German ocean carrier Hapag-Lloyd is expecting its recent merger with Dubai-based United Arab Shipping Co. (UASC) to generate various benefits and synergies for the newly joined company, but they won’t necessarily come easily.
They say the things that come easily won’t last, and those that last won’t come easily. This is certainly the case when it comes to joining together two separate companies and their potentially disparate operational structures, IT systems and corporate cultures.
German ocean carrier Hapag-Lloyd’s recent merger with Dubai-based United Arab Shipping Co. (UASC), for example, is expected to generate various benefits for the joined company, but they won’t necessarily come easily.
The two firms officially consummated the deal May 24 after signing a business combination agreement in July 2016 and receiving regulatory approval from roughly a dozen competition authorities across the world. Hapag-Lloyd said in June it is confident it will be able to ensure complete integration by the fourth quarter of 2017.
Combined Efforts. The new-look Hapag-Lloyd features a fleet of 230 containerships—172 vessels from Hapag-Lloyd and 58 from UASC—with an average capacity of 6,842 TEUs and an average age of 7.2 years. Executives estimate the company will have a combined annual transport volume in excess of 10 million TEUs.
Based on their current individual fleets, the merged entity will sport an operating containership fleet with an aggregate capacity of 1.6 million TEUs, the the fourth largest worldwide after Maersk Line with 3.3 million TEUs, Mediterranean Shipping Co. (MSC) at 3 million TEUs, and CMA CGM at 2.4 million TEUs, according to ocean carrier capacity database BlueWater Reporting (figures include subsidiary lines).
As far as the integration goes, Hapag-Lloyd says current registrations on UASC’s e-Commerce portal, including schedule subscriptions and alerts, will automatically be transferred to Hapag-Lloyd’s system, ensuring no business disruption. And UASC customers that use portals such as INTTRA, GT-NEXUS or CargoSmart will automatically be transferred as well.
“Customers with a direct EDI connection will be contacted individually to set up a connection with Hapag-Lloyd. If different e-channels are used with UASC and Hapag-Lloyd, the e-channel with the higher volume should be the preferred channel,” the company said.
Under the merger agreement, Hapag-Lloyd is planning a cash capital increase via a rights issue secured through a backdrop commitment in the amount of $400 million within six months of closing. Hapag-Lloyd’s new ownership structure before the planned cash capital increase includes CSAV (22.6 percent), HGV (14.8 percent), Kühne Maritime (14.6 percent), Qatar Holding (14.4 percent), the Public Investment Fund of the Kingdom of Saudi Arabia (PIF) (10.1 percent), and TUI (8.9 percent), with a free float of around 14.6 percent.
“Hapag-Lloyd has long-term and extensive know-how when it comes to acquisitions,” said Rolf Habben Jansen, the chief executive officer of Hapag-Lloyd. “By merging with the Canadian shipping company CP Ships in 2005 and, more recently, with CSAV in 2014, we have demonstrated that we are able to combine businesses and integrate them quickly, efficiently and profitably.”
Anil Vitarana, principal at Cranford Consulting Inc. and a former president of UASC North America, said that experience bodes well for the upcoming integration.
“Hapag-Lloyd concluded what appeared to outside observers to be a relatively smooth and seamless integration with CSAV,” he said. “This recent experience should stand in good stead as they begin the integration process with UASC.”
what appeared to outside
observers to be a relatively
smooth and seamless integration
with CSAV. This
recent experience should
stand in good stead as they
begin the integration process
with UASC.” – Anil Vitarana, principal,
Cranford Consulting
Vitarana also noted that because the deal took longer than anticipated to finalize, Hapag-Lloyd has had more time to plan and prepare for the merger with UASC than it had with the CSAV integration.
