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Wading in French Waters

Wading in French Waters



It is official: Temasek Holdings is selling off Neptune Orient Lines (NOL) to French ocean carrier CMA CGM Group, a French shipping line that has been in operation since 1855, for US$2.4bn in cash.

According to Alphaliner, a research consultancy company, CMA CGM will have a combined fleet that takes 11.5 per cent of the global container shipping market. Combining the world’s third and 12th largest container lines would lead to a total of 563 vessels, with a capacity for 2.4 million twenty-foot equivalent containers and US$22bn in revenue, the companies said in a joint statement.

Only Danish carrier A.P. Moeller-Maersk and Swiss carrier Mediterranean Shipping Co. have larger market shares, leading in the first and second place respectively. German company Hapag-Lloyd AG is a distant fourth with 4.6 per cent of the market.

Many see this as a win-win situation for both companies. But how much of a risk is it at a time when cargo demand has fallen to an unprecedented low?

Making sense of the merger

Drewry, an international provider of research and consulting services to the maritime and shipping industry, mentioned that any takeover deals for NOL will be motivated by opportunity rather than logic. This takeover is based on long-term plans rather than shortterm investments. In 2014, The Straits Times reported that NOL was taking a serious financial hit – its net loss had risen from US$91m to US$137m, and it had even sold off its headquarters building in Singapore.

While NOL may not be the only shipping line suffering losses, the merger comes at a time of crisis for the global container shipping market. Vessel overcapacity and low demand on many lanes have caused freight rates to plunge. Vessel capacity and cargo demand has fallen this year to 91, a level not seen since 2000. A reading of 100 indicates equilibrium in the market.

In a joint statement, CMA CGM and NOL acknowledged the problems confronting them and the rest of the industry. The proposed combination, they maintained, would improve vessel productivity, create compelling economies of scale, and create a flexible fleet capable of deploying the most efficient ships “on any given route” as they are needed. It would also give the financially stronger CMA CGM significantly improved exposure on key Asian routes.

An ode to a homegrown success

NOL was started in December 1968 as Singapore’s national shipping line. With a humble start of five ships, it was formed in an attempt to build and retain Singapore’s reputation as a shipping hub. In the mid- 1970s, under the leadership of Managing Director and later Prime Minister Goh Chok Tong, NOL saw the importance of containerisation and invested in purpose-built vessels for it.

In 1981, the company went into an Initial Public Offering, raising S$155m, fuelling its growth and reinforcing its position as one of Singapore’s leading companies. By the mid-1980s, it had diversified into oil and petroleum tankers. Given its impressive achievements in under 20 years, NOL is arguably one of the biggest and most successful home-grown companies.

However, due to overcapacity and a highly competitive industry, NOL was pushed deeper into the red by the third quarter of 2015, with a net loss of US$96.1m. In fact, NOL has struggled in the downturn, reporting four consecutive years of losses up to the year ended December 2014.

The company also cited a decrease in liner revenue from void sailings and the absence of peak summer season. In addition, analysts have also commented that NOL’s strategy to focus on high-value shipments instead of volume has not paid off.

Although the Organisation for Economic Co-operation and Development, a think tank funded by wealthy countries, expected global output growth to pick up to 3.3 per cent, the current slowdown of global trades have already taken their toll. In fact, global trade flows have fallen dangerously close to levels usually associated with a global recession. Without a takeover, NOL would likely continue to lose money, and the immediate future could get a lot worse.

A French takeover

If the deal proceeds, the takeover of NOL will hardly be the first time CMA CGM sweeps a national icon into its fold. A fierce industry consolidator, CMA CGM has, over the years, acquired and integrated brands such as government-owned Australian National Line, African specialist Delmas and Taiwan’s Cheng Lie Navigation into its suite.

The shipping giant, privately owned by the billionaire Saade family, made its first leap onto the league tables after it was chosen by the French government to take statebacked Compagnie Generale Maritime private in 1996.

According to Mr Rodolphe Saadé, Vice Chairman and member of the CMA CGM Group’s Board of Directors, pending greenlight from the anti-trust authorities, NOL’s name will disappear and American President Lines (APL), the brand that NOL vessels operate under, will be expanded on all continents.

The NOL deal, expected to close in the second half of next year, also sees CMA CGM making a commitment to reinforce Singapore as a maritime hub by sending more volumes through the PSA ports in the country. Currently, most CMA CGM’s ships call at Malaysia’s Port Klang instead.

Despite a slump in global trade volumes, Mr Saadé is convinced that “double hubbing” in Southeast Asia makes sense. According to The Straits Times, the Vice Chairman has also mentioned that “it is not a question of competition (between the two ports).” They have enough volumes to operate in the two terminals.

What’s next on the horizon?

Despite the takeover, NOL’s original purpose, which is to develop and support Singapore’s shipping industry, is expected to stay intact. At a recent joint press conference NOL’s chief executive officer and group president, Mr Ng Yat Chung, reiterated that the change in ownership of NOL “will not impair Singapore’s journey to become a global maritime hub”. In addition to bringing more volumes to Singapore’s ports, CMA CGM will select Singapore as the country for its regional headquarters.

CMA CGM is looking to leverage on NOL’s Asia-to-Americas routes, which is seen as a weak spot for the company, and expand into new territories. CMA CGM is also expected to take advantage of NOL’s long-term contracts with the US government.

The takeover, which the companies expect to proceed in mid-2016 following anti-trust approvals, should not impact the G6 Alliance, which currently include APL, Hapag-Lloyd, Hyundai Merchant Marine, Mitsui O.S.K. Lines (MOL), Nippon Yusen Kaisha (NYK Line), and OOCL.

With the outlook of the global container shipping industry looking grim, joining forces is key to riding out the storm.