There will be increased movement toward mergers and acquisitions (M&As) in the shipping industry as carriers begin to see them as the better solution to overcapacity than alliances, predicts global credit rating agency Fitch Ratings.
“Mergers and acquisitions, rather than the historically more popular alliances, are inevitable to address chronic overcapacity and drive further cost savings in container shipping,” Fitch Ratings said.
“The merger talks between Hapag-Lloyd and United Arab Shipping Company (UASC) announced last week demonstrate that full-blown M&A deals are gaining momentum.”
Fitch said that while the Far East-Europe trade route is dominated by just four alliances—2M (36%), CKYHE (24%), Ocean Three (21%), and G6 (18%)—container shipping remains effectively fragmented, highly competitive, and plagued by overcapacity.
This, it added, is because alliances operate within a limited scope, and lack full coordination of networks and fleets and exploitation of resources, which restrict their ability to manage capacity and cut costs.
Alliances have proved popular because of their flexibility and because many shipping companies are either family- or state-owned. But market conditions are now unsustainable, with freight rates falling below operating unit costs for many companies, and bank loans increasingly difficult to obtain.
“This will continue to drive M&A, which can more effectively reduce costs, increase utilization rates and support more disciplined capacity management,” said Fitch.
Examples include the recent merger between China’s COSCO and China Shipping Container Lines (CSCL), creating the world’s fourth largest container shipping company, and the planned acquisition of Neptune Orient Lines (NOL) by CMA CGM, which would strengthen CMA CGM’s position as the global number three.
The potential merger between Hapag-Lloyd and UASC would create the fifth largest container shipping company with a 7.2% share of global fleet capacity.
The recent M&A activity is also prompting a significant shake-up of alliances, said Fitch. Recently, CMA CGM, COSCO Container Lines, Evergreen Line, and Orient Overseas Container Line announced a plan to create Ocean Alliance, which is intended to begin operations in April 2017 for five years, subject to regulatory approvals.
The new group is formed from the main, and in most cases financially strongest, entities from the G6, Ocean Three, and CKYHE alliances, and will have a market share to rival the 2M alliance between Maersk Line and MSC.
“We believe it is likely to put further pressure on the financially weaker companies and result in a reshuffle of the remaining alliances. However, the long-term agreement between UASC and CSCL for deployment of mega ships on certain trades is expected to remain in place,” said the agency.
CMA CGM secures EU nod
Meanwhile, CMA CGM announced that it has received approval from the European Commission for its pending acquisition of NOL. The proposed transaction was notified to the European Commission on March 8, 2016 and was cleared April 29 following a Phase 1 review, under the condition of NOL’s exit from the G6 shipping alliance, which has been already committed by NOL and CMA CGM.
Photo: Saberwyn
