Thursday, November 13, 2014

Container Shipping Line Quits the Freight Trade

Founded by the Box Pioneer Jones Act Group Downturn Leads to 'Painful Decision'
Shipping News Feature

US – Having operated in the container shipping industry for past 58 years, the domestic ocean cargo carrier Horizon Lines, is to exit the freight market after announcing a series of transactions that will result in the sale of the entire company to its competitors, the first being the sale of its Hawaii business to the Pasha Group, followed by Horizon Lines’ subsequent acquisition by Matson. As part of a separate decision, Horizon also said that it is to cease providing liner service between the US and Puerto Rico by the end of 2014 due to ‘continuing losses without the prospect of future profitability’.

Horizon Lines is one of the largest Jones Act maritime shipping and logistics companies, accounting for approximately 37% of all US container shipments linking the continental United States to Alaska, Hawaii and Puerto Rico. The Charlotte, North Carolina-based company currently owns a fleet of 13 fully Jones Act qualified vessels with both buyers receiving at least four ships each, assuming the transactions are granted regulatory approval. Horizon can trace its history back to its foundation by Malcolm McLean, generally considered to be the ‘father’ of the container industry.

Under the Matson agreement, Matson will acquire all outstanding shares of Horizon Lines for $0.72 per share, or $69.2 million, in an all-cash transaction, plus the repayment of debt outstanding at closing. The total value for the transaction is around $456.1 million (before transaction costs). Matt Cox, President and Chief Executive Officer of Matson, said:

"The acquisition of Horizon's Alaska operations is a rare opportunity to substantially grow our Jones Act business. Horizon's Alaska business represents a natural geographic extension of our platform as a leader serving our customers in the Pacific. We are also encouraged by the long-term prospects of the Alaska market, which mirrors Hawaii in many operational ways, despite different underlying economic drivers. Both markets depend on reliable, superior and timely container cargo service as part of vital supply lifelines."

Horizon Lines currently deploys three diesel powered vessels that provide twice weekly service between Tacoma, Anchorage, and Kodiak, and a weekly service to and from Dutch Harbor. Horizon also has a reserve steam powered Jones Act containership for dry-dock relief.

Under the Pasha agreement, the purchaser will acquire certain subsidiaries of Horizon, constituting substantially all of Horizon’s Hawaii trade-lane business, including four Jones Act container ships, prior to closing of the Matson agreement, for approximately $141.5 million in cash. The proceeds from this transaction will reduce Horizon Lines' debt obligations before the closing of the Matson deal, at which time Matson will acquire all of the outstanding shares of Horizon Lines and repay the remaining debt outstanding at closing.

The two transactions taken together are valued at approximately $598 million on an enterprise value basis. Both of these deals are expected to close in 2015, subject to regulatory approval, whereas Horizon Lines' decision to terminate its Puerto Rico service is independent of the transactions, with the company intending to cease operations between the US and Puerto Rico whether or not the sale goes through.

In Puerto Rico, Horizon Lines has incurred substantial cumulative losses and negative cash flows in recent years, despite ongoing efforts to remain competitive. Horizon is currently serving the trade with two vessels built in the early 1970s that have become increasingly costly to operate and expensive to maintain. As recently as 2012, Horizon operated four vessels, but the company had been forced to remove two vessels from the Puerto Rico service due to prolonged falling demand and the need to cut costs.

Operations of the Puerto Rico service will be curtailed in a careful and orderly manner. The company will cease liner service for domestic customers by the end of the year, however San Juan terminal services will continue into the first quarter of 2015. The company says that it will work closely with customers to assist them in identifying service alternatives.

Horizon expects to incur restructuring charges between $90 and $100 million related to terminating its Puerto Rico operations. These charges include the cost of employee severance and termination benefits of $35-$45 million and costs of $55 million primarily related to equipment impairment and contract termination costs. Approximately $85-$95 million of the charges are expected to result in cash payments. These costs are preliminary estimates and are subject to change. Steve Rubin, President and Chief Executive Officer of Horizon Lines, said:

"We have a 56-year history in the Puerto Rico trade and truly value the relationships we have established. Unfortunately, a combination of factors, including uncertain prospects for the Puerto Rican economy, losses over recent years and more expected going forward, ageing ships that we cannot afford to continue to maintain or replace, and upcoming large capacity additions by two other carriers has led to this difficult but prudent and necessary decision."

"During my short tenure as CEO we have made tough decisions to try to restore profitability in the hopes of continuing the service. In addition, management had explored several other strategic options in an attempt to maintain a presence in Puerto Rico, however none proved to be possible. This decision is a very painful and difficult one for all of us, but it is the only viable course of action for our company given the circumstances."

Photo: Malcolm McLean in iconic pose.