Analysis: just where, and on whom, will APMM's M&A gaze settle?
The corporate story of AP Møller-Maersk Group (APMM) is incredibly fascinating. It is worth watching ...
Singapore’s Neptune Orient Lines (NOL), owner of the world’s eleventh largest container shipping line APL, and APL Logistics, has found itself between a rock and a hard place as it looks to sell its supply chain management operation.
If APL Logistics is sold at a high price, the resulting market value of the remainder of its assets portfolio, which would comprise its liner unit APL, may come under more pressure.
But if it doesn’t sell its logistics unit, the group may struggle to deploy fresh capital in the container shipping division – which, in turn, would yield a loss of competitiveness at APL Logistics.
NOL has been in the red for a few years now, with cutting costs at APL chief of its priorities. A sale of APL Logistics, which has been consistently profitable, could help NOL repair its balance sheet. The group’s capital structure is stretched, but value, the argument goes, could be released if proceeds from disposals were used to pay down its huge debt load.
But would that actually happen?
APL Logistics is a relatively attractive asset. It has grown revenues and Ebitda by about 4% over the last three quarters compared to the same period in 2013. As at October 31, it reported revenues and core Ebitda of $1.2bn and $56m respectively, for an implied Ebitda margin of 4.6%.
Financial newswires have reported that APL Logistics could be worth up to $1bn, which means its implied equity value could amount to 50% or more of NOL’s $1.6bn current market value, depending on certain assumptions. That’s not unrealistic, although the unit’s revenues and Ebitda amount to only 18.7% and 25% of the group’s total revenues and Ebitda, respectively.
While APL Logistics has shown growth, albeit at a rather slow pace, NOL’s core business needs big operational cost savings and massive investment cuts to stay afloat. What will be left of NOL’s core business once the sale of APL Logistics is executed remains a big question that management will have to answer.
Assuming in the last quarter of 2014 APL Logistics generates revenues north of $400m – which is achievable based on weekly revenues of more than $30m in recent quarters – its annual revenues will stand at about $1.6bn. The unit has fared pretty well in recent times, having grown in all its markets: Asia, Middle East, Americas and Europe. Assuming steady operating margins, it may generate Ebitda of about $80m in 2014, up from $76m in 2013.
An enterprise value of up to $1bn for APL Logistics would imply an EV/Ebitda take-out multiple of 12.5x for the unit, based on that level of adjusted operating profitability. This is a rich valuation for a business that is not growing incredibly fast, and whose underlying core profitability is below 5%.
Private equity funds such as KKR, and trade buyers such as CJ Korea Express and XPO Logistics, are all circling the asset, so a sale may occur as early as January. Trade buyers could afford to pay a high price as they would look to bank on synergies; while private equity would implement efficiency measures and look to leverage the balance sheet.
As for the rump NOL, even if proceeds from a sale of APL Logistics were used to pay down debt at group level – and assuming APL Logistics will carry just a small portion of NOL’s debt after the sale – NOL’s resulting balance sheet will be stretched, with more than $3bn of net debt.
If APL Logistics is sold, NOL may free up capital that will be reinvested in its core business, but it will also lose about $80m of core operating earnings. Its gross debt position will drop, yet net leverage will remain problematic.
And of course there is also the competitive position of the shipping line in an industry which is almost entirely focused on economies of scale – its largest ships are 13,200teu, at the lower range of the ultra-large container vessel class and which offer considerably higher cost per slot operating economics compared to the 18,000-19,000teu ULCVs.
VesselsValue.com calculates that its combined fleet is worth $2.49bn, with a demolition value of $687m. It currently owns 47 container vessels ranging from 2,500teu capacity to 13,800teu, and is total owned capacity is 379,600teu.
The more the equity of APL Logistics is valued – say up to $800m – the less NOL’s equity may be worth on the stock exchange post-disposal, although NOL shares may bounce on the day the sale is announced.
Indeed, rumours of the possible sale of APL Logistics boosted NOL stock earlier this summer. Enthusiasm was short-lived, however. The shares have lost more than 20% of value since they rose 8.5% on the news of possible divestments in mid-August.
It would appear that investors have yet to be convinced a sale of the logistics division is in the best interest of shareholders. On the face of it, it is taking quite a long time for the divestment to be sealed, and current market conditions do not bode well for a float. An IPO of APL Logistics is also an unlikely option because as an independent public company, the unit would have to withstand close market scrutiny, and that is not ideal for a pure play logistics company.
Whether NOL can afford to divest the asset depends on whether the divestment itself would open the door to a fully fledged takeover of NOL’s core liner unit. The big caveat is whether such a scenario has become less likely since Germany’s Hapag-Lloyd, the most obvious suitor, tied the knot with Chile’s CSAV.
Hapag-Lloyd shareholder Klaus Michael Kuehne stated in an interview earlier this year with a German newspaper that he believed the Hamburg-headquartered company should continue to consolidate after taking over the Chilean carrier, and publicly identified APL as a suitable target – almost completely turning the tables on the 2009 situation when NOL mounted a hostile bid for Hapag-Lloyd, and which would have been successful in had it not been for the intervention of Mr Kuehne and Hamburg municipality.