Container Analytics: Knock-on effects of carrier consolidation

   Mergers and acquisitions don’t take place in a vacuum. No matter the industry, or specific situation, there are almost always knock-on effects, which often take the form of further consolidation, either via M&A activity or more organic means like companies going under. This is especially true when it comes to consolidation on a large scale, i.e. among the most powerful players in the market, and when the activity is symptomatic of an industry struggling to maintain profitability.
   The past six months have seen two such deals take place in the ocean shipping industry—the $2.8 billion acquisition of APL parent Neptune Orient Lines by CMA CGM, already the third largest container carrier worldwide; and the merger of state-owned conglomerates COSCO and China Shipping (CSCL) at the behest of the Chinese government, making the combined “COSCOCS” company the fourth largest. The CMA CGM-APL deal recently received regulatory approval from the European Union and had already been rubber stamped by the relevant authorities in the United States and China, meaning it will likely go through as proposed.
   After the abovementioned mega-mergers were announced in quick succession, analysts (me included) wondered who might be swept up—or dragged under—in the next wave of ocean carrier consolidation. Many of us posited it could be troubled South Korean firms Hyundai Merchant Marine (HMM) and Hanjin Shipping (See American Shipper’s March 2016 issue, “Who’s next for liner M&A,” p. 30) being forced to merge by their government, but South Korea continues to insist it will not require the two to merge as part of their respective debt restructuring agreements.
   Meanwhile, Hapag-Lloyd and United Arab Shipping Co. (UASC) in April announced plans to cooperate heavily in their container operations, and possibly even combine them. Hapag-Lloyd said that although there is no agreement in place as of yet, a scenario has been discussed under which it and UASC would own 72 percent and 28 percent, respectively, of a merged company. Hapag-Lloyd conducted a similar merger in 2014 with the container business of Chilean carrier CSAV in order to strengthen its presence in South America.
   A tie-up with UASC, which is jointly owned by six of the wealthier countries in the Middle East—majority owner Qatar with a 51.27 percent stake, and the United Arab Emirates, Bahrain, Saudi Arabia, Iraq and Kuwait as minority owners—would give Hapag-Lloyd a strong financial partner, as well as a solid foothold in the Middle East trades and access to new large ships. UASC is still in the process of taking delivery of 17 newbuilds, including six 18,800-TEU ships delivered in 2015 and 2016 and seven of 11 15,500-TEU ships delivered since 2014.
   Those ships likely would have been deployed on the Ocean3 Alliance’s Asia-Europe loops, but the Hapag-Lloyd/UASC announcement came just one day after UASC’s Ocean3 partners, CMA CGM and CSCL, announced they would leave that vessel-sharing agreement and form a new alliance with APL, COSCO, OOCL and Evergreen dubbed the OCEAN Alliance. Such an agreement would leave the current G6 Alliance with only four members—Hapag-Lloyd, HMM, NYK and MOL—and the CKYHE with only three – “K” Line, Yang Ming and Hanjin. (For more details about the alliance implications of the various mergers and acquisitions, see this month’s feature story “Emerging from the Fog,” pages 28-31).
   Just how big would a Hapag-Lloyd/UASC merger be in relation to the blockbuster CMA CGM-APL and COSCOCS deals?


SOURCE BLUEWATER REPORTING

   The adjacent chart, built with data from BlueWater Reporting’s Carrier Ranking Report, compares the combined overall deployed capacity of Hapag-Lloyd and UASC with the other top lines by individual capacity, including the merged fleets of CMA CGM and APL, and COSCO and CSCL. Ranked fifth and 13th in the world in terms of individual fleet capacity (after the abovementioned consolidation activity) at 1,038,277 TEUs and 538,861 TEUs, respectively, Hapag-Lloyd and UASC sport a total operating fleet capacity of 1,577,138 TEUs. A merger between the two would immediately vault the combined company into the No. 4 spot behind Maersk Line (2,811,627 TEUs), Mediterranean Shipping Co. (2,748,235 TEUs), CMA CGM-APL (2,390,145 TEUs), and COSCOCS (1,711,284 TEUs), and well ahead of Evergreen (955,665 TEUs) and Hanjin (665,676 TEUs).
   With large-scale vessel-sharing agreements accounting for nearly all container traffic on the major east-west trades, a merger between Hapag-Lloyd and UASC might previously have been too complicated to pull off because they belong to different carrier alliances. By engaging in some M&A activity of their own and forming the new OCEAN Alliance, however, Hapag-Lloyd and UASC’s competitors may have given them exactly the opportunity, not to mention the motivation, they needed to make it happen.
   Meyer is web editor of American Shipper and a research analyst with BlueWater Reporting. He can be reached by email at bmeyer@shippers.com.