Tuesday, April 22, 2014

Balance of Ocean Freight Shifts with Container Shipping Alliance and Fourth Largest Box Carrier Deal

German and Chilean Lines Form Another Big Hitter to Battle P3
Shipping News Feature

GERMANY – CHILE – WORLDWIDE – Back in January we speculated that the long expected convergence of two second division container carriers would happen shortly and, true to form, last week saw the final details emerge of a tie up between Hapag-Lloyd and Compañía Sud Americana de Vapores (CSAV) in a deal which punts the new group straight in as the world’s fourth largest box carrier behind the three members of the newly formed P3 Alliance, Maersk Line, Mediterranean Shipping Co. (MSC) and CMA CGM, with a formal agreement representing over three centuries of ocean freight carriage experience between the South American and German partners.

A joint statement revealed the complexity of the deal which both companies evidently felt was essential if they wished to avoid being swept away by the buying power of their larger rivals. Subject to the usual approvals CSAV’s entire container business will merge with Hapag-Lloyd which will retain its name and control some 200 vessels with total transport capacity of around one million TEU, an annual transport volume of 7.5 million TEU and a combined turnover of €9 billion.

The group will retain Hamburg as its HQ whilst continuing with a strong presence with a regional office in Chile. CSAV gets a core share, initially 30%, of the new company alongside the City of Hamburg and Kühne Maritime whilst investing a €259 million share from an overall cash input of €370 million when all the dust has settled. This will bring the CSAV slice of stock up to 34% whilst a second capital increase of €370 million will be linked to Hapag-Lloyd’s planned stock exchange listing.

The company statements insist that the order books of the two groups are complementary, later this month we shall see Hapag-Lloyd put into service the last of the ten 13,200 TEU vessels ordered for the Far East trade whilst CSAV still has seven container vessels, each of 9,300 TEU, scheduled for delivery in 2014 and 2015 specially designed for the South American trade. Michael Behrendt, Chairman of the Executive Board of Hapag-Lloyd, said upon signing the agreement:

“I am delighted that we have succeeded in concluding this partnership through which our two companies are playing an active part in consolidating the liner shipping industry. This day is an important milestone in the history of Hapag-Lloyd. The transaction increases the value of the Company and therefore also the value of our shareholders’ shares.

“By integrating CSAV’s container business, Hapag-Lloyd is able to build on its strengths and is therefore in an excellent position for future growth. This combination will further strengthen our service portfolio and enable us to deliver an even better global service to our clients.”

The relevant corporate bodies of both companies have already approved the merger. The closing of the transaction is subject to the approval of competition authorities but there is another condition that perhaps might seem a little hurried to the casual observer. Despite the official announcement coming toward the end of the week before Good Friday there was a condition that not more than 5% of total CSAV´s minority shareholders exercised their appraisal rights till the 20th April, which was of course Easter Sunday, until then dissident CSAV shareholders had the right to withdraw from the deal. Oscar Hasbún, CEO of CSAV was certain however that this was a good move for the Valparaiso based group, saying:

“By joining forces, we are creating a stronger, larger and more global company with significant economies of scale and a considerably improved competitive position. The combination with CSAV, Latin America’s leading container shipping line, considerably strengthens Hapag-Lloyd in this growth market and adds a strong position in the North-South traffic to the company’s global network and to its established strength in East-West traffics. We will have a young and cost-efficient fleet, the use of optimum tonnage in the trades is one of the key prerequisites for successful operations in the face of international competition.”

Many will detect the essential nature of this alliance due to the pressures which have come to bear on the industry of late, Hapag-Lloyd itself is in fact a member of the G6 group of box carriers. Coupled with the slump in world economies a few years ago was the simultaneous fall out of overcapacity, box ships larger than any previous fleets ordered during the boom and now due for delivery. In addition anti-competitive legislation made the global authorities quick to jump on any perceived collusion which has produced a climate where the larger freight carriers can lobby governments and antitrust bodies more effectively if presenting a combined front from a formally acknowledged alliance or an international merger.

The threat of a mega carrier falling by the wayside would produce a backlash of unemployment, not confined to a single state, and the smaller box groups will now have to fight even harder to retain their niche markets whilst the big boys, of which Hapag-Lloyd may now be perceived as one, battle it out to ensure their larger vessels carry cargoes big enough to make their trips worthwhile. This new grouping will have a foot in both camps but, with the economies of scale doubtless resulting from the merger, certainly is likely to be a safer bet that the two companies from whence it came formerly presented.

Photo: L to R - Michael Behrendt, Chairman of the Executive Board of Hapag-Lloyd, and Oscar Hasbún, CEO of CSAV.