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The China Cosco/OOCL saga is officially over – or is it?
On the stock market, the price of OOIL today hovers around HK$72 (US$9.2), after peaking at a multi-year high of HK$75 when the news hit the wires.
Its current level is 8.4% below the value of the joint offer put forward by Cosco and Shanghai International Port Group (SIPG), which means investors do not think a counter bid – let alone a bidding war – is at all likely.
But it also might signal that traders are wary of certain risks surrounding the closure of the deal, and expect it to encounter some resistance before it is carried over the finishing line.
Yesterday, the day after the deal was announced, Drewry Maritime Research questioned whether there were likely to be any regulatory obstacles.
“The simple answer is that we don’t know,” it said – and in any case, it is perfectly clear that, with or without OOIL, there remains very little visibility, if any at all, of Cosco’s capital structure and assets base, despite the fact that is it is evidently changing beyond recognition without any proper disclosure from the Chinese government.
Paying over the odds
On the face of it, Bejing is paying over the odds, to put it mildly, to secure the assets of the Hong Kong-based container line and its parent company, Orient Overseas (International) Ltd (OOIL), after months of vibrant speculation, during which OOIL played the waiting game, rightly so in my opinion, despite one of its worst years on record, generating confusion among observers.
Last week, Alphaliner said “unsubstantiated speculations of an imminent acquisition of OOCL by COSCO have propelled the share price of OOIL, the parent company of OOCL, to a five-year high, but a deal is still far from certain to go through”. But this week, the deal prompted Drewry to argue that the “takeover of ‘perfect bride’ OOCL takes the container industry one step closer to liner paradise”.
But was the Cosco-OOCL story ever meant to be one of true love?
The mating game started as early as mid-2016, when OOIL stock traded at around a 52-week low of HK$26 – I thought Cosco was smart to bottom-fish for a bargain in those days.
OOIL has always been desirable, and Cosco has always been the only reasonable pretender given that it has always been expected to pay to become more influential in global container shipping circles.
With OOIL, it gets what it wants on the road to world dominance, some have argued.
It’s my view that, strategically, this is a smart and necessary move for Beijing – although it has once again shown to be pretty poor at allocating excess capital abroad.
Cosco was joined by SIPG to entertain a blown-up offer worth over $6bn in cash for OOIL’s outstanding equity, but the way it might end up, assuming the deal receives the green light from regulators – and there may still be some nasty surprises here – isn’t different from a blind date that turns sour within an hour, particularly if the prey and predator find themselves at the same table to talk the nitty gritty business of running two shipping lines currently managed in entirely different ways.
Cosco promised “the joint offerors intend to maintain OOIL’s listed status following close of the offer, and are committed to retaining the existing compensation and benefit system at OOIL and will not terminate the employment of any employee at OOIL as a result of this transaction for at least 24 months after the close of the offer”.
That may work if an upturn in container shipping activities is on its way, but in general it would seem problematic for company to acquire a better run target and then say, “Hey, we will keep it on our books but it will be an independent company listed on the stock exchange”.
Deals usually work when a good company buys a bad company, so OOCL should really have acquired Cosco but clearly didn’t have the resources. Now I foresee clashes between the two managements.
In addition, massive impairments could seriously harm the combined entity’s competitiveness, among other things.
If there is one thing money cannot buy, it is financial acumen. The pre-conditional voluntary cash offer values OOIL’s equity at $6.3bn, or at least two times the fair value of OOIL, according to my calculations.
Consider that the proposal values the OOIL enterprise, including net debt, at $8.2bn, which implies a whopping pro-forma 30x adjusted operating cash flow multiple on a trailing basis (excluding revenue and costs synergies), which falls to 14x on a normalised basis, hence assuming 2016 was just a very, very bad one-off year for OOIL.
That’s a valuation unheard of in the container shipping industry, by all metrics. Given the take-out price of HK$78.67 a share, signing the sale agreement is a no-brainer for the seller.
Why this is an insane takeover premium is simply explained by OOIL’s unaffected share price since the turn of the year, when the stock traded in the mid-HK$30s.
On that basis, the suitors are paying a premium of about 130% over OOIL’s undisturbed share price – which, more broadly, could belie a belief at Cosco that the rebound in freight rates is not be sustainable, although a more consolidated market at the top of the containership industry will determine increased pricing power for the largest carriers worldwide.
Another reading is that Cosco is borrowing cheap taxpayers’ money to fund the deal, while its managers do not give a damn to the underlying economics of a transaction that now leaves most of the players outside the top four in the league table exposed to takeover chatter through to the end of 2018.