By Laura Barnes
AP Moller-Maersk looks set to become the king of the ocean as it nears its merger with P&O Nedlloyd. It may now only be a matter of time before other lines decide to follow suit.
|~|Maersk-shipfor-web2.jpg|~||~|The shipping industry has seen increasing moves towards consolidation in recent years with a number of high profile takeovers and mergers. Last month’s move by AP Moller-Maersk, the world’s largest shipping company, to buy up the number three global player, P&O Nedlloyd, however, marked a step change in the consolidation process, which will shake up the global shipping market. The industry will still be highly fragmented though, which will leave room for both niche players to be successful and also for further consolidation.
Since AP Moller-Maersk announced its bid for P&O Nedlloyd, the target company’s share price has rocketed, raising the takeover price to between US $2.6 billion and $3.4 billion. The deal, which would give Maersk a 17% share of the container industry, is expected to be finalised over the summer.
“We announced our intention to make an offer to P&O Nedlloyd in mid-May, since then we have purchased over 5 million shares in Royal P&O Nedlloyd and by the end of July the closing of acceptance period will begin,” said a spokesperson for AP Moller-Maersk in a statement.
The takeover is big business in the sea container sector — Maersk Sealand, a division of the Danish giant, already has a cargo capacity 34% greater than its nearest rival — and it marks a further stage in the industry’s consolidation, following a wave of shipping mergers and takeovers that began in the mid-1990s.
In 1997, for example, P&O merged with Royal Nedlloyd, followed by Neptune Orient Lines’ famous takeover of the then larger company, US-based American President Lines (APL). AP Moller-Maersk, itself, has also carried out three notable takeovers in recent years, buying up EAC-Ben, Safmarine and Sea-Land. The Maersk/P&O tie-up, however, dwarfs all previous deals as it involves the world’s largest and third largest shipping lines, totalling a combined fleet of 1.5 million TEUs.
Like other consolidations before it, the Maersk/P&O deal will have a knock-on effect on the industry as a whole. The question though, is what the impact will be on the global scale, and particularly here in the Middle East, and whether the Maersk/P&O tie-up will deliver the host of benefits promised by its backers.
“In general, there are what I call good and bad mergers,” comments Fred Doll, consultant, Doll Shipping Consultancy. “A good merger is a new company that is able to acquire assets it needs and also bring to the acquiring company assets cheaper than it could have bought them separately. Additionally, the new combined business has to be able to do more than what the two companies could have done separately,” he explains.
“A bad merger, however, is simply where you take two companies and throw them together, resulting in one larger company that is doing exactly what both companies were doing beforehand,” he adds.
The merger comes at a time of increasing competition in the shipping sector, with a number of lines in the Far East rapidly building up fleets of larger vessels. Buying P&O will help Maersk secure its market share, as P&O Nedlloyd is in the midst of a programme to build a number of large ships. These will quickly add capacity to the Danish line’s fleet, particularly the new mega-ships that will be launched in the coming years.
“Within the next decade mega-ships will be seen in the sea. There are already ships in the market serving 8000 TEUs, but Maersk is looking towards 10,000 TEUs in order to compete with upstarts from the Far East,” says Farhad Sunavala, regional sales manager, Middle East, CMA CGM Group.
In the Middle East, preparations for mega-ships are already underway. For instance, Dubai Ports Authority placed an order for 16-18 super post-Panamax tandem gantry cranes last year to cope with the demand from larger vessels entering the port. Last month, it commissioned five of these cranes, with another five expected to be placed into service towards the end of the year.||**|||~||~||~|With the additional capacity of P&O Nedlloyd’s new ships, Maersk should be able to benefit from the economies of scale generated by both its larger vessels and fleet. However, achieving these efficiencies will require good integration of the two lines and their routes — just adding more ships will not generate savings on its own. Instead, Maersk has to look at how the business can grow from the deal, rather than just using it as a lever to increase its portfolio lead over competitors.
