Matson will expand into Alaska while Pasha will acquire Horizon’s Hawaii business.
Horizon Lines, the largest Jones Act container carrier, is being
broken up, and parts of its business will be acquired by Matson Line and
Pasha.
Horizon had been the only domestic carrier with container liner
services to Alaska, Hawaii and Puerto Rico, and could trace its roots to
Sea-Land Service, the original container service started by Malcom
McLean.
Under the deal announced Tuesday afternoon, Horizon:
- Will “cease providing liner service between the U.S. and Puerto Rico
by the end of 2014 due to continuing losses without the prospect of
future profitability.” - Sell its Hawaii operation to Pasha for $141.5 million. Pasha is a
privately owned company that several years ago started a
roll-on, roll-off service between San Diego and Hawaii; it is building a
new container/roll-on, roll-off ship for the trade that is expected to
being operating early next year. - Will be acquired by Matson, which today has services to Hawaii, Guam and an eastbound
service from China to the U.S. Matson will expand into a new market, Alaska. Matson said value for
the transaction is $456.1 million, excluding transaction, restructuring
and integration costs.
The Pasha and Matson deals are expected to be completed next year, subject to regulatory approval and closing conditions.
“The acquisition of Horizon’s Alaska operations is a rare opportunity
to substantially grow our Jones Act business,” said Matt Cox, president
and chief executive officer of Matson. “Horizon’s Alaska business
represents a natural geographic extension of our platform as a leader
serving our customers in the Pacific. We expect this transaction to
deliver immediate shareholder value through earnings and cash flow
accretion via significant cost and operating synergies.
“We are also encouraged,” he continued, “by the long-term
prospects of the Alaska market, which mirrors Hawaii in many operational
ways, despite different underlying economic drivers.” Matson said there
is about an 80-percent overlap with Matson’s Hawaii customers.
Military cargo is important to both trades, and while tourism is a
primary driver of the Hawaiian economy, the energy businesses is key to
growth in Alaska, Matson noted in a call with securities analysts.
“Both markets depend on reliable, superior and timely container cargo
service as part of vital supply lifelines — hallmarks of the Matson
brand,” said Cox.
Kevin Sterling, a managing director at BB&T Capital Markets, said Pasha and Matson were paying reasonable amounts for the Horizon
businesses.
“In my opinion, Matson is getting the jewel of the Horizon
franchise, which is Alaska,” he said. He noted that Matson will acquire Horizon’s
three youngest vessels and said, “I think there is good customer overlap
and synergies.”
Wells Fargo said in a research note that Matson “paid retail,” adding
that “all together though, while [Wall Street] will likely have a positive
initial reaction to this deal, we think it’s pretty expensive.”
Horizon has three “D-1” diesel ships operating in the Alaska trade; they
were built in 1987 and have capacity of 1,668 TEUs. Wells Fargo said
Matson “should get 10 years out of them.”
Horizon has about half the market for “containerized” cargo moving
between Tacoma and Anchorage — although container is a poor choice of
words in this instance because Horizon’s principal competitor is Totem
Ocean Trailer Express, which operates ro-ro trailer ships that carry
domestic truck trailers as well as containers on chassis; flatbed trucks
loaded with cargo; cars; or any sort of cargo with wheels or tracks.
In addition to Anchorage, Horizon calls the ports of Dutch Harbor and
Kodiak, which are big southbound markets for fish and other seafood.
Matson said it plans to spend $18-24 million (or $6 million to $8
million per ship) to install scrubbers on each of the Horizon ships so
that they can comply with new emission control requirements from the
International Maritime Organization that go into effect Jan. 1. The rules require ships operating within 200 miles of the North
America coast to burn fuel with a sulfur content of 0.1 percent, compared
with 1 percent today.
These fuel regulations loomed large for Horizon and now for Matson and Pasha.
In its annual report with the Securities and Exchange Commission,
Horizon noted that “while the EPA has received approval at IMO to exempt
and has exempted our 10 steamships from the 0.1-percent sulfur content
fuel oil requirement until 2020, our three D-7 vessels utilized in our
Alaska trade lanes are diesel-powered and will be subject to the 0.1-percent
sulfur content requirement beginning in January 2015.
“In order to comply with these environmental laws and
regulations, we will most likely need to make material capital
expenditures related to these D-7 vessels prior to 2015. Additionally,
in order to address the expiration of the steamship exemption in 2020 ,
and because our 10 steamships cannot currently safely burn 0.1-percent
sulfur content fuel oil, we will most likely need to make material
capital expenditures to install engines or systems on these vessels to
address fuel efficiency and emissions or to replace such vessels
altogether. It is not yet known whether any engine or system
modifications will exist or be feasible to allow our fleet to be brought
into compliance with these environmental laws and regulations.”
Those 10 steamships were built between 1968 and 1980.
The four youngest steamships, all built in 1980, operate in the
Hawaii and will be acquired by Pasha. The 1973-built steamship Consumer
will be acquired by Matson, and company officials said it will be
inserted into the rotation to Hawaii as the diesel ships undergo the
installation of the scrubbers.
