The urge to merge

Yet another giant SOE consolidation – this time in shipping and logistics

sinotrans rep

She may soon have a new boss

A reform-minded minister intent on creating a world-beating Chinese company that attracts international investment and draws on Western technology but which stays under government control.

It might sound like someone on a high-profile mission for current Chinese president, Xi Jinping. But in fact it describes Li Hongzhang, a leading government minister in the later years of the Qing Dynasty. The business that he created – China Merchants Steam Navigation – was China’s first joint stock company. The Western competitors he had in his sights were Hong Kong-based merchants Jardine Matheson and Butterfield and Swire. Li’s efforts formed part of a broader ‘self-strengthening’ movement that was popular at the time (although he was less successful in propping up the ailing Qing Dynasty). After its establishment in 1873, China Merchants did break the duopoly of the British hongs in Yangtze River shipping.

Almost 150 years later, the company the Qing bureaucrat created is spearheading another round of reform of state-owned enterprises (SOEs). Last week, the listed entities of shipping firm Sinotrans & CSC Holdings announced that they had received notice from their parent about a strategic restructuring that could see their businesses run by a new controlling shareholder.

According to the Chinese press that new shareholder will be China Merchants Group (CMG), the latest incarnation of China Merchants Steam Navigation, which went on to shift its headquarters to Hong Kong in the 1980s.

21CN Business Herald says the idea came from CMG and has been approved in principle by Sasac, which will remain the ultimate shareholder of the merged entity.

The newspaper also claims the merger will take a different form from the enforced merger between train rolling stock manufacturers CNR Corp and CSR Corp, or the potential joining of container shipping giants China Cosco and China Shipping Group (CSG).

There will be no asset swaps between CMG’s maritime arm China Merchants Energy Shipping (CMES) and the Sinotrans & CSC listed entities. Instead, the merger will take place at group level and CMG will use its financial firepower (it is better known for its banking operations) to structure the deal as an acquisition, with Sinotrans & CSC becoming a subsidiary.

A merger would create a supertanker of an SOE with total assets of around Rmb700 billion ($110 billion): far larger than the proposed Rmb500 billion asset base of a combined Cosco/CSG.

A similar deal almost happened a decade ago, if rumours are to be believed. Indeed it has been suggested that Sinotrans’ current chairman Zhao Huxiang left CMG in 2005 for the logistics group in order to facilitate a merger. Instead, he found himself overseeing a consolidation with Wuhan-based Changjiang National Shipping Company, which was completed in 2008 – although it took a further six years before the two companies had fully integrated their operations.

In a press conference last week Zhao argued that a tie-up between CMES and Sinotrans & CSC would be more straightforward as the operations of the listed entities will not change significantly and the groups have complementary rather than overlapping businesses.

Sector experts agreed, noting too that – unlike Cosco and CSG, which are expected to confirm their merger early next year – none of the companies concerned have suspended trading in their stocks pending further details of a deal.

Both CMES and Sinotrans & CSC have energy transportation businesses which can expect to be a focus of the new arrangements, says 21CN. Likewise, the partners both have shipping businesses, with CMES focusing on regional markets and Sinotrans & CSC on more domestic business. Linking them would create a shipping services chain underpinned by the logistics capabilities of Sinotrans.

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