Not keeping it in the family

Bigger is better in the world of container shipping, where supersized ships, augmented alliances and titanic takeovers are key themes for survival.

It was the same story this week in Hong Kong, with a $6.3 billion bid for Orient Overseas International Line (OOIL), the city’s flagship fleet, by Cosco Shipping Holdings, the container division of China’s top shipping conglomerate.

OOIL’s controlling shareholders have agreed to sell their stake to Cosco and Shanghai International Port Group (SIPG), and Cosco will make a cash offer for the remaining shares on Hong Kong’s stock exchange.

The backdrop to the bid is China’s ambition to take on and outgrow Europe’s shipping giants, historically the dominant players in container vessels. Copenhagen-headquartered Maersk, MSC from Geneva and Marseille-based CMA CGM have long enjoyed control of the key routes and commanded most of the pricing power, but Cosco is mounting a new challenge, bolstered by backing from its national government.

Ranked sixth largest of the container lines just two years ago, Cosco’s acquisition of OOIL will move it past CMA CGM into third place in capacity terms. The new combination will boast a fleet of 421 container ships, with another 37 on order, at a time when consolidation has been transforming a sector chastened by some of the worst trading conditions in its history.

All of the leading lines have been scrambling for scale, including a merger of the three main players from Japan, the takeover of APL by France’s CMA CGM, and Maersk’s acquisition of Hamburg Sud.

Last year the Chinese bulked up as well, when Cosco teamed up with China Shipping in a merger that we first flagged in WiC292.

The move was hastened by a dreadful run of results for Cosco, which was forced to sell some of its businesses to its state-owned parent in a bid to avoid an embarrassing delisting from Shanghai’s bourse.

The freshly grouped giant has just announced a return to profit for its container shipping division but Cosco was expected to announce more takeovers and OOIL had looked like a decent candidate, with a well-managed operation and a young, fuel-efficient fleet.

Helpfully it is already a partner in the same shipping alliance as Cosco, alongside CMA CGM, the French line that will be giving up third spot in the global rankings.

The other attractions in OOIL’s locker include its niche refrigerated container business, investments in some key ports (including a state of the art facility in Long Beach, California) and a roster of international clients that will give Cosco an opportunity to broaden its customer base.

Completion of the deal would see Cosco surpass Maersk as the largest carrier on the Trans-Pacific route and overtake CMA CGM for third place on the Asia-Europe lanes.

For instance, the Cosco-Orient Overseas duo will have the capacity to move more than 77,000 containers a week between Asia and North America, based on traffic for May from Alphaliner, a shipping data provider.

Now the shipping sector is waiting to see if Cosco might try for more takeovers, although the remaining candidates are politically problematic, including the Taiwanese lines Evergreen and Yang Ming.

Another possibility is that Cosco makes a play for CMA CGM, which is soon to become a junior partner to the Chinese giant in the Ocean Alliance grouping.

Conveniently, Turkey’s Yildirim Holding wants to offload its 24% stake in the French line (to add a little intrigue it has hired China Citic Bank to conduct the sale), although the French authorities aren’t likely to be as laissez-faire as Hong Kong’s in waving through an offer.

“Over the coming months the Chinese will no doubt test the resolve of the French to block sales of CMA CGM shares to China. The French state might even consider buying shares in CMA CGM to pre-empt the Chinese doing so, which might be a logical consequence of the discussion this year on what constitutes a strategic merchant fleet,” suggested Olaf Merk, a respected voice on ports and shipping, on his industry blog this week.

Talk of the politics underpinning deals such as these comes at a time when the industry has been mulling Beijing’s bid for maritime mastery, a topic that WiC will review in a special Focus publication at the end of this month.

Supersized Cosco is said to be pioneering the power play on Beijing’s behalf, growing its fleet with finance from the state banks, and steering a greater share of the country’s trade onto its ships and through its ports.

The premise is that the Chinese are under-represented in global shipping proportionate to their contribution to world trade and that bids like the one for OOIL are signs of Beijing’s determination to bolster the country’s standing in the sector.

Certainly there was state backing for this week’s offer, not just in the involvement of state-owned SIPG, which controls terminal operations in Shanghai, the world’s busiest container port, but also the $6.5 billion in finance on offer from Bank of China, a state-owned lender.

Cosco’s ports division is also said to be close to taking a stake in SIPG, in further evidence of the tighter ties between some of the key state-owned enterprises.

Back in Hong Kong there was some dismay that another asset was falling into mainland Chinese hands, however, despite Cosco’s assurