Report: Maersk’s takeover of P&O Nedlloyd will soften market downturn

Report: MaerskÆs takeover of P&O Nedlloyd will soften market downturn    The soon-to-be-completed acquisition of P&O Nedlloyd by A.P. Moller Maersk will raise the Danish carrier’s earnings and soften the impact of the expected cyclical downturn of the container shipping industry in 2006-2007 on the enlarged operation, according to a new report from investment analyst Dresdner Kleinwort Wassertein.
   The analyst expects the $3 billion takeover to eventually result in about $200 million of annual costs savings for the enlarged group, in addition to higher revenues and earnings.
   “This provides significant earnings enhancement against our original core expectations, even allowing for the acquisition finance,” Dresdner Kleinwort Wassertein said in a report issued in July. “At best this would accelerate divisional growth; most likely, however, it and the associated cost savings would act as a cushion against the anticipated downturn in profitability through 2006-2007.”
   Dresdner Kleinwort Wassertein predicts that P&O Nedlloyd will contribute $644 million to Maersk earnings before interest and tax in 2006 and $740 million in 2007, after taking into account expected merger-related cost savings.
   Maersk’s container shipping revenue, not including the P&O Nedlloyd contribution, would rise from an estimated $13 billion in 2004 to $14.8 billion this year and $15.2 billion in 2006. Earnings before interest and tax for the Maersk container shipping business would rise from $1.2 billion (9 percent of revenue) in 2004 to $1.3 billion (also 9 percent of revenue) in 2005, before declining to $1.1 billion (7 percent of revenue) in 2006 and about $700 million (5 percent of revenue) in 2007.
   Saying the industry has probably reached its cyclical peak, Dresdner Kleinwort Wassertein expects freight rates to average $1,390 per TEU this and next year, before decreasing to $1,321 in 2007. But it stressed that the timing and scale of the next cyclical downturn will depend on the ongoing rate of volume growth, the vessel delivery schedule and port congestion.
   Growth in container shipping demand “has exceeded expectations in each of the last three years as a consequence of strong global GDP growth and China’s growing position in world trade,” the analyst said, commenting on volume growth. Much of that growth has come from “replacement manufacturing” (offshore outsourcing) rather than incremental final demand growth, and the current slowdown in consumer expenditure worldwide could see the rate of growth fall back into single digits through 2005-2006, it added.
   Any growth rate below this level “could see conditions deteriorating rapidly,” the analyst warned.
   An important element of the outlook for Maersk’s container division is “the success or otherwise of the integration of P&O Nedlloyd,” the report said.
   It noted that several previous container shipping mergers have lost more of the combined revenue than they have reduced costs, thereby negating the financial benefits of the deal. “There is certain to be some of that in this deal, but Maersk Line has a good track record and experience of acquisitions through the Sea-Land and Safmarine deals and could be expected to minimize the risks,” the report added.