With capacity in the ocean carrier industry continuing to outstrip demand levels, many are left wondering what carrier is next in line for a merger or acquisition.
2016 was a bonanza year for ocean carrier consolidation, both in terms of merger and acquisition activity and the largest carrier bankruptcy in history. With capacity still well above demand levels in most trade lanes and expected to remain as such – industry analyst Alphaliner recently estimated deliveries of new containerships will outpace scrapping by two to one in 2017 – many are already speculating on which carrier might be next in line.
Stock in Orient Overseas International Ltd. (OOIL), parent of Hong Kong-based ocean carrier OOCL, skyrocketed in the first few weeks of 2017 on rumors it may merge with or be acquired by another global carrier. OOIL shares surged more than 40 percent, from HK $32.15 (U.S. $4.14) on Dec. 30 to HK $45.05 Jan. 19 (its highest price since May 2015) after a report in the Wall Street Journal citing anonymous sources said the firm was already in talks with state-run China COSCO Shipping about a more than $4 billion bid.
I can practically hear the famed announcer Rod Roddy (apologies to any Johnny Olson fans reading this) saying, “China COSCO, come on down! You’re the next contestant on The Price is Right!” Only instead of guessing the price of household appliances or a new car, COSCO is bidding on the seventh largest container carrier worldwide.
For its part, OOIL has denied the rumors, telling the Hong Kong stock exchange the company is “not aware of, nor is it involved in any bid relating to the company or OOCL,” and advising shareholders and potential investors to “exercise caution” when buying or selling its shares.
But a recent report from the financial services branch of London-based maritime research consultant Drewry referred to OOIL as a “perfect bride for any potential suitor,” primarily thanks to its “long-established reputation as being one of the most well-run container carriers with a good track record for profitability, even in a very challenging environment.” The report noted, however, that “in a market where size is critical, [OOCL’s] lack of scale has become its nemesis.”
With an operating fleet capacity of 602,546 TEUs, OOCL isn’t a small carrier, or at least it wouldn’t have been considered as such until recently, but it lags well behind the new top six carriers – Maersk Line, which recently agreed to acquire north-south specialist Hamburg Süd; Mediterranean Shipping Co. (MSC); CMA CGM, which now controls APL; China COSCO, born from the merger of the former COSCO and China Shipping (CSCL); Hapag-Lloyd, which purchased UASC; and the “Big 3” Japanese carriers, NYK, MOL and “K” Line, which agreed to begin a joint container operation in early 2018.
OOCL was one of the earliest participants in the contemporary east-west carrier alliances, however, having been a member of the Grand Alliance, which in 2011 merged with the New World Alliance to become the G6. Come April, the alliances will be reorganized once again, and OOCL will join the OCEAN Alliance along with COSCO, CMA CGM and Evergreen Line.
And COSCO certainly has the funds to pull off an OOCL purchase. Despite massive losses throughout the industry in 2016, China Development Bank in January pledged to provide COSCO with 180 billion yuan (U.S. $26 billion) in financing through 2021. Evergreen has also been rumored as a potential suitor for OOCL, but does not have access to nearly the same amount of capital, despite the Taiwanese government making $1.9 billion in loans available to the country’s shipping companies.
The adjacent chart, built using data from BlueWater Reporting’s Carrier Fleet Ranking application, compares projected operating fleet capacity for the top 10 container carriers worldwide.
Following a combination with OOCL, COSCO would remain the fourth largest carrier by the slimmest of margins behind Maersk, MSC and CMA CGM. Perhaps more interesting, however, is the fact that the container shipping industry will be left with just seven major carriers, each with more than 1 million TEUs in fleet capacity. Yang Ming, HMM and ZIM round out the top 10, but even the largest of these mid-sized global players still only sports 601,125 TEUs, just over half the size of its next closest competitor and only about 15 percent of the industry leader’s fleet of more than 3.8 million TEUs.
With all the recent M&A activity in container shipping, it’s fair to wonder if it will do any good for the companies involved and the industry at large. Or, as one colleague put it recently, “If we take two smaller, poorly run companies and combine them, won’t we just have one larger, poorly run company, instead of two?”
With OOCL, this is precisely the question the Tung family ownership group must ask themselves: are the improved economies of scale and potentially limitless access to capital worth the downside risk of entrusting management to the Chinese government?
And for COSCO, or whomever the eventual buyer may be, the question as always is will the price be right?
Ben Meyer is Managing Editor of American Shipper and Research Analyst with BlueWater Reporting. He can be reached by email at bmeyer@shippers.com.