Market Headwinds. We would be remiss not to mention that Hapag-Lloyd’s merger with UASC is the latest in an unprecedented string of consolidation in the container shipping industry, including the merger of state-run Chinese lines COSCO and China Shipping (CSCL), CMA CGM of France’s acquisition of Singapore-based APL parent Neptune Orient Lines, Hanjin Shipping declaring bankruptcy, and Japan’s three largest carriers—Nippon Yusen Kabushiki Kaisha (NYK Line), Mitsui O.S.K. Lines (MOL), and Kawasaki Kisen Kaisha (“K” Line)—announcing their intent to combine and jointly operate their container businesses. The three Japanese carriers said in May they will operate their joint venture under the name “Ocean Network Express,” and expect to commence service April 1, 2018.
At the beginning of April 2017, there was also a reduction in ocean carrier alliances on major east-west trades from four to three— “THE” Alliance, composed of Hapag-Lloyd, Yang Ming, NYK, MOL and “K” Line; the OCEAN Alliance, which comprises CMA CGM, APL, Orient Overseas Container Line, COSCO and Evergreen Line; and the 2M Alliance of Maersk Line and MSC.
In 2016, a year in which freight rates plummeted to near historic lows and carrier financials were awash in red ink, Hapag-Lloyd reported a net loss of 93.1 million euros (U.S. $104.2 million), compared to a net profit of 113.9 million euros in 2015. Revenues totaled 7.73 billion euros, a decline of 12.5 percent from 2015, as its average freight rate fell 15.4 percent year-over-year to $1,036 per TEU. On a brighter note, container volumes inched up 2.7 percent in 2016 to 7.6 million TEUs.
And the first quarter of 2017 wasn’t exactly rosy for Hapag-Lloyd either, as the company posted a net loss of 62.1 million euros, compared to a smaller loss of 42.8 million euros in the same 2016 period. Revenues, on the other hand, jumped 10.7 percent from the first quarter of 2016 to 2.13 billion euros, thanks to in large part to a 6.8 percent year-over-year increase in transport volume to over 1.9 million TEUs. The volume gains, however, were offset in part by a 1.9 percent year-over-year drop in average freight rate to $1,047 per TEU.
Hapag-Lloyd released indicative pro forma results for UASC when the corporate bonds were issued at the beginning of 2017 showing that for the first nine months of 2016, UASC’s revenues reached 1.6 billion euros, transport volumes stood at 2.3 million TEUs, and the average freight rate totaled $610 per TEU.
Container freight rates have risen in the early part of 2017—as much as 40 percent on some east-west trades—but it remains to be seen whether this is a temporary bump or the start of a true recovery.
Tan Hua Joo, executive consultant at maritime industry analyst Alphaliner, said the primary challenge Hapag-Lloyd will face from the merger will be its very high debt burden. Based on latest available figures, Hapag-Lloyd’s standalone debt totals $4.4 billion, but including UASC, its debt will jump to $8.3 billion, Hua Joo said.
Significant Synergies. According to Rainer Horn, director of public relations at Hapag-Lloyd, the company expects to incur one-off costs from the UASC merger of around $150 million.
But overall, the merger is projected to create synergies that will reduce costs by $435 million per year. A significant amount of these savings should be realized in 2018, while the full amount is expected to be reached in 2019, Hapag-Lloyd said in announcing the completion of the deal.
Those synergies will primarily be derived from network effects, since using bigger ships will reduce per unit transport costs; procurement effects, as larger volumes and contracts will lead to lower costs; and equipment effects, with reduced imbalances in transport volumes between markets resulting in fewer empty containers being transported and relocated, Horn explained.
Hapag-Lloyd will also have some workforce reduction over the next year or two, but Horn said the company does not see job cuts as the quickest and most effective way to obtain synergies, since business continuity will be so much more important in the first months after the closing.
Following the merger, Hapag-Lloyd is looking to cut up to 12 percent of its almost 11,000 land-side employees, but the company’s 2,100 sea-based jobs will not be affected. After Hapag-Lloyd’s merger with CSAV in December 2014, there was about a 12 percent reduction in workforce over the following 12 to 24 months, Horn said.
In addition to the $435 million in annual synergies, Hapag-Lloyd is also gaining access to a very young UASC fleet with many ultra-large containerships. The combined fleet will be about two-thirds owned vessels and one-third chartered capacity, according to Horn.
