Drewry: Opportunity Makes an NOL Buyer

In a rational world, neither A.P. Moller–Maersk nor CMA CGM should put their balance sheet at risk in buying the Singapore-based Neptune Orient Lines (NOL) at a time when container shipping is expected to stay challenging for the next three years, said the U.K.-based shipping analyst Drewry, adding that any deal will be motivated by opportunity rather than logic, as well as an inviting price tag. 

In its previous analysis on the topic of a potential NOL sale, Drewry concluded that NOL was not a particularly attractive proposition, seeing as its liner shipping business that now accounts for 100% of revenue following the sale of the logistics unit earlier this year has been losing money for a long time, and that its wealthy parent company was under no financial pressure to sell at a discount price that might tempt buyers.

Drewry stands by its initial assessment of NOL – the company lost another USD 66 million in Core EBIT in the third quarter and is on course for five-year operational losses from its liner division of over USD 1.1 billion. However, Drewry believes that they misjudged the willingness of other carriers to pass on the chance to acquire a loss-making competitor possibly at a low price.

Following the sale of APL Logistics, NOL employs around 4,600 staff globally in 180 offices and on about 90 ships, 56 of which are owned. Its largest ships are its 10 x 14,000 TEU units and, unique among the leading 17 carriers in terms of fleet size, it has no vessels on order. While these ships may be relatively new they are not a big draw in a slowing market, according to Drewry.

Of more interest will be the nine terminals NOL has in Asia, the US and Europe. Both CMA CGM and Maersk are expanding their terminal portfolios, and while neither has a particular need for them, both would like to have them – for reasons of non-organic expansion and, presumably, because they are profitable assets.

Buying APL would represent a big step-change for CMA CGM as its previous M&A diet has consisted of absorbing much smaller regional carriers. Drewry believes that the French carrier has the bigger imperative to buy APL, but could be outgunned by its deeper-pocketed rival.

CMA CGM is smaller than Maersk in the Transpacific and would benefit from access to APL’s large base of high-end textile and other time-sensitive product customers, as well as its profitable US government contracts linked to the use of US-flag vessels, both of which Maersk already has.

For Maersk, even admitting an interest in APL sends out a very different message to the one given a couple of weeks ago, when it announced lower profit expectations for the liner division and the axing of around 4,000 staff and is perhaps indicative that this is just an exploratory mission at this stage.

Ultimately, Drewry says that the likelihood of any deal will hinge on the price tag.

NOL’s stock has been the best performer in the last year, inflated by the takeover talk that has surrounded the company from early 2015. However, it remains below the book value of the company, suggesting a takeover has already been priced in and that the ceiling for what Temasek can hope to receive is near to being reached.

Drewry believes this could force Temasek to conclude a deal as failure to do so would seriously puncture NOL’s share price. It is therefore possible that Temasek may decide for a partial sale now and off load the remainder when the market picks up, in which case CMA CGM’s weaker budget won’t be such a big issue.

Of the two named APL suitors CMA CGM is the better fit, but Maersk has the deeper-pockets. Carriers are aware of the big risks attached to any takeover and are unlikely to enter into a bidding war, meaning that Temasek might not get the price it wants.

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