The German shipper Hapag-Lloyd is in merger talks with the Middle East’s United Arab Shipping Company (UASC) as shipping lines consolidate amid a drop in freight rates.
Hapag-Lloyd’s shares surged 16 per cent to €19 in late afternoon trading in Frankfurt.
“In case of a business combination, the parties are basing their discussions on a relative valuation of the two businesses at 72 per cent (Hapag Lloyd) and 28 per cent (UASC), subject to a mutually satisfactory completion of the negotiations and the mutual due diligence exercise,” the two companies said in a joint statement.
“To date, the discussions conducted between the two carriers have not resulted in any binding agreement and no assurance can be given that these discussions will lead to a definitive agreement.”
Both Hapag-Lloyd and UASC declined to comment further on the merger talks.
The merger is part of a consolidation wave in the industry, which is suffering from low rates and shipping overcapacity as trade flows stagnate.
Growth in the volume of world trade is forecast to remain low this year at 2.8 per cent, unchanged from the 2.8 per cent increase recorded last year. This year is projected to be the fifth in a row of trade growth below 3 per cent.
“The consolidation is accelerating for the whole market,” said Guido Hoymann, the head of equity research for utilities and transport at the German bank Metzler.
“The question is if we are going to see capacity taken out of the market and if freight rates stabilise or move up again. The market is still highly fragmented and has huge overcapacity and I think this merger is probably still too small to make a difference in terms of consolidation.”
Hapag-Lloyd had merged in 2014 with the container shipping operations of Chile’s Cia Sud Americana de Vapores.
The French shipping company CMA CGM agreed in December to buy Singapore’s Neptune Orient Lines for US$2.4 billion, while China Ocean Shipping Group and China Shipping Group said in December they would combine operations.
“The Arab line [UASC] is a very, very attractive partner, because they have an attractive fleet and they have the attractive location at the hubs of the Gulf, so that’s a very strategic aspect for Hapag-Lloyd,” said Oliver Drebing, an analyst at Hamburg-based Alsterresearch.
Hapag-Lloyd is a publicly listed company, while UASC is privately held.
Hapag-Lloyd swung to a profit of €114 million last year from a loss of €604m in 2014. It has forecast an increase in its profit this year thanks to synergies from its merger with the Chilean shipper, along with cost reductions and a better shipping market.
The merger talks between Hapag-Lloyd and UASC are taking place at a time of dwindling merger deals in the Middle East due to the economic slowdown hitting the region.
The value of mergers and acquisitions in the Middle East in the first quarter of this year reached $4.7bn, a 67 per cent dip from the first quarter of last year and the slowest first quarter since 2014, according to a report by Thomson Reuters and Freeman Consulting.
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