“That gives us still enough flexibility, but means lower costs compared to a large portion of chartered tonnage in the fleet,” he said.
As a result, Horn said the company will have no need to make large scale investments in vessels or containers over the next couple of years, which should allow it to use more cashflow for deleveraging the company in terms of debt.
The merger also gives Hapag-Lloyd a more diversified service portfolio, making it one of the market leaders in the Middle East trades, where it was previously a relatively small player, Horn said. The company plans to establish a “Region Middle East” division, which will be headquartered in Dubai, complementing its existing regional centers in North America, Latin America, Europe and Asia.
With the creation of the new operating region, Hapag-Lloyd “has paved the way to more easily integrate UASC’s Middle East organizational elements it wished to retain, in an effort to build on the 40 years of UASC’s strong presence in the market,” Vitarana said.
“We now not only have a very strong market position in Latin America and the Atlantic, but also in the Middle East, where we will become one of the leading carriers,” said Habben Jansen.
Cultural Evolution. In early June, several Gulf states in the Middle East severed diplomatic ties with Qatar, blocking airspace and seaports to Qatari companies and vessels, which could put a wrinkle in the integration between Hapag-Lloyd and UASC, according to Vitarana.
The Qatari sovereign wealth fund, which is becoming a 14 percent shareholder in Hapag-Lloyd, was the largest shareholder of UASC.
“Having an entity from a state that has been branded a sponsor of terrorism could be uncomfortable for Hapag, unless the Middle East impasse is resolved swiftly,” Vitarana said.
He also noted that UASC’s new 15,000-TEU and 18,000-TEU vessels do not fly under the Qatari flag, but if they did, that would have posed an imminent short-term problem for Hapag-Lloyd.
Commenting on the integration, Hua Joo said he does not foresee “the location of the headquarters [being] a major issue, primarily because of the plan to switch over to the German process and IT systems anyway.”
And it would be easy to assume that culture might be an issue in the merger, being that Hapag-Lloyd is a German company with roots dating back to 1847 and UASC was established jointly by six wealthy Middle Eastern countries—Bahrain, Iraq, Kuwait, Qatar, Saudi Arabia and the United Arab Emirates—but Vitarana said this is simply not the case.
Vitarana, who was with UASC for 30 years, said the company has gone through three distinct cultural phases during its 41 years in operation.
“During its formation in 1976 and until early 80’s, the company, an offshoot of Kuwait Shipping Co., had a strong British presence with many managers and staff drawn from the Merseyside area of Liverpool,” he said. “In the early 80’s, we saw the Arabization of UASC, with most British managers replaced by Arabs, primarily Iraqis, many of whom had prior maritime training in the U.K. When I joined UASC in the mid-80’s, the company had a distinct Arab culture with the shipping services mostly focused on serving the Middle East market.”
That would all change suddenly in the early 1990s, not because of anything to do with the business, but because of rising political tension in the region.
“The Iraqi invasion of Kuwait in 1990 that prompted the Gulf War saw the exodus of most of the Iraqi management,” said Vitarana. “They were replaced by Arabs from other member states, or non-Arabs. In the mid 90’s, Jorn Hinge, a Danish national, was brought in as COO and subsequently became CEO. Gradually, more Europeans were brought into management and the company’s Arab culture began to dissipate.”
Then in 2013, UASC went through a restructuring after a study and recommendation by Roland Berger, a German consulting company that had previously handled an organizational restructuring at Hapag-Lloyd. The restructuring at UASC resulted in an influx of former Maersk staff and the further adoption of a more European style of doing business.
UASC also made a conscious effort to become more global in terms of service coverage, and it embarked on a highly ambitious fleet expansion plan, which regrettably boomeranged under unfavorable market conditions, prompting the merger with Hapag-Lloyd, Vitarana explained.
“Hapag-Lloyd clearly wanted UASC for its modern fleet—nothing else,” he said.
