The deal will see Qatar Holding and The Public Investment Fund of the Kingdom of Saudi Arabia, majority shareholders of UASC, take 14 percent and 10 percent shares of the combined company, respectively.
Hamburg-based ocean carrier Hapag-Lloyd AG and United Arab Shipping Company S.A.G. (UASC), owned by a conglomerate of wealthy Middle Eastern states, have officially agreed to a merger, according to a joint statement from the companies today.
Financial terms of the Business Combination Agreement (BCA), which was approved unanimously by an Extraordinary General Assembly of UASC´s shareholders and the Supervisory Board of Hapag-Lloyd, were not disclosed.
Under the BCA, still be subject to regulatory approval, CSAV Germany Container Holding GmbH, HGV Hamburger Gesellschaft für Vermögens- und Beteiligungsmanagement mbH (the City of Hamburg) and Kühne Maritime GmbH will remain majority owners of the combined company. The current majority shareholders of UASC, Qatar Holding LLC and The Public Investment Fund of the Kingdom of Saudi Arabia, will take 14 percent and 10 percent interests in the new company, respectively.
The deal also includes additional commitments from both sides, including backstopping a cash capital increase of $400 million planned by way of a rights issue within six months after the closing of the transaction.
Shareholders for the two companies agreed in principle to the arrangement on June 30, at which time they said UASC would own 28 percent of the combined shipping firm and Hapag-Lloyd 72 percent. The remaining 4 percent of UASC’s stake will presumably be shared by the other current owners – funds representing the United Arab Emirates, Iraq, Kuwait and Bahrain.
Following the integration, the new Hapag-Lloyd will become the fifth largest container shipping line worldwide, assuming no other mergers or acquisitions are carried out in the meantime.
According to Hapag-Lloyd, the combined company will sport a fleet of 237 vessels with a total transport capacity of around 1.6 million TEUs, annual volumes of 10 million TEUs and revenues of around $12 billion. The new company will remain a registered and stock listed company in Germany with its head office in Hamburg.
Included in the deal are six new 18,800-TEU ships recently received by UASC, as well as 11 15,000-TEU newbuilds, the last of which is scheduled to be delivered soon. The combined fleet will have an average age of 6.6 years and average size of 6,600 TEUs.
“The combined company will have a global, diversified trade portfolio, with leading product offerings in the major East-West and North-South trades,” Hapag-Lloyd said of the deal. “In addition, it will leverage on UASC´s solid presence in Middle Eastern markets and trades, with a commitment to further strengthening this presence by establishing a fifth Hapag-Lloyd Regional Center in Dubai.”
The company still plans to join the recently announced “THE Alliance” vessel sharing agreement in the major east-west trades. Scheduled to begin operations in April 2017, THE Alliance is comprised of Hapag-Lloyd, South Korea’s largest container carrier Hanjin Shipping, “K” Line, Mitsui O.S.K Lines (MOL) and Nippon Yusen Kaisha (NYK) of Japan, and Taiwan-based Yang Ming.
Hapag-Lloyd’s deal with UASC is the third major merger or acquisition in the ocean shipping industry in under a year. French ocean carrier CMA CGM in May said it is moving forward with its estimated $2.4 billion acquisition of Singapore-based Neptune Orient Lines, the parent company of container carrier APL, while state-run COSCO and China Shipping (CSCL) began their own merger integration at the behest of the Chinese government.
As a result of this M&A activity, three of the four current major east-west VSA’s will no longer exist come next year. The G6 Alliance, CKYHE Alliance and Ocean3 Alliance agreements will all run their course by the end of first quarter 2017 and be replaced with THE Alliance and the OCEAN Alliance, comprised of CMA CGM-APL, COSCO-CSCL, Evergreen Line, and OOCL.
Only the 2M Alliance of Maersk Line and MSC, which just last week announced it would add South Korea’s HMM to its ranks, will remain intact after 2016.
The Hapag-Lloyd/UASC deal is expected to be completed by the end of the year, pending approval from the relevant regulatory authorities, and until then, the two will continue to operate as standalone companies and within their respective current alliances.
“Hapag-Lloyd and UASC now take the next step to further consolidate and shape the liner shipping industry. The new transaction is strengthening not only our market position, but also our service portfolio. The merger will create annual net synergies of at least 400 million US Dollars and save a significant amount of capital expenditure for the company,” said Michael Behrendt, Chairman of the Supervisory Board of Hapag-Lloyd.
“During its 40-year history, UASC has grown from a regional carrier to become a truly global one with comprehensive coverage of the main trade lanes and a state-of-the-art fleet,” added UASC Board Chairman Dr. Nabeel Al-Amudi. “We are very proud of UASC´s achievements over the years that paved the way for such a remarkable deal.”
Meanwhile, Hapag-Lloyd simultaneously issued a negative profit warning along with the announcement of the signing of its merger deal with UASC.
“The revised expectation of the Executive Board is a clearly decreasing EBITDA and a clearly decreasing EBIT compared with previous year,” the company said in a statement.
The firm attributed the negative outlook revision primarily to prolonged weakness in container freight rates, which have fallen to historic lows of late due to a fundamental imbalance in supply and demand stemming from persistent overcapacity, another year potentially without a traditional peak in shipping during the summer season, increased bunker prices, and costs related to the integration with UASC.
The warning did not come as a surprise to analysts with Drewry Equity Research, however.
“In our earlier reports, we have defined the industry being in a transition,” the London-based consultancy said in a research note. “Alliances along with M&A are response to the low-growth industry, where a significant number of carriers have not made money in the recent past.”
Drewry cautioned that alliances and M&A activity are often perceived as a solution in a market with tepid demand, allowing companies to gain economies of scale and boost profitability, but the two should not be seen as a “silver bullet.”
“We project that supply-demand imbalances will persist, with revenues and pricing remaining under pressure with as new build capacity set to enter the market over the next few years,” said Drewry. “We anticipate further pain and industry may need to be prepared for another couple of tough years until the earnings impact of the consolidation becomes tangible.”
Hapag-Lloyd, UASC finalize merger agreement
