The shipping industry’s extremely cyclical nature makes it particularly prone to the forces behind merger and acquisitions.
The buzzword in the shipping industry in recent times has been “consolidation”. Amidst the challenges that the shipping industry faces, shipping companies keep getting bigger.
The past 12 months alone has seen mergers and acquisitions activity such as Hapag-Lloyd and United Arab Shipping Company in May 2017, bringing together a total fleet size of 230 vessels and creating the fifth-largest liner shipping company in the world, and between Cosco and OOCL in July 2017 creating the world’s third-largest container line based on shipping capacity.
Alongside this, December 2017 also saw the merger between Euronav and Gener8 Maritime announced, which will create one of the largest operators in the crude tanker sector, with 75 large crude tankers focusing on very large crude carrier and suezmax asset classes and two floating, storage and offloading vessels in joint venture.
In good times and bad, M&A activity will exist in one form or another. In good times, cash-rich buyers look for attractive targets. In bad times, distressed sellers look for buyers for their assets or businesses.
The shipping industry’s extremely cyclical nature makes it particularly prone to these forces.
Key motivating factors for M&A
The main commercial driving force behind M&A is that the activity enhances value. Whether this is value for the shareholders through profitability; via offering instant growth rather than waiting for organic growth; or by helping the company diversify into geographies or market segments where it did not have a presence or knowledge.
M&A can also offer economies of scale and allow a company to price efficiently as compared with its competitors. When companies merge, they are empowered to become cost-effective as a result of the combination of their resources.
What is more, mergers offer companies the chance to gain market share and/or to diversify into new complementary business lines. This is particularly true in the shipping sector. For example, with APL now part of CMA CGM following the latter’s acquisition of NOL in 2016, it increased CMA CGM’s market share in the shipping sector to close to 12 per cent, enhanced its already strong portfolio and added to the global services that it could offer.
The integration of Maersk and Hamburg Süd is another quoted example of how M&A has strengthened its global positions and achieved tangible cost savings.
DHT Holdings’s acquisition of Samco Shipholding in 2014 brought to the table a fully integrated ship owning company with in-house technical management because the transaction included Samco’s ownership in Goodwood Ship Management. This acquisition complemented DHT’s business by offering a full service business.
Another advantage of scaling up via M&A is that a larger company generally enjoys better options when raising capital. This debt or equity financing is easier to come by for a bigger and well-capitalised company. Statistics have also shown that companies with over a billion dollars of market capitalisation are able to be priced with lower margins from their financiers than companies with less than a billion dollars of market capitalisation. In addition, a bigger company will invariably attract a bigger pool of investors to it, thereby increasing liquidity within the company. A liquid company can in turn help with any security value maintenance provisions it has to comply with.
Another attraction of M&A is that it gives the company flexibility when structuring its financing. For example, the M&A may be structured through cash and shares, such as how Scorpio Tankers closed the merger with Navig8 Product Tankers and DHT’s acquisition of 11 VLCCs from BW Group, as compared to a pure asset sale.
Challenges of undertaking M&A
Pursuing an M&A strategy is not without challenges however. Shipping companies more familiar with the conventional vessel sale and purchase model may take some adjusting to the high workload and timeline implications pursuing growth by M&A presents, particularly when the tried and tested vessel sale and purchase route offers a document-light, quick to close option.
M&A transactions may have long timelines and complex process to execution: Maersk Line’s acquisition of Hamburg Süd, for example, took a year from signing to close, including a due diligence process that covered more than 20,000 documents in a virtual data room. When the alternative is a traditional sale and purchase model where the acquisition is usually documented on the Norwegian Sale Form standard and likely closes in short order, participants may be surprised of the various challenges to pursuing a successful M&A strategy.
The M&A model may not always be the most appropriate structure for a company. Each M&A opportunity will need to be judged on its own merits, weighing factors such as increased scrutiny of large scale mergers from anti-trust and competition authorities; expensive/time consuming to execute; due diligence process needing to be more thorough as a company acquisition will see the indirect acquisition/assumption of all liabilities.
How will SMEs cope?
Based on the above analysis, the answer to “Is bigger better?” seems to be a qualified yes. Many shipping companies remain as relatively small, family-run businesses (as we often see in Greek ship-owning companies) and who may not be willing or ready to embark on an aggressive M&A strategy.
However, it remains to be seen whether there will continue to be more M&A activity among the small and medium enterprises in the next few years. Will SMEs be able to survive on their own or will they be forced to consolidate to increase efficiency to maintain competitiveness in their pricing as well as to maintain profitability. It will be interesting to see how these SME market participants will perform.
But one thing is for sure, given the continuing over-supply issues the industry is subject to, increased M&A in the Asian shipping market appears to be the lesser evil compared with companies continuing to order new ships as the path to growth.
Stephen Woods is a partner and Sue Ann Gan is Of Counsel in the Singapore office of Norton Rose Fulbright.
2018 Informa plc. This article was originally published in Lloyd’s List, April 2018