Analysis: CEVA wants a happy ending, and you can take that to the banks
Over the past few weeks I have had a number of conversations concerning the future ...
Executives at Denmark’s AP Møller-Maersk (APMM) care a lot about their shareholders – it appears to me to be at the heart of their quest for a more balanced corporate structure; to basically defend the diverse portfolio of assets under their management less subject to various business cycles.
The recent news of its intended takeover of Hamburg Süd has confirmed the group’s inorganic growth prospects, while market rumours point to possible solutions for its most problematic assets based on projected capital requirements.
How Maersk intends to carry out its second comprehensive restructuring in less than a decade is by far the most important value-driver for investors – and the AP Møller family, apart many investors are almost blind on the subject and management’s strategy.
I believe that market appetite for its stock is a very important detail because Maersk will need all sorts of financing options over the years, including the possible issuance of new equity capital either to fund its ambitious corporate plan, or simply to keep at bay the threat posed by rising leverage.
Crucially, its current market cap of $29bn currently indicates that its reorganisation is not only appropriate, but also has been well received in the financial circles. If anything, the Danish conglomerate ought to be more transparent when it comes to disclosing how the restructuring is going to work out, and what its timetable is.
After a rally that has boosted its stock by 14% in the wake of the US elections, its stock trades only 5% below the highs for the year, but the market needs guidance – its performance on the stock exchange signals uncertainty surrounding its ability to deliver swiftly.
Management so far has opted to err on the side of caution given that multiple exogenous risks weigh on corporate strategy, but investors are wary of a poor track record. The previous restructuring – executed in the aftermath of the credit crunch – showed that drastic corporate changes don’t always move the valuation needle. One reason for this was that action was not aligned with macroeconomic conditions, and they currently remain as unpredictable as ever.
Maersk Line and Damco
The takeover of Hamburg Süd was long due, banking sources have pointed out, and open the door to the possibility of a full-fledged or a partial float of the combined entity.
Before the soft reorganisation of Maersk was announced earlier this summer, our team had discussed the opportunity of spinning-off Maersk Line – if management is brave, it should waste no time, clearly stating its intention in this regard.
Sources close to the Møller family declined to comment on the matter, even off the record, but if a break-up becomes a viable scenario, then the future of Damco also hangs in balance. Albeit reluctantly, I have come to terms with the idea that APMM could sell its freight forwarding unit, although much depends on the broader strategy for Maersk Line.
On the one hand, Damco could be monetised at fair value if it fetched a price tag of between $1bn and $1.5bn. On the other, it could be a nice addition to the spun-off entity, so its future is less certain than some market observers might think. In a recent report on the global freight forwarding industry, Transport Intelligence argued that Damco is “heavily dependent upon high volume sea freight forwarding over major tradelanes”.
“This is problematic both because of the struggling freight rates on such routes and because of structural changes as a result of nearshoring and more localised trade.”
The deal and other risks
The Hamburg Süd purchase is being structured as a cash deal, and at least partly financed by debt. It adds over $6bn of revenues to the group’s $35bn; while some reports argue that its rising net leverage could jeopardise its solid credit rating, management is right to embrace risk in a low-rate environment that rewards those companies boasting strong relationships with their bankers.
Maersk is one of them, and arguably its strong reputation convinced the Oetker family to sell its prized, but challenged, shipping business.
However, if the mooted price target of $4bn for the enterprise is right – reports indicate that that the target’s debt levels are negligible – Maersk will have paid a hefty cash flow multiple to secure the assets of Hamburg Süd – about 10x EBITDA, pre-synergy, according to my estimates – and overpaying in this shipping market carries obvious downside risk.
Namely, assets impairments. In the past few years, several billions of restructuring charges have been booked by Maersk – future write-downs, inevitably, would put more strain on the capitalisation of a balance sheet that will likely be more stretched than in the past.
As we reported last week, “Hamburg Süd’s fleet of 44 vessels, all operating north-south services in the Latin America market, is valued at $1.44bn”, according to vesselsvalue.com.
There remains some negligible regulatory risk, in my opinion, given the combined market share of combined entity (18.6%, up from 15.7%), although Lars Jensen of Seaintelligence Consulting was recently quoted by ShippingWatch as saying that “the EU Commission will definitely take a critical stance on the size of the market share that would potentially befall a combination of Maersk Line and Hamburg Süd”.
The third pillar
Here I should also spend a word or two on APM Terminals, the third pillar of Maersk’s new transport and logistics unit – I don’t think these assets are going anywhere, and APM Terminals’ success will likely remain tied to the success of Maersk Line, given its strategic value.
Clearly, then, one of the biggest upcoming stories concerns its oil assets, which operate under the energy division, alongside such activities such as drilling and tankers.
Maersk – which is rumoured to be in talks with Dong Energy to merge their oil assets, after a failed attempt one year earlier – could take a leaf out of General Electric’s playbook. As a reference, the US industrial group recently merged its oil and gas assets with Baker Hughes, creating a separate, independent, and listed company in which GE will retain control.
But given the lack of information coming out of Copenhagen, what happens next is anybody’s guess, although we will know more next week, on 13 December, when its capital markets day is due.
For the time being, all we know is that Maersk executives are trying to insulate the company from a list of risks that include cyclicality; low rates; pressure on revenues; break-up and heavy investment risk; rising operating costs; relatively low oil prices; and, probably, rising net debts.
Good luck to them.