Sailing into the sunset?

What does a maritime marriage say about Sasac’s M&A challenges?

Sailing into the sunset?

Happy ship? Local media say Sinotrans and CSC merger faced problems

“Without matchmakers on earth there will be no marriage, just as without clouds in the sky there will be no rain”. Such is Chinese legend on how marital union is sometimes best encouraged by a third party.

And so it seems in industrial policy terms too, with the State Council having confirmed its previous directives to push more of the country’s leading SOEs into more prominent global performance.

The modern-day matchmaker is Sasac (the State-owned Assets Supervision and Administration Commission, see WiC45) which has the thorny task of organising the consolidation, often in the face of fierce opposition from the companies themselves.

Seen in that light, there are plenty of clouds ahead in proverbial terms. China’s latest five-year plan included commitments to reduce the number of flagship SOEs to between 30 and 50 by 2015. (Sasac was supposed to have whittled the number of companies down to 100 by the end of this year, though there were still 123 at last count).

The theory is that Sasac will end up with stronger companies than it started with. “[Each company will] have its own intellectual property, a world-renowned brand, [be able to] compete at an international standard, and have a certain degree of soft power,” explains the China Securities Journal.

To that end, policymakers have implemented Darwinian conditions for determining which companies to merge. “Within three years be among the top three in [your] industry, or Sasac will find you a new boss,” warned then Sasac Chairman Li Rongrong back in 2004.

That was the principle behind the 2008 merger of Sinotrans and China Changjiang National Shipping Group (CSC), among the weakest of China’s five major state-owned shippers. (Chinese shipping continues to be dominated by COSCO and China Shipping Group, which together account for around 80% of domestic capacity.)

The deal was meant to combine CSC’s dominance of the Yangtze River with Sinotrans’ experience in coastal and ocean-going shipping.

But it’s been two years since the mandated merger, and precious little has been achieved. “The reorganisation still remains at the group level only,” argues the Economy and Nation Weekly, “and the restructuring of the real business has not yet commenced”. The pairing is fast becoming a prime example of just how hard it is to consolidate two very different cultures and systems under one roof.

In most mergers, the management of one company wins out in the struggle to direct the reorganisation. In this case, you’d expect that to be Sinotrans (its website has even become the group’s new homepage).

“Although CSC dominates in oil shipping, and the two sides are evenly matched in the dry bulk transportation business,” Economy and Nation Weekly points out, “in terms of size, quality, profitability and access to capital markets Sinotrans is stronger than CSC.”

But that’s without accounting for the byzantine politics involved in running state-owned companies. The reality is that, so far, neither group has had the power to take the necessary decisions.

The most immediate problem facing management is simply to make sure the new entity (now named Sinotrans & CSC) isn’t competing with itself. “Between Sinotrans and CSC there is considerable business overlap,” explains the Economy and Nation Weekly. “It’s a particularly big problem for the listed companies of the two groups – Sinotrans Shipping and CSC Phoenix.”

It turns out that the two firms are both going after the same coastal and ocean-going ‘dry bulk’ cargo business. And the newly combined leadership hasn’t been able to decide how to divide domestic and foreign shipping between the two (one of the principal reasons for the merger in the first place). Reportedly, the company’s board hasn’t even agreed to integrate each of its divisions (logistics, shipping, shipbuilding and ship repair). In the meantime, the group continues to be run as two standalone operations.

“The liabilities of CSC present another challenge to the reorganisation,” reports the 21CN Business Herald. It points out that CSC continued to suffer from high leverage (an 80% debt-asset ratio) and remained responsible for the pensions of an estimated 50,000 retired staff. “Once the two are properly merged, [Sinotrans] will have to bear the cost of those retirees, which isn’t fair,” a Sinotrans insider told 21CN.

One more challenge: the struggle to reconcile two fundamentally different ways of doing business. While Sinotrans relies on its direct relationships with companies that ship various commodities, CSC does business primarily through freight forwarders (ship brokers).

Ultimately, a final solution to these issues will have to wait until one of the two management teams is given sufficient clout to reassert command. “If the company fails to straighten out its internal politics, restructuring will be very difficult to achieve,” an industry insider confirmed.

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