Hapag-Lloyd warns on profit, seals UASC merger deal

[FRANKFURT] German container line Hapag-Lloyd warned investors that profit would fall in 2016 and signed a binding agreement with Arab peer UASC to form the world's fifth largest shipping company in response to a global industry crisis.

Container shipping, which transports everything from iPhones to designer dresses, is suffering its worst downturn as a combination of weaker consumer demand and overcapacity force lines to cut costs and try to build scale.

The merger between Hapag-Lloyd and UASC is expected to be completed by the end of 2016 and is the latest in a series of mergers and alliances in the industry.

It will create a group with 237 vessels, transport capacity of around 1.6 million twenty foot equivalent unit containers (TEU) and a combined turnover of around US$12 billion, Hapag-Lloyd said in a statement on Monday.

"We are able to combine UASC's emerging global presence and young and highly efficient fleet with Hapag-Lloyd's broad, diversified market coverage and strong customer base," said Rolf Habben Jansen, chief executive of Hapag-Lloyd.

Underling the urgency for remedial action, Hapag-Lloyd forecast operating profit would fall in 2016, citing significantly weaker-than-expected freight rates. Its shares fel 8.5 per cent to 17.18 euros by 0830 GMT.

The new Hapag-Lloyd will remain headquartered in Hamburg and listed in Germany. Chile's CSAV, the City of Hamburg and Kuehne Maritime will remain controlling shareholders.

UASC's majority shareholders, Qatar Holding, and the Saudi Public Investment Fund (PIF), will become major shareholders in the new group, holding 14 and 10 per cent respectively.

The new company will seek to tackle the sector's ills by gaining access to ultra large container vessels that offer economies of scale, as well as providing access to cash injections, the statement said.

Some of the controlling shareholders have committed to backstop a cash capital increase of US$400 million planned through a rights issue within six months of the deal closing.

With an average age of 6.6 years and average size of 6,600 TEU, the combined company will have one of the most modern and efficient fleets.

The two had unveiled plans to merge in April, won consent from both companies' boards and shareholders and then worked on detailed specifications of the agreement.

Separately, the enlarged company will also be the key player in a new shipping alliance, dubbed "THE Alliance". Due to start in April 2017, THE Alliance will cover all important Asia to Europe trade lanes.

REUTERS