Contain yourself

7 December 2015 By Quentin Webb

The latest round of consolidation in the shipping industry should stack up. CMA CGM, the French group that is the world’s third-biggest container shipper, has agreed to buy Singapore’s ailing Neptune Orient Lines for $2.4 billion plus debt. The price offered to majority backer Temasek and Neptune’s public shareholders looks generous. Still, the unlisted buyer can chart a course to a financial payoff.

Billionaire Jacques Saade’s group is paying S$1.30 a share, a 49 percent premium to Neptune’s price before deal rumours deal leaked in July. That’s a hefty markup versus other takeovers of Singaporean listed groups: Credit Suisse analysts say premiums have averaged 15 percent in the last three years. A valuation of 0.95 times book value also looks full for a challenged industry: Germany’s Hapag-Lloyd trades on just 0.5 times historic book value, Starmine data shows.

Yet the deal still ought to make sense for CMA CGM. The premium equates to nearly $800 million. Suppose deal costs are another 5 percent of the total equity value – or about $122 million. That would imply the buyer needs to create $920 million or so of value for the transaction to wash its face.

Annual synergies of $111 million a year, taxed at 17 percent and capitalised at 10 times, would cover the outlay. That equates to just 1.6 percent of Neptune’s liner revenues last year. CMA CGM will not put a number on the likely cost savings and other benefits, merely saying it should enjoy fuller vessels, better purchasing power, and a larger, more flexible fleet. Neptune has already spent several years cost-cutting. But in reality the buyer should be able to save at least $200 million a year.

Then there are the strategic benefits. First, the buyer addresses its biggest shortcoming, which is that it is underpowered on the comparatively attractive Trans-Pacific route from Asia to North America.

Second, the timing could prove smart. This looks a lot like the trough in the cycle: shipping rates, industry sentiment, and valuations have all crashed. That’s exactly when families like the Saades, which can take a longer-term perspective than public companies, should be pouncing. Though they are a family of shippers rather than truckers, they are still in it for the long haul.

 

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