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Hapag-Lloyd shareholder Michael Klaus Kuehne may have rejected the idea of a merger with CMA CGM – but is it a good idea, nonetheless?
Let’s find out what the numbers – and hard evidence – suggest in the wake of the latest market reports.
Last week, I argued in favour of a tie-up between the German carrier and the market leader, Denmark’s AP Møller-Maersk Group (APMM), which should be willing to pay over the odds to get a merger deal sorted as soon as early 2019, in my humble opinion.
This week Reuters reported: “The world’s number-three container shipping line (…) had initiated discussions in recent months with Hapag-Lloyd, which is ranked fifth globally, to look into some form of share merger of the two groups.”
The bullish M&A news pushed up the stock of Hapag almost immediately, after APMM shares had already bounced back nicely, before midday, from its Friday lows.
Both Hapag and APMM were under a bit of pressure on the stock exchange on Tuesday, which is typical in these situations. What gives?
No partner, no party
Sources told the news agency a “non-cash merger” had been proposed, and it couldn’t be otherwise, given that all the western box lines are constrained due to limited balance sheet leeway.
Hapag shareholders are resistant to a change of ownership; regarding a CMA CGM proposal, “the sense is that there was nothing in it for Hapag’s principal shareholder,” Reuters wrote, and 81-year-old Klaus-Michael Kuehne, in particular, is not interested in selling out. Alongside CSAV, he is one of the major Hapag shareholders and is said to be “unshakable”.
Yet “nothing in it” isn’t quite true if APMM, rather than CMA CGM, is the coveted partner.
Based on a scenario detailed in my Friday coverage of APMM/Hapag, if Hapag shareholders retain 25% in a combined entity, a 50% annual dividend boost (or more, going with last year’s numbers) to €150m is not out of the question for Hapag shareholders, cementing a more solid corporate income story over the medium term. That’s hardly a good reason to tie the knot with APMM, right?
Hapag, unwisely in my view, agreed to pay out €100m in extraordinary dividends last year, which was neither a commitment nor a sign that resources would be allocated to larger payouts in future. “But it did not have any other choice given shareholders’ preferences,” a German-based corporate advisor said.
Then there is that side issue – mounting debts in a down market – which is reflected in its widening five-year credit default swaps (CDS), as the chart below shows. Unsurprisingly, Hapag’s emphasis is on cost management.
It is obvious that a CMA CGM-led deal largely financed by cash, say 50% of the take-out price, would be more enticing, as well as aligned with benchmark M&A structures. But I understand most of Hapag’s shareholders are focused on the strategic merits of teaming up with other key container shipping players rather than short-term, taxable cash returns.
So, we can probably rule out another round of industry consolidation led by the French, although first-quarter results proved that CMA CGM must gauge all its options after a stellar performance in 2017, spurred by inorganic growth.
Reuters pointed out that CMA CGM “has scale in Asia”, and if bulking up its trades there is the rationale behind a merger, Cosco Shipping Holding would be a much stronger partner for Hapag, at least on paper.
It is better off financially, as it boasts state backing and virtually unlimited funding resources both in the form of new equity and debt capital. As we know, fresh equity issued to a selected number of investors will be used to finance the purchase of 20 container vessels, while debt will be deployed to consolidate Orient Overseas International Lines (OOIL) and its container line arm, OOCL.
Moreover, a Cosco/Hapag deal could further strengthen political ties between Beijing and Berlin in supply chain matters, although executives in Hamburg have different ideas: headlines such as “Germany, China lobby against US trade tariffs” this week are a case in point.
Money doesn’t buy everything (particularly when a would-be suitor approaches a billionaire who loves to run the show) though, and cultural hurdles might be unsurmountable.
So, we are again left with an APMM/Hapag tie-up that is almost compelling for APMM – which, however, might consider CMA CGM instead, if Hapag doesn’t blink or is taken over by Cosco.
Another problem concerning the rumoured CMA CGM/Hapag deal is that CMA is not listed, but luckily, I have recently run the numbers, determining a possible value of up to $700 a share for the French carrier at IPO, so we can make some assumptions here.
To start with, I reiterate the idea that a 50% premium over Hapag’s recent low of €28 a share (its undisturbed price) could be enough to seal the deal.
“It is not just about price, but rather think of the broader implications for CMA CGM/Hapag and its shareholders,” one London-based banker pointed out.
Following his appointment as executive chairman of Kuehne Holding AG by Klaus-Michael Kuehne, Karl Gernandt “remains related to Kuehne + Nagel as vice-chairman of the board of directors of Kuehne + Nagel International AG,” Kuehne + Nagel says.
Here below is a snapshot of some of the most influential individuals running Hapag.
As far as Mr. Gernandt is concerned, Hapag rightly says that “the chairman of the audit and financial committee should be independent.” However, it adds that “at this time, Mr Gernandt is the chair of the audit and financial committee.”
It goes on: “Mr Gernandt is also a managing director for a shareholder who holds a significant interest in Hapag-Lloyd AG. Therefore, Mr Gernandt cannot be considered as independent (…). In the opinion of the supervisory board, it is in the urgent interest of the company and all its shareholders that Mr Gernandt continues to exercise his office as the chair of the audit and financial committee, because Mr Gernandt is well suited to the role of chair of the audit and financial committee. There is no doubt that he exercises his office in an independent manner.”
You might well be right if you think this is unconvincing stuff, in terms of corporate governance, but then look at the two charts below and spot the difference.
If I am right about the fair value at which it could be sold, the equity of Hapag could be worth up to €7.3bn (against a book value of €5.9bn and a market value of about €5bn), while its enterprise value (market cap plus net debt excluding minorities) would amount to €12.7bn.
If the French offer were 100% financed by new stock, CMA would retain a 55% stake in the combined entity, with Hapag ending up owning 45% of the equity capital, my model shows.
Hapag’s minority stake would be hardly satisfying (too high) for a properly balanced board mix, I think. (For Hapag to retain control of the combined entity in an all-stock deal, I estimate its shareholders would have to receive a premium of about 83%, all other things being equal.)
With total net debt of $13.5bn, the implied pro-forma net leverage (as gauged by net debt/ebitda) of a combined CMA CGM/Hapag entity would be 3.8x, post-synergies, against 3.5x for APMM/Hapag. In terms of capital structures, before and after synergies are taken into account, it is likely that CMA/Hapag and APMM/Hapag would compete in a similar financial backyard, but CMA/Hapag would leapfrog APMM in terms of revenues, in a race to scale where Cosco must still fill a gap against its Danish rival. After the consolidation of OOCL, its top line will likely be a touch short of $20bn, as the charts below imply.
It is only a day or two since the OOIL deal received the green light, but it’s not too early to think about the next move in Greater China.