CMA CGM reportedly seeking financing for NOL deal

The third largest ocean carrier worldwide has entered into discussions with BNP Paribas SA, HSBC Holdings Plc and JPMorgan Chase & Co. to fund an acquisition of Neptune Orient Lines, parent of liner company APL, according to multiple media reports.    CMA CGM SA has entered into discussions with several banks regarding financing of an acquisition of Neptune Orient Lines, parent of liner company APL, according to multiple media reports.
   The reports quoted “people with knowledge of the matter,” who said the French ocean carrier has been talking with BNP Paribas SA, HSBC Holdings Plc and JPMorgan Chase & Co. about securing loan commitments to back a potential offer for NOL.
   Spokespersons for Temasek, NOL and the banks involved in the financing the potential purchase offer declined to comment on the reports.
   The company announced last weekend Lentor Investments Pte. Ltd. (a wholly-owned subsidiary of Temasek Holdings) had entered into an exclusivity agreement CMA CGM with regard to an acquisition of NOL that would combine the third and thirteenth largest container carriers worldwide.
   According to ocean liner schedule and capacity database BlueWater Reporting, CMA CGM currently a fleet of 462 ships on direct, region-to-region liner services with combined capacity of 1,845,178 TEU. NOL’s subsidiary container carrier APL, on the other hand, deploys 100 ships with a capacity of 625,427 TEUs.
   The exclusivity agreement will remain in place until Dec. 7, at which time NOL would be free to negotiate with other parties should CMA CGM fail to deliver a palatable offer.
   Regardless of whether a deal actually takes place, CMA CGM would first need to demonstrate its ability to finance an acquisition of that size. Bloomberg estimates the market value of NOL, which is owned primarily by Singapore’s sovereign wealth fund Temasek Holdings, at market value of $3.1 billion Singapore (U.S. $2.2 billion).
   “CMA CGM must show it has the financial muscle to go through with the deal so it is talking to the banks,” said one of the sources, who also noted that terms of the deal have yet to be finalized.
   Temasek has been rumored to be shopping for a buyer for NOL, which has posted consistent losses over the past six years in a tumultuous period for the ocean shipping industry. The state-owned investment firm owns about 67 percent of NOL.
   Stock in NOL has risen steadily since the announcement of initial sale discussions with CMA CGM and industry leader Maersk Line at the beginning of November. Company shares closed at S$1.21 (U.S. $0.86), up 0.84 percent on the day and 26 percent from S$0.96 (U.S. $0.68) as of close of markets on Monday, Nov. 2.
   This could drive up the internal valuation at NOL, but that will be tempered by the $96 million loss the company recently reported for the third quarter of 2015, as well as the fact it already divested itself of its profitable third-party logistics business, APL Logistics Ltd., to Kintetsu World Express Inc. for $1.2 billion back in May. NOL attributed the results primarily to a non-existent peak shipping season caused by massive overcapacity and weak global demand that has sent rates plummeting across the industry.
   “The absence of the traditional third quarter peak season in Europe and North America led to severe freight rate erosion in major trade lanes,” NOL Group President and CEO Ng Yat Chung said of the results.
   APL’s average freight rates fell 21 percent to $1,847 per 40-foot equivalent unit compared to the third quarter of 2014, but the drop in rates was widespread. The Shanghai Containerized Freight Index, a composite index of rates on 15 individual shipping routes out of Shanghai to different parts of the world, fell 38 percent year-over-year in the third quarter of 2015.
   CMA CGM fared better than NOL in the third quarter, posting a consolidated net profit of $51 million, but income was still down nearly 75 percent from $201 million in the same 2014 period. For the first nine months of the year, CMA CGM has increased profits 56 percent to $613 million compared to the corresponding period last year, and the company said it expects to continue to outperform the industry in 2016.
   A deal between NOL and CMA CGM makes sense from a market share and network deployment standpoint. CMA CGM already has a strong foothold in the Asia-Europe trade lane, whereas APL is more active in the transpacific, where CMA CGM has been seeking to grow its share of a more fragmented market.
   Even if CMA CGM makes an offer though, there is no guarantee a deal will get done. Maersk could reenter discussions with NOL, if only to drive up the price for its fierce rival, or another carrier, Hapag-Lloyd of Germany or Hong-Kong-based OOCL for example, could emerge with a more attractive offer. Although both have been linked to the struggling shipping company in rumor and speculation surrounding a possible sale, neither Hapag-Lloyd or OOCL, both fellow members of the G6 Alliance with APL, have made any public indications of interest in purchasing NOL.
   Another option for Temasek, as suggested by a former NOL executive in an interview with the Singapore Business Times, would be to spin off the company’s profitable port terminal operating arm and sell that business separately, similar to what it did with APL Logistics. This would likely be an easier sell than a package deal for all of NOL, but by the same token, could make it more difficult to unload the liner operations.
   “Temasek has many choices,” said Lim How Teck, former deputy CEO of NOL. “While NOL’s book value is S$1.38, this valuation fails to take into consideration the mark-to-market value of the terminals,” noting the company could potentially sell the terminal business to PSA International, one of the largest port terminal operators in the world and another subsidiary of Temasek Holdings.
   “I think many parties will be interested in the terminals,” added Lim. “The terminals are a prize catch and of strategic interest for PSA. If CMA is interested but is not going to offer mark-to-market price for the terminals, NOL can sell them to PSA.”