Special Coverage: Examining Maersk’s plan to acquire Hamburg Süd

The Danish ocean carrier’s acquisition of Hamburg Süd from the Oetker Group would expand its market share in Latin America and Oceania trades.

   Maersk Line, the world’s largest ocean carrier, in December agreed to acquire north-south specialist carrier Hamburg Süd from the German conglomerate the Oetker Group.
   Maersk said it expects full approval of the acquisition to take most of 2017, but if consummated, it will boost the Danish carrier’s overall fleet capacity from 3.14 million TEUs to 3.76 million TEUs, growing its share of the world container fleet from 15.7 percent to 18.6 percent.
   The deal capped a landmark year for consolidation in the container shipping industry. In 2016, CMA CGM acquired APL parent Neptune Orient Lines, and COSCO and China Shipping merged; Hapag-Lloyd announced it would acquire United Arab Shipping Co. (UASC); and Japan’s “Big 3” carriers – NYK Line, Mistui O.S.K. Line (MOL) and “K” Line – announced plans to form a container shipping joint venture that will begin operations in 2018.
   As a result of those deals, and the bankruptcy of then-seventh largest carrier Hanjin Shipping, the vast majority of the container shipping industry, at least in the major east-west trades, will be controlled by just 12 carriers operating in three alliances.
   These vessel sharing agreements include the existing 2M Alliance, which consists of Maersk Line and MSC (with South Korea’s Hyundai Merchant Marine purchasing slots though not a full member); the OCEAN Alliance, consisting of CMA CGM, China COSCO, Evergreen Line and OOCL; and THE Alliance, which counts Hapag-Lloyd, Yang Ming, and the three Japanese carriers as members. The OCEAN Alliance and THE Alliance are both scheduled to launch in April 2017, following the end of the current CKYHE and Ocean3 alliance agreements.
   The acquisition, which is subject to a final agreement and the relevant regulatory approvals, was described as an all-cash deal, but the exact purchase price was not revealed.
   Maersk said it “expects to communicate further details following the approval of the sales and purchase agreement, expected early in the second quarter of 2017. The acquisition is subject to a satisfactory due diligence, final agreement and subject to regulatory approval in, amongst others, China, Korea, Australia, Brazil, the United States and the EU.” Maersk said it will work closely with authorities and expects the regulatory process to last until the end of next year.

Southern Exposure. Hamburg Süd is presently the world’s seventh largest container shipping line by fleet capacity, and a leader in the north-south trades. Its services connect both Latin America and Australia and New Zealand with North America, Europe and Asia.
   Søren Skou, chief executive of Maersk Line as well as parent A.P. Møller-Maersk, said the company plans a “light-touch integration model” and will maintain Hamburg Süd as a separate brand. This has been Maersk’s strategy in all of its recent regional acquisitions, such as Safmarine in the Africa trades, MCC in the intra-Asia market, and Seago Line in the intra-European trades. In the east-west trades, an area in which Hamburg Süd has been expanding in recent years, Skou said Hamburg Süd’s volumes would be included in the 2M Alliance, though it’s not clear yet how those routes will be branded.

   It’s not all sunshine and rainbows though. Hamburg Süd workers worried about layoffs demonstrated in Hamburg’s central square the day after the announcement to express their concern about possible job losses. More than 1,000 of the company’s nearly 6,000 workers are based in Hamburg, according to the Hamburger Abendblatt newspaper.
   The accompanying chart, constructed with data from ocean carrier schedule database BlueWater Reporting’s Carrier Trade Route Deployment Report, compares the number of vessels and total deployed capacity of Maersk Line and Hamburg Süd on several of the many different trade lanes on which the carriers participate. According to BlueWater Reporting, those 10 north-south trade routes account for 63 percent of Hamburg Süd’s overall deployed capacity and 21 percent of Maersk’s.

   In explaining the rationale behind the sale, the family-owned Oetker Group noted the recent poor financial performance of the ocean shipping industry as a whole.
   “Global container liner shipping has been generating losses for years in the face of rising overcapacity,” it said. “Nevertheless, Hamburg Süd has performed well compared with its competitors. It has grown clearly in excess of the market and has financed the expansion of its network as well as the ship and container fleet largely from its own cash flow.
   “The owners and management of Hamburg Süd must, however, recognize that active participation in the consolidation process of the sector currently taking place would entail an even higher capital requirement,” the group added. “This would, in addition, make the balancing of risk within the Oetker Group business portfolio more cumbersome.”
   Hamburg Süd provides about half the annual revenues of its longtime owner, which is also involved in the food and beverage business.
   August Oetker, chairman of the advisory board of Dr. August Oetker KG, the management holding company of the Oetker Group, said, “Giving up our engagement in shipping after an 80-year-long ownership in Hamburg Süd was not an easy decision for my family. We are very confident, though, to have chosen the best of all possible partners. Maersk will preserve and grow Hamburg Süd and what the brand and the whole organization and a highly dedicated workforce stand for: reliable and high quality logistical services to our customers.”
   For its part, Maersk said it believes it can create an “unmatched product” in the Latin America reefer trades and achieve major cost synergies by combining the networks of the two companies and reducing variable costs thanks to increased buying power. Subsidiary Maersk Container Industries opened a new factory for manufacturing refrigerated containers in Chile in 2015.

