CMA-CGM has offered to buy NOL for SG$3.38bn (US$2.4bn) in cash which CMA-CGM describes as a 49% to 33% premium on NOL’s share price over the past three months. This purchase, if approved by regulators around the world, will add US$22bn worth of revenue and 563 ships to the French company. According to data from the analysts Alphaliner, the combined fleet of the two companies will hold 11.4% of the market, making it the third largest carrier after Maersk and Mediterranean Shipping Company.
This deal reinforces the trend in the market towards the big three being distinct leaders, with the next largest carrier being Hapag Lloyd with 4.6% of the market. However, if the two Chinese carriers COSCO and CSCL merge, as is rumoured, this will produce a company with the fourth largest fleet representing 7.6% of global capacity.
That CMA-CGM has offered to buy NOL is not a surprise. The discussions initiated by the Singapore owned company were clearly serious but price was always going to be key. NOL’s Liner division had a core EBIT (Earnings Before Interest and Tax) of negative US$143m in 2014 although results have recovered this year which complicates the valuation. None-the-less on a long-term basis the price to earnings ratio of the offer is around 16 times according to NOL.
After its own rocky experience several years ago, CMA-CGM has sustained a more robust financial position. Yet, its most recent results showed revenue and margins weakening despite higher volumes and lower-costs.
The long-term question over the purchase of NOL is whether it will improve the profits and growth of CMA-CGM. The French company points to the improved exposure to Asian routes that buying NOL will bring with it, creating a truly global company. However, the APL fleet is not composed of the very largest vessels and its sustained difficulties in making profit suggest that successful integration may be a demanding task.
The challenge that all container shipping lines face is to make a profit in market that is growing very slowly and is over-supplied with ships. The lines can do little about the short-term growth prospects however if this consolidation continues they might be able to start to control the supply of capacity. Although on paper the largest carriers only control market-shares in low double digit percentages, in reality the market for intercontinental trades is being to revolve around the biggest ships run by the largest lines. This may signal an important change in the structure of the market and thus its profitability.