Analysis: first signs of stress push CH Robinson toward a crossroads
In May 2015, I argued that it was hard to find cracks in the way ...
From time to time, the family that runs French shipping line CMA CGM, the Saades, raises the possibility of listing the company on some stock exchange or other – most likely Paris.
The news is then excitedly reported by the shipping media, but these comments tend to come in isolation, and are then slowly forgotten.
It happened most recently when CMA CGM first announced it had agreed to buy Singapore firm NOL and its troubled container shipping arm APL, suggesting that once the integration of the new business was complete, an IPO could be its next corporate move.
Nothing has since been said officially, but it may well soon have to take this decision, I have concluded after performing a detailed analysis of its latest financials.
Rising losses and net debt in the first nine months of the year combined with deteriorating cash flows to inspire little confidence, although the recent deal-making does make this a transition period for it.
Additionally, state aid should not be ruled out if the situation spirals out of control.
The debt-funded purchase of NOL and its APL container shipping line – an “acquisition without precedent”, CMA CGM termed it a year ago – should start paying dividends in the first half of 2017 at the latest.
But if it fails to deliver on time, the balance sheet of the French carrier could become more problematic, while other external factors could force it to entertain a new fundraising by issuing new stock. If I am right, how a market listing will be structured – and particularly how much new equity, if any, will be offered to investors – will be one of many important elements to watch.
The prospects of a CMA CGM float also depend on AP Møller-Maersk Group’s intentions in regard to Maersk Line – last week’s capital markets day reinforced the view that the Danish group will retain most of its supply chain services and operations under its transport and logistics umbrella.
Although a Maersk Line spin-off is far less likely than before, a carve-out remains possible and would reverberate across the industry, determining – and here’s where we enter behavioural game theory territory – a zero-sum game where one or more losers will see their odds of survival diminish dramatically. Even if Maersk Line continues to be run as part of a broader group of assets (Maersk is obsessed with size and revenues growth), its size and stronger negotiating power could mean more strain for smaller rivals… at which point we also need to mention Hapag-Lloyd, which recently snapped up UASC, and is unsurprisingly in a hurry to complete that deal.
The German company has bought time with UASC, but it is unlikely to be the last asset it will chase before 2020.
M&A alternatives are increasingly scarce. Israel’s ZIM is currently the most obvious target in the entire container shipping industry, but would probably be unpalatable to Hapag’s proposed new shareholders.
But what other long-term options are there, aside from a takeover of Hapag itself by either Maersk Line or CMA CGM?
Its financial performance recently confirmed that the synergy benefits from the integration of Chile’s CSAV are fading away, as I expected. Most of its core metrics fell significantly in the first nine months of the year, as the table below shows.
As we reported recently, chief executive Rolf Habben Jansen warned the merger ought to close “before the end of 2016” and then Hapag should move “ahead ‘very swiftly’, with a six-month target for the integration of the UASC business”.
This is ambitious, but it makes a lot of sense.
As 2016 draws to an end, the container shipping industry must question the sustainability of its main players and how competitive forces are changing, while leverage is tricky – as I argued in my recent Maersk column – in an industry that not only might be entering a new era with regard to debt deployment, but also where most assets are highly illiquid.
Are the risks understood?
Bigger vessels are helpful to propel market share and volumes, and admittedly have a cost per slot ratio that makes them attractive to accountants. However, as global operations are constrained due to limited prospects for growth and rates, so tension and deal-making are here to stay – because, in short, it could end badly for some carriers.
So, to return to CMA CGM, just how bad is the situation in Marseilles?
Underlying operating cash flow, as gauged by Ebitda, plummeted in the first nine months of the year, as the table below shows.
Net working capital, meanwhile, widened from -$534m in the first nine months of 2015 to -$1.04bn this year, on a comparable basis.
That almost equates to its entire gross cash position at the end of September.
CMA CGM has ways to monetise its most liquid assets, although a securitisation programme is already in place. Its debt maturity profile is shown in the table below.
It debt-to-equity ratio is not properly balanced, and while I appreciate the NOL deal will take time to take effect, there remains a huge degree of uncertainty surrounding execution. Based on annualised forward Ebitda of $400m/$500m, its implied forward net leverage is between 16x and 20x, and even if Ebitda hits $1.2bn – in line with trailing trends shown in the chart below – the implied net leverage is a whopping 7x.
Of course, rising debts also mean rising interest costs, which affect the bottom line rather than core operating cash flows.
“Borrowing costs capitalised in the nine-month period ended September 30, 2016 amounted to $22.1 million ($13.7 million for the year ended December 31, 2015),” it said, which means about $30m of interest costs a year. Financial leverage, history shows, can be a heavy pressure on management teams that are unused to dealing with it. After all, a new fundraising might not be such a remote option if the NOL integration doesn’t go smoothly next year.
And that is why CMA CGM may end up issuing new equity while pricing existing stock on the public markets, although the timing remains unpredictable. Inevitably at this point, my initial prediction in March this year – “an IPO could happen as soon as in the fourth quarter” – has to be pushed back to the beginning of second quarter of 2017 at the earliest.