Hapag-Lloyd restructuring needs to deliver repositioning as well

The most recent move in the consolidation of the container shipping sector was the agreement last week on the terms to merge CSAV into Hapag-Lloyd which created the fourth largest container shipping company. Yet the market suggests that this may not be enough to improve the viability of these businesses.

The intention to create a new larger and hopefully more profitable entity by selling CSAV’s container shipping division in exchange for 30% of the equity of Hapag-Lloyd, was announced in January; approval by shareholders is little more than a formality. Indeed the dominant shareholders in both companies are desperate for a deal. In the case of the Luksic family, which largely owns CSAV, it rescues a business that has encountered the most acute difficulties over the past couple of years. The German corporation TUI now has the prospect of disposing of its stake in Hapag-Lloyd as part of an IPO process whilst Klaus-Michael Kuehne achieves his aim of a larger company capable of competing in global markets. Kuehne, the Luksics and the City of Hamburg (who are partners with Kuehne in the ‘Albert Ballin’ consortium) will be left owning 75% of the new company.

Hapag-Lloyd is now faced with the problem of creating a competitive company from the elements of two rather uncompetitive ones, even if the new company will have greater volume and sales over which to amortise its fixed costs.

The underlying market conditions are not that hostile, with world economic growth moderately positive suggesting an increase in container volumes of 3-4%. Yet as Drewry Shipping consultants point-out if “freight rates are increasingly being dictated by carrier behaviour and psychology, rather than the fundamentals.” The desire to buy new very-large vessels is driven by the fear of losing market-share rather than the ability to deliver improved profitability. If the new Hapag-Lloyd CSAV combination falls into this trap it faces the probability of repeating its past failures in the long-run. For this is a game that Maersk is capable of playing, under-cutting rivals by utilising its structurally lower cost base. Others must either match this or wait to go bankrupt.