Pasha has not yet detailed its plans, but Horizon currently operates
three sailings a week between Honolulu and three ports on the West
Coast: two sailings a week from Los Angeles and one each from Oakland
and Tacoma. The company also offers inter-island barge service in
Hawaii.
Gary North, currently the executive director of the Hawaii Harbor
User Group and a former Matson executive, said, “I think Pasha has been a viable
player here in Hawaii; it really makes good sense that they acquire
Horizon and expand their footprint in Hawaii. They are a well-run
company. Horizon and Matson have been stabilizing
forces in Hawaii relative to our harbor and our harbor situation.”
Mike Hansen, president of the Hawaii Shippers’ Council and a
long-time critic of the Jones Act, said the deal was not unexpected
given Horizon’s financial condition.
“It was really only a matter of time before this kind of action
would have to be taken. Horizon’s primary problem was operating very
old containerships in the non-contiguous trades of Alaska, Hawaii and
Puerto Rico. With the cost of U.S. newbuildings now five times that of
constructing comparable ships in South Korea and Japan, Horizon could
not afford to build new Jones Act ships to continue as an operating
company. This will reduce the level of competition in the non-contiguous
container trades and clearly demonstrates the disproportionate burden
of the domestic build requirement of the Jones Act on the non-contiguous
jurisdictions.”
He said he was “a little surprised that TOTE didn’t purchase
Horizon’s Hawaii” business, noting that TOTE has a West Coast terminal in
Tacoma and that a sister Saltchuk company, Young Brothers, has an
inter-island freight service and handles Horizon relays. TOTE also
operates in the Puerto Rico trade through Sea Star Line.
Hansen said he was concerned that the loss of a major player in
the non-contiguous container trades such as Horizon Lines could cause “an
erosion of competition at the margins through further industry
consolidation and making the trades even less contestable.”
In Puerto Rico, both Sea Star and Crowley are building new
container ships. Sea Star’s ships are scheduled for delivery in 2015 and
2016; Crowley’s will come in 2017.
“Somebody is going to have to pick up a lease on a ship; it’s not
enough steel,” said Robert Browne, president of Aqua-Gulf Transport, the
largest NVOCC in the Puerto Rico trade. “Up until now, we had too much
steel in the water as far as the carriers were concerned; now we don’t
have enough steel.
“Somebody is going to have to pick-up one Horizon ship,” he continued.
“That will stop the screaming because there will not be enough slots.
It is going to be a long year.”
Horizon operates ships out of Jacksonville and Philadelphia, and
has been buying space from chartering space on National Glory, a
containership operated by National Shipping Company of America between
Houston and San Juan.
Alternatively, if no one charters one of the Horizon ships, demand
could be met by Crowley or Trailer Bridge adding barges to their
services between Jacksonville and Puerto Rico.
Mark Miller, a Crowley spokesman said, “We would simply like to
convey that Crowley is committed to the market and is making the
necessary investment in new ships — the first of which is under
construction. And we are currently seeking proposals to build a new pier
with container cranes at our Isla Grande terminal in Puerto Rico.”
Mike Avara, chief financial officer at Horizon Lines, said the company
“procures stevedoring services from Holt in Philadelphia
and APMT in Jacksonville, and accordingly does not have terminal lease
agreements in those two locations and only minimal assets. However, we
do operate the terminal in San Juan by leasing the facility from the
Puerto Rico Port Authority, and as a result own cranes and other
terminal equipment.”
He said Horizon Lines made its own decision separate and apart from the two
transactions with Matson and Pasha to shut down the Puerto Rico
service. “Accordingly, we will attempt to minimize our shutdown costs by
trying to sell assets to interested parties, if any,” he said.
Brian Taylor, the chief executive officer of the Port of
Jacksonville and a former chief operating officer of Horizon Lines, said,
“While we are always saddened to hear about the dissolution of a
long-standing business, given the unfavorable financial and capacity
dynamics impacting this trade lane, most of us in the maritime business
are not surprised by this development.
“While Horizon will discontinue service to Puerto Rico, we fully
expect that their share of the Puerto Rican cargo volume will continue
to be handled through Jacksonville by the other businesses serving this
trade lane,” he added.
Horizon, Sea Star, Crowley and Trailer Bridge operate liner services
from Jacksonville to San Juan. Taylor said, “Puerto Rico will always
remain a critical component of the JAXPORT business portfolio, but
situations like this simply reinforce the important concept of trade
lane and commodity diversification, something that has become a
strategic focus at JAXPORT during the last five years.”
Matson will pay 72 cents per share to holders of 96.1 million
dilutes shares of stock for a total of $69.2 million for Horizon. It
will also assume $528.4 million in debt, which includes pension
liabilities, for a total of $597.6 million. After deducting the $141.5
million that Horizon expects to realize from the sale of its Hawaii
business, Matson said it will end up paying $456.1 million for Horizon,
excluding the $25 million in closing costs and $20 million-$25 million
in restructuring and integration costs.
Horizon has been in financial distress for years. Horizon was one of
several companies, including Sea Star and Crowley, that were caught up in
a price-fixing scandal in the U.S. mainland-Puerto Rico trade that
resulted in million of dollars in fines and a half dozen shipping
executives receiving jail sentences.
Eric Kulisch contributed to this story.
