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Maersk gets debt market warning to shun container line takeovers

Friday, November 13, 2015 - 20:37
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Debt markets are warning A.P. Moeller-Maersk A/S not to pursue an acquisition in the struggling container line industry.

[COPENHAGEN] Debt markets are warning A.P. Moeller-Maersk A/S not to pursue an acquisition in the struggling container line industry.

Neptune Orient Lines Ltd last week said it's in talks with Maersk and CMA CGM SA as Southeast Asia's biggest container company seeks a buyer. Borrowing costs for both potential suitors have risen since the announcement.

"Maersk Line could possibly derive some synergies from an acquisition but Maersk Line is one of the few profitable companies in the sector and it could dilute margins initially," Marie Fischer-Sabatié, a senior vice president at Moody's Investors Service, said by phone. In June, Moody's added a positive outlook on its Baa1 rating for Maersk.

The container line industry is suffering from a toxic cocktail of vessel overcapacity and sluggish global growth, which has sent freight rates plunging and turned some of the world's maritime trade lanes unprofitable. The industry has responded with job cuts and - to a limited extent - capacity reductions. But so far there has been little consolidation as container lines instead have formed vessel-sharing agreements with rivals.

"Real consolidation could be positive for the cost structure of companies involved, but it would likely take more than just one or two mergers to materially improve the overall market conditions in the container market," Fischer-Sabatié said.

The yield on Maersk US$750 million 2.55 per cent bond due 2019 rose to a high of 2.84 per cent this week. The yields on bonds issued by Marseille-based CMA CGM have also gone up. Moody's has a B1 junk rating on CMA CGM, six steps lower than what it assigns to the Copenhagen-based conglomerate.

Maersk said on Oct 23 that the container market was doing worse than it expected as it cut its 2015 forecast for the group's underlying profit by 15 per cent to US$3.4 billion. A week later, it said it will slash as many as 4,000 jobs at the container line, scale back capacity and delay investments to cope with a weaker market.

Maersk Chief Executive Officer Nils Smedegaard Andersen said last week his container unit "will look at everything that comes up for sale in the market but our base strategy is to grow organically." He also said he would "welcome any consolidation - - that would only be healthy for the container line industry." Meanwhile, Maersk, which is Denmark's largest company with more than 1,000 subsidiaries, may be better off investing in its other units.

"Overall, the Maersk Group is more likely to pursue acquisitions for its oil unit - because it needs to increase its reserve levels - than for its container line unit," Fischer-Sabatié said. Maersk Oil "has previously invested mostly organically, but reserves have declined." The unit said on Nov 9 it has agreed to buy oil assets in Kenya and Ethiopia for as much as US$845 million. The company, whose North Sea fields are maturing, has signalled it's ready to buy more.

"If they find the right acquisition target, it could have a positive impact on Maersk Oil's business profile," the Moody's analyst said. "But the eventual impact on A.P. Moeller-Maersk's credit profile would obviously depend on the size and the details of the deal."

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