhancing its position on strategic trades such as the US, intra-Asia and Japan, and forming a larger entity that will own the world’s third-largest container shipping fleet.

CMA CGM offered S$1.30 for each NOL share, the companies said in a joint statement. The transaction was unanimously approved by the NOL board and fully supported by NOL’s majority shareholders, the statement said.

CMA CGM and APL’s combined fleet will have an 11.5% share of the world’s capacity, making the merged entity the third-largest container shipping line after Maersk Line and Mediterranean Shipping Co. The acquisition will result in a combined turnover of $22bn with a fleet size of 563 vessels.

CMA CGM said it would establish its regional head office in Singapore and intended to retain and develop the APL brand.

“At a time when the shipping industry is facing strong headwinds, scale is more critical than ever to capitalise on synergies and capture growth opportunities wherever they arise,” CMA CGM vice-chairman Rodolphe Saade said in the statement.

CMA has a leading position on the Asia-Europe, Asia-Mediterranean, Africa and Latin America routes while APL is strong along the transpacific, intra-Asia and Indian subcontinent shipping routes, the companies said. Following the transaction, the combined group will hold market shares from 7% to 19% on the routes on which it operates.

“This is a welcome move. The industry needs consolidation,” Drewry Maritime Equity Research director Rahul Kapoor said. Still, Mr Kapoor said that it is unlikely that the industry will embark on a “merger frenzy.” The “valuations remain depressed and M&A remains challenging from both buyer’s and seller’s perspective.”

The offer price represents a 5.7% premium based on NOL’s last closing share price of S$1.23 on December 4. The Singapore company suspended trading of its shares today. The shares have surged 46% since the beginning of the year amid speculation that the carrier’s assets would be sold off.

NOL has been suffering from the downturn in the container shipping industry, posting annual losses since 2011 that ran up to a cumulative $1.2bn. Weaker-than-expected global trade, tonnage oversupply and the resulting drop in freight rates hit hard APL, eclipsing efforts to cut costs and increase operational efficiency.

APL to join Ocean Three

Speaking exlusively to Lloyd’s List after the announcement, Mr Saade said APL had been underperforming partly because it did not have big enough ships in the Asia-Europe trades.

Once the deal is finalised, Mr Saade said APL would have access to bigger vessels as it would join the Ocean Three alliance alongside China Shipping and United Arab Shipping Co. APL is currently part of the G6 alliance.

“The [G6] shipping alliance has been helpful to bring better cost rationalisation, particularly for mid-sized players like NOL,” said NOL chief executive Ng Yat Chung. “Unfortunately, it does not really give the full benefits of an entity combination. The alliance helped but for NOL, it is not enough. A combination with a strong partner like CMA CGM is the way to go.”

The boards of NOL and CMA CGM have unanimously approved the terms of the proposed transaction which is still subject to the approval of the relevant anti-trust authorities. The approval is expected by mid-2016.

De-listing NOL, IPO plans

Mr Ng said CMA CGM planned to eventually de-list NOL when it had acquired 90% of NOL’s shares.

Asked about plans for an initial public offering, Mr Saade said the priority would be on integrating APL. “We have so much on our plates for the coming months that we need to focus on integrating APL and then we will consider eventually a listing and why not in Singapore,” he said.

The transaction, which will be funded by a combination of available cash and bank financing, values NOL at a price-to-book ratio of 0.96 times. BNP Paribas, HSBC and JP Morgan acted as financial advisers to CMA CGM and have provided financing for the transaction together with three other international banks.

The deal looks like a good one for CMA CGM, giving it complementary assets and significantly expanded presence in the transpacific arena. CMA CGM will gain 34 vessels which are less than three years old, the result of NOL's long-standing fleet renewal programme for APL.

These will include six 14,000 teu ships, well suited for the transpacific loop, as well as 10 ships of nearly 11,000 teu that will able to transit the widened Panama Canal when it opens next May. CMA CGM will also gain 12 ships of 9,000 teu-9,500 teu that will serve well for Asia-Latin America trades.

“If CMA CGM wanted to buy these assets individually they probably wouldn’t spend a great deal less,” said Andy Lane, an analyst for Singapore consultancy CTI.

Tan Chong Lee, head portfolio management at Temasek, majority holder of NOL shares stated, “We are supportive of this transaction as it presents NOL with an opportunity to join a leading player with an extensive global presence and solid operational track record."

The merger is unfolding at a time when container shipping rates are at record lows on key routes. With overcapacity in the global container fleet, rates, particularly on Asia-Europe routes, are expected to stay below operating costs for some time.

Asset sale and double-hubbing

Savings from economies of scale will undoubtedly be a major factor in this merger. CMA CGM chief financial officer Michel Sirat said that post-merger, the combined company would seek asset sales of at least $1bn.

The sales would follow a "strategic review of assets of the combined group," and added that the sales could include containerships and terminals. CMA CGM intends to de-leverage its balance sheet within 18 to 24 months post the closing of the offer.

Economies of scale would also require some staff reduction. CMA CGM employs a total of 22,000, while NOL employs around 7,400, both at land and sea. Mr Ng confirmed at the press conference that "there will be a process of rationalisation and some employees will be affected”.

However, he said that the rationalisation would be mitigated by CMA CGM's intention to retain the APL brand, and of the decision to set up regional headquarters in Singapore.

Mr Saade said that rationalisation does not just involve reducing headcount, adding that he hoped that senior management of NOL would stay on board.

“We have acquired over the past 20 years, 10 companies so we have the experience and expertise of integrating companies.”

Maersk recently announced cuts of about 4,000 by 2017 from its current 23,000 land-based workforce. Maersk also downgraded its earnings expectations for the year by $600m in November, a reflection of the depressed market.

“We firmly believe that in view of the size of the combined entity, it will make a great deal of sense to have double hubbing in Southeast Asia,” Mr Saade said, adding the volumes of the combined entity will allow increasing business in Singapore and keeping a strong presence in Port Kelang, Malaysia.

Asked about CMA CGM’s future acquisition plans, Mr Saade said: “There is always appetite but our stomach will be full with APL so we need to focus on integration. We believe it is a significant and reasonable price we are putting on the table so we need to make sure we deliver synergies before we do anything more.”