TUI boss prefers Hapag-Lloyd sale over merger, spin-off
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Michael Frenzel, chief executive officer of TUI AG, said Tuesday that the end of the group’s “two-pillar” shipping and tourism business strategy was decided upon after “intensive” discussions with company investors, and that he favors an outright sale of container line Hapag-Lloyd over other options.
“The dialogue with all our shareholders, including our core tourism shareholders who have been with our company positively for so many years, made it clear to us that faced with the choice of expanded shipping or tourism then their clear preference lies in tourism,” he said via a translator during the group’s analyst briefing.
“We’ve got to take note of the fact that for various reasons today a considerable portion of our investors believe that it would make sense to separate from shipping. The reaction of the market ahead of the decision has evidenced this impressively.”
Frenzel said TUI had considered different ways to separate its shipping operations in 2006 but decided against it as it was too busy integrating CP Ships into the group.
“Unlike 2006 we have improved earnings in both business segments today and we have given tourism a growth perspective with TUI Travel which we didn’t see then.
“By separating from shipping we will significantly reduce our debt and at the same time improve our financial scope for further organic or external growth in tourism.”
The TUI boss said the group is focused on getting the best value for shareholders and has no preference for a “political solution” that would see the shipping line remain in German hands.
“Our obligation is to act in the interest of all our shareholders, the bondholders, the employees, and our business partners, and to proactively find a solution which will take account of all interests as far as possible and will offer the TUI group the best possible development opportunities,” he said.
“All, I repeat all, options of a separation will be explored. This includes a spin-off, a possible merger or an overall divestment.”
When asked his favored option, Frenzel said: “Preferences don’t seem to count for much these days from what I’ve learned.”
In January, he put forward a controversial plan to merge Hapag-Lloyd within the holding company, something that would have made the container line virtually immune from a takeover, as it would have required any potential bidder to stump up for the entire group.
Without making further comment on the rejection of his plan, Frenzel said an outright sale of Hapag-Lloyd, worth an estimated $7 billion, would be the simplest and quickest solution.
“I would probably opt perhaps for a divestment with optimum purchase price as the best scenario. Perhaps a merger would come as No. 2. And then a spin-off would be my third option. It would also take a lot longer. It would probably cover a period of 12 to 16 months. A spin-off is highly complex transaction that would probably also involve an IPO.”
Frenzel earlier this year was said to be engineering a merger between Hapag-Lloyd and APL, the container line owned by Singapore’s Neptune Orient Line, which in turn is majority owned by the Singapore government's investment company Temasek Holdings. Nothing concrete emerged from that speculation, and Frenzel said any merger would only make sense as an interim step before a later sale.
“A merger can only take place as a first stage with a minority shareholding because otherwise basically we would consolidate additional debt, so this would exactly be the opposite of our strategic goal. A merger could only be the start of our entry into exit if you like.”
It remains to be seen how many potential buyers will enter into an auction for Hapag-Lloyd in the current environment of global economic uncertainty, especially in the U.S. trades, and the financial turbulence restricting the amount of credit available to fund acquisitions. Frenzel, however, is convinced now is the right time to sell as the container market continues to have strong growth forecasts and freight rates are starting to rise across all trades. He also stressed that TUI is not a forced seller.
“We are not in a situation whereby we want to sell at all costs. There is no pressure from our net debt. We have long-term financing. We want to generate maximum value from a separation,” he said.
“We are not going to rush into this. We’re going to go through this carefully and cautiously over the next few months. This is a step that has been demanded from the market for sometime. When we acquired CP Ships we didn’t have the scope to do this then but we think this is the right time. We will observe the market developments carefully and find the optimal path.” ' Simon Heaney