“Economies of scale are key to mergers,” says Doll, “It is all about strategy rather than simply increasing the number of ships, as a merger solely for increasing the size of a company will not always work. Eventually, if there is no other reason for the merger apart from increasing the size of the company then there is the potential for dis-economies of scale,” he warns.
Maersk’s ‘strategic rationale’ for the merger emphasises the importance of efficient supply chain management and adds that the two businesses create a platform for long term sustainable growth. It also highlights the possible economies of scale to be gained from the optimisation of the combined networks.
“The combined company will be able to provide better service offerings for customers through combined expertise and experiences, through more port calls and wider geographical scope,” said a spokesperson.
Maersk refused to comment on the potential impact of the deal within the region; however, in comparison to other parts of the world there appears to be little overlap between the two companies’ operations. P&O, in particular, has only a limited network in the Middle East, so most routes after the takeover are likely to be continued. However, it is likely that some of the company’s new fleet of mega-ships will be used on Maersk’s Middle East and Asia network. Rivals add that the effect cannot be clearly known until the deal is finally implemented, but because of the fragmentation of the industry there will still be plenty of competition and new business opportunities.
“Perhaps it may affect shippers that are not global players but you cannot really say what may happen until the deal is signed. However, it depends on the logic Maersk will apply, whether they want the whole market share or if they use their logic for growth,” predicts CMA-CGM’s Sunavala.
“However, Maersk has been good competition so far as they have not undercut anyone. Right now in the Middle East, they move a lot of US cargo, military cargo and US aid, so I guess they will be looking at increasing revenues,” Sunavala adds.
While the P&O deal will give Maersk a strong position both locally and globally, the shipping market will remain highly fragmented. The EC, for instance, cleared the takeover of any competition issues, as Maersk will still only have a 17% market share, which is too low to activate monopoly laws. Indeed, the deal has been welcomed in Brussels, as it will create a European giant capable of competing with the emerging Far East and American shipping giants.
Yet despite the emergence of global giants and increasing consolidation there will still be room for smaller players operating in niche sectors of the market. “Normally, mergers by giants like Maersk would be a problem for smaller companies as it has around 680 ships in its total fleet. But this is not the case for the container market. The industry is going through a niche stage allowing smaller companies to concentrate on a certain patch of water instead, say the Mediterranean, the South China Seas or the Persian route,” explains Sunavala.
Smaller companies are also able to take advantage of third party management, which is a key aspect for many companies that operate across the Gulf, as it allows them to cut their costs.
“Fragmentation of the market has seen a lot of smaller companies emerge as they are able to enter the market and take a share of it. Some of these new companies will hope to start small and get bigger but there are also the companies who want to remain small, and this can be done through third party ship management companies,” says Doll.
“There are quite a lot of third party ship managers in the Middle East region, so it allows small owners to keep costs under control whilst still being able to take a portion of the market,” he adds.
However, although there are still niche opportunities for smaller shipping lines, the larger players are likely to react to AP Moller-Maersk’s takeover bid in order to ensure that they do not lose market share. “We are seeing a wave of consolidation in an industry that is still so fragmented. This is just the beginning for the container industry,” says Henrik Lund, analyst, Danske Equities to APB.
Indeed, rumours abounded last month that APL would make a counteroffer for P&O; however, it is likely that it will now look at a line that complements its strengths instead. Lund also predicts, that Canada’s CP Ships and Germany’s Hapag Lloyd could be targeted for takeover bids by other companies, such as China Shipping Group. Exel is also making moves to expand its sea freight division, although with a takeover budget of $183 million, it is unlikely to make a major purchase. Another global player CMA CGM has also hinted that it is looking towards a takeover that would suit its business.
“We would love to own P&O but I guess, like other companies, the price is too high. However, we are looking at consolidations, everyone is on the lookout really,” adds Sunavala. ||**||