Klaus-Michael Kuehne

While many investors and financial analysts have their eyes on Kuehne Nagel’s (K+N) interim results, due to be published tomorrow, I’m still digesting the remarks of Klaus-Michael Kuehne, K+N’s honorary chairman and majority shareholder, following the recent rumours that CMA CGM had talked M&A with Hapag-Lloyd.

Mr Kuehne, who is personally invested in Hapag, reportedly said “Hapag-Lloyd would rather take over CMA CGM”, than the other way around.

And Hapag chief executive Rob Habben Jansen dismissed the market reports as speculation, adding he did not foresee “major takeovers in the industry. If at all, there are smaller tie-ups by niche players in the short term”.

K+N in charge

There is little hard cash kicking around the container shipping industry, which is swamped in debt.

However, the number of major carriers competing globally has shrunk, and there is a general expectation that the global alliances will be reconfigured again. In terms of negotiating power and market share strategy, all major carriers are now stronger than they were only two years ago, thanks to their lenders, who could conceivably roll over their debts forever if needed.

Those who complain COSCO Shipping has a competitive advantage because it is state-owned, should also pay attention to the identity of the banks and investors who have lent billions to its western rivals.

If a big bankruptcy story in shipping is ever going to materialise after Hanjin, it will likely be again in Asia. Yet, at a time when inorganic growth options are thin on the ground and organic sales growth is unlikely to offset rising costs, does Mr Kuehne have something in mind that could change the complexity of the Hapag investment case and spur unexpected vertical consolidation in the supply chain, leaving us all in awe before he retires?

What his words last week implied was that no matter what, Hapag is based in Hamburg and will not forgo that privilege, unless, possibly, one of its main shareholders, Mr Kuehne himself perhaps, benefits from extraordinary corporate activity of some kind.

No deal?

Mr Kuehne is the epitome of a true leader who never gives up in a fight, not even in the later stages of his working life. He really is a remarkable businessman. Those who know him well talk of a man who always leans towards the future, looking to consolidate relationships, always in control when he discusses business and logistics.

However, Hapag taking over CMA CGM would likely imply an all-stock deal in which the French carrier, which doubles Hapag in terms of sales, would have to offer a massive premium to Hapag shareholders to cede control of the combined entity, based on my calculations.

Hapag financials snapshot (Source: Hapag)


CMA CGM financials snapshot (Source: CMA CGM)

Seriously, the odds are very long this is ever going to happen and CMA CGM, I reckon, is much better off than its German rival on many levels.

So, what are the options for Hapag if things turn for the worst, say by 2020?

Mr Habben Jansen could be right as a far as the prospects of a fully-fledged merger between major container shipping companies are concerned, but what about a takeover of Hapag by K+N, which could help the Swiss forwarder optimise its own overcapitalised capital structure?

Its stock has struggled for some time, and could do with a fillip from Hapag, given the performance of the latter.

KN vs Hapag share prices

Unsurprisingly, given the fundamentals of cash-rich freight forwarders as opposed to debt-laden ocean carriers, the numbers make a lot of sense, and although operational benefits are less immediately obvious, there is the intriguing prospect of a major sea freight customer effectively taking control of its own capacity in a sort-of similar way to which Panalpina has approached air freight.

Despite pressure on margins, K+N is projected to be able to generate ebitda well over Sfr1bn ($1bn) through to 2020 (market projections are realistic, albeit a tad bullish), while Hapag should comfortably churn out about $1bn in adjusted operating cash flow over time, even though more bullish forecasts may prove difficult to meet, due to market conditions.

Hapag financials (4-traders.com)

KN financials (4-traders.com)

Hapag has $6.3bn of net debt sitting on its books, while K+N boasts a net cash position. Assuming an all-cash deal and a take-out value of €42 a share for Hapag, the combined entity would double its adjusted operating cash flows, or ebitda, but the net leverage of Hapag would drop materially as part of a larger company, even excluding meaningful cost and revenue synergies.

There are many moving parts here, and the deal could be structured in several different ways (Mr Kuehne holds a large stake in Hapag via Kuehne Holding AG and Kuehne Maritime GmbH), but I estimate that K+N could easily retain a 71% stake in the combined entity, even paying a large premium, while Hapag shareholders would control the remainder.

Mr Habben Jansen, a veteran freight forwarder himself, could top the list of executives being shortlisted to lead a “K+N+H” powerhouse.

Given the trading multiples of the two, K+N could afford to pay up to entice Hapag’s other shareholders, and the deal could be accretive to underlying earnings from year one, I estimate, both excluding one-off charges and even maintaining the current interest expenses burden of Hapag ($400m), while assuming minimal cost synergies. Among other considerations, “deal accretive” usually means thumbs up in M&A.

The obvious domino effect?

CMA CGM could consolidate CEVA Logistics, although the scale of such a tie-up would be irrelevant, if gauged against a K+N-Hapag deal. More importantly, though, Mr Kuehne could be remembered as the man who beat his rivals to the punch, sorting out the biggest consolidation puzzle in supply chains of the 21st century.


Leave a Reply

  • Alan

    July 22, 2018 at 6:24 pm

    In a way it would be similar to the strategy that Maersk is currently pursuing, by integrating Damco, Terminals and Maersk Line.
    But is there any reason why the forwarders need to give up their asset lite, high ROCE business model, to own all these assets? It seems to me that such a strategy will take many years, and a lot of further consolidation to pay off, and risks totally destroying profitability in the meantime, with no certainty of success.
    Perhaps this is a necessary step to protect themselves from Amazon, but it is pretty risky to trash your whole business, in the hope of emerging with a credible business model in 5-10 years.

    • a.pasetti@yahoo.co.uk

      July 24, 2018 at 6:34 am

      That’s right, Alan, but relationships play a big part here, and nonetheless K+N, in its current form, runs the risk of destroying value for years to come. Its stock is only ~ 15% higher than seven years ago, ex dividends. Also, with Hapag it could boost ROE with more leverage, although looking at one single metric is seldom a good way to look at a business, and the same applied to ROCE. Btw, I have a follow-up column coming up later this week, where, alternatively, I argue in favour of horizontal integration for K+N… your feedback would be gratefully received. Best, A.