Neptune Orient Lines sale boosts Singapore's hub ambitions

[SINGAPORE] CMA CGM SA's S$3.38 billion takeover of Neptune Orient Lines Ltd. offers two advantages for Singapore: It allows state investment firm Temasek Holdings to get rid of a money-losing business, while furthering the city-state's ambitions as a shipping hub.

The French company, the world's third-biggest shipping company by capacity, offered S$1.30 a share in cash, 6.1 per cent more than Neptune Orient's last closing price of S$1.225 on Friday. Temasek agreed to sell its roughly 67 per cent stake, triggering a mandatory takeover offer by CMA CGM for the remaining shares.

The deal lets Temasek break free of a company that has posted losses in five of the past six years, and pocket US$1.6 billion from it, while CMA CGM expands its trade links within Asia and to the US. The Marseilles-based company will set up a regional headquarters office in Singapore and deploy more vessels to its port, bringing in more container volume than Neptune Orient could achieve on its own.

"Ultimately it's all about entrenching Singapore's role as a hub, be it for logistics, financial or legal services," said Song Seng Wun, an economist at CIMB Private Banking in Singapore. "If we can't be physically moving the goods we do the next best thing, which is managing and making money from the various spokes and hubs that connect the movement."

The companies expect to gain approval from antitrust regulators in China, Europe and the US for the deal by June, and for the transaction to close in August, they said in presentation materials Monday.

The combined entity will still remain the world's third- largest container liner, Rodolphe Saade, vice chairman of CMA CGM, said Monday, behind AP Moeller-Maersk A/S's Maersk Line division and Mediterranean Shipping Co.

It will have about 11.5 percent of the global shipping market, the companies said in a statement announcing the deal, while Maersk Line has 14.7 percent, according to shipping-data provider Alphaliner.

Song of CIMB Private Banking called the transaction a "done deal" in a note dated Tuesday. "We expect the regulatory authorities to give the go-ahead for the CMA CGM acquisition of NOL, as it will not disturb the competitive position of the alliances too greatly."

Neptune Orient traded below the offer price, closing 0.4 per cent lower at S$1.22 in Singapore. The stock resumed trading Tuesday after being halted Monday. CMA CGM, which is closely held, said it doesn't plan to keep the Singapore company's listing.

"There's a time value in money. If you put in S$1.30 today it's dead money until August next year," Timothy Ross, a Singapore-based analyst at Credit Suisse Group AG, said of the stock's decline. "You wouldn't pay today what you're going to get back in eight months from now. You pay a discount to that because otherwise you put that money in the bank, buy government stock you will get a return." The shares have advanced 46 percent this year before Tuesday, compared with a 14 per cent drop for Singapore's Straits Times Index. Bloomberg broke news on the talks with CMA CGM last month, and in March flagged Neptune Orient as a possible takeover target.

The deal is the largest in the container shipping industry since Maersk bought Royal P&O Nedlloyd NV for the equivalent of US$2.96 billion a decade ago.

Several shipping companies are exploring mergers and acquisitions amid a glut of capacity, declining demand and reduced freight rates. Germany's Hapag-Lloyd AG merged last year with Chile's Cia. Sud Americana de Vapores SA. The Chinese government is said to be preparing a plan to combine China Cosco Holdings Co. and China Shipping Container Lines Co or merge some of their operations.

The CMA CGM-Neptune Orient combination will create a company with annual revenue of US$22 billion and 543 vessels able to carry a total of 2.33 million 20-foot containers, the two companies said.

Maritime Hub The new owners "will be looking to reinforce Singapore's competitive position as a maritime hub," Neptune Orient chief executive officer Ng Yat Chung said at a briefing Monday afternoon, after the deal was announced.

CMA CGM vice chairman Saade said the company was committed to the idea of a hub in Singapore, in addition to its existing one in Port Klang, Malaysia.

The combination "will mean significant volumes and it will be difficult to use only one hub in the area," Mr Saade said at the news conference. "Having the two hubs made quite a lot of sense to us." For Temasek, selling Neptune Orient allows it to focus on investments in consumer, financial services and life sciences and agriculture. The deal joins Neptune Orient to a leading industry player with an extensive global presence, Tan Chong Lee, Temasek's head of portfolio management, said in a statement on the fund's website.

"NOL is a small player in a fragmented industry. There's nothing Temasek can do to change its fortunes," said Ross of Credit Suisse. "At this stage they would rather direct their resources, both managerial and financial, into more value-added, long-run businesses where Singapore has some competitive advantage." Not everyone was enamored of the deal. Standard & Poor's Ratings Services maintained its B+ rating on CMA CGM but lowered its outlook to negative from stable, citing a risk of liquidity deterioration at the French company.

CMA CGM plans to sell at least US$1 billion worth of assets once the deal is concluded, according to the statement. Michel Sirat, the French line's chief financial officer, said both companies' operations would be reviewed and that vessels, terminals and containers could be sold.

"The key takeaway here is Singapore's efficiency," said Rahul Kapoor, a Singapore-based director at Drewry Maritime Services. "This shows that Singapore is focusing growth on industries rather than on individual companies. That will help Singapore maintain its global hub status."

BLOOMBERG