Diverse Network. According to Lars Jensen, chief executive officer of SeaIntelligence Consulting in Copenhagen, the service networks of Maersk and Hamburg Süd are “a very good match – the key here is the depth and breadth of the combined network.” He noted the tie-up allows for an especially diverse network in Latin America, providing cargo owners with a broad product offering and reducing overall costs for the combined entity.
   Hamburg Süd operates 130 container vessels with an overall capacity of 625,000 TEUs. It has 5,960 employees in more than 250 offices across the world and markets its services through the primary brand, as well as its two sister companies: CCNI, which is headquartered in Chile, and Brazil-based Aliança.
   “As for regulatory scrutiny, my view is that they must have thought this through, and if there are a few specific locations where this becomes an issue, the solution might be to divest of minor portions,” Jensen said. “I do think that in terms of culture, the two companies are relatively compatible, and given the ‘light-touch’ integration announced by Maersk, this should not prove to be a major issue.”
   For Jensen, however, “the most interesting part of this takeover is when seen in combination with all the other consolidation going on,” he said. “Essentially, the main carriers will in the next one to two years be competing on their ability to get synergies out of the mergers, a completely different competitive parameter than the ‘usual’ price and cost competition.”
   The deal also aligns with a plan Maersk announced on Sept. 22 to grow market share both organically and through acquisitions, said Skou, adding that the acquisition would increase the volumes of Maersk Line as well as A.P. Møller-Maersk’s port terminal operator subsidiary, APM Terminals.
   Neil Dekker, director of research, containers at the London-based consultants Drewry said in a recent interview with American Shipper the current wave of ocean carrier consolidation won’t solve all the industry’s problems, at least not right away.
   “The industry is undergoing the most intense period of M&A in its history,” he said. “We are moving from a top-20 player scenario to one where there will be as many as seven or eight players only and this is as a direct result of the poor returns in the industry since the recession of 2008-2009.
   “Scale seems to be the driving force for the biggest players right now and with the exception of MSC, which remains intent on organic growth, all of the largest players have had an appetite for acquisition. The imminent failure of Hanjin has finally proven that weak balance sheets will be punished. The re-structuring of the industry will impact freight rates, but this will not overnight bring about higher or more stable rates. In the short-term, the rates should be even more volatile as many shippers rethink their risk strategies and negotiate new deals with new carriers,” he added.
   “The removal of certain players from the arena should ultimately help the industry as there are fewer companies to pump weak rates into the market, and as we eventually come out of the present trough by 2019-2020, only the strongest companies will survive,” Dekker predicted.
   Skou said the deal was not dependent on Maersk selling any businesses, but the firm in November raised $468 million by selling over 16 million shares in Danske Bank and is reported to be in talks to merge its oil and gas operations with those of another Danish company, DONG Energy.

Regulatory Headwinds. Unlike Jensen, trade information service Panjiva cautioned the deal could face substantial regulatory hurdles in certain markets.
   Panjiva said the addition of Hamburg Süd’s business on the major east-west trades would only modestly increase the 2M Alliance’s market share. On a proforma basis, 2M’s share on U.S. import trades, for example, would grow from 15.1 percent to 16.8 percent if Hamburg Süd were to become part of Maersk today, still less than the proforma share of the proposed OCEAN Alliance. Still, it noted the U.S. Federal Maritime Commission (FMC) is under pressure to take a stricter stance on alliances.
   FMC Chairman Mario Cordero said that although it does review vessel sharing agreements, the commission is not responsible for anti-trust reviews of mergers.
   “Another market of concern is Latin America, one of Hamburg Süd’s strongest market areas,” Panjiva said. “In Brazil it held a 25 percent share in the third quarter of shipments into and out of the country. The addition of Maersk’s 10.6 percent to make a total 35.6 percent share may make the combination unacceptable to Brazilian authorities.
   “This could be solved, however, by disposals or commitments on market share,” it added. “There has already been a process of consolidation of market power among larger rivals, the largest of whom would be MSC at 20.2 percent, with the top five jointly holding 79.9 percent.”
   Having attended the American Association of Port Authorities’ 25th Latin American Congress of Ports in Merida, Mexico in December, Cordero said there was a good deal of optimism about the outlook for shipping in emerging markets in Latin America.
   Both Hamburg Süd and Maersk, including its sub-brand SeaLand, are already major carriers in the Latin American markets.
   Fellow FMC Commissioner William P. Doyle also told American Shipper, “We’ll take it one step at a time as to the appropriate regulatory review by the U.S.,” noting that “some of Hamburg Süd’s services would appear to complement the new SeaLand that is operating services from all three U.S. coasts and between Latin-South America.”

Bottom Line. In 2015, Hamburg Süd generated revenues of about $6.73 billion, with $6.26 billion stemming from its container line activities and the remainder from its bulk shipping business, which Maersk is also acquiring.
   “The timing of this transaction is, we believe, right from the point of view of the cycle, the state of the industry and not least our own position,” Skou said. According to him, Maersk has become the most competitive carrier, with industry-leading margins driven by lower costs and a strengthened information technology and process platform.
   From Dekker’s perspective, “Weak demand growth coupled with overcapacity has led to the demise of the independent loops of old and the alliance structures are now well entrenched in the key east-west trades. From next year, agreements will spread into the Asia to Mid-East and Red Sea trades, which is a positive. This is the one east-west trade where capacity has not been addressed properly and despite decent volume growth, ocean carriers are not profitable.
   “The gradual move towards dedicated alliance structures should help to sort out the strong and weak players in the next year,” he said. “The north-south trades remain fragmented, with many ocean carriers present and some independent loops still in evidence in the absence of strong alliance agreements. The Asia to East Coast South America trade was a positive example earlier this year of carriers rectifying the trade imbalance, and this is strong indicator that similar strategies will take place on other north-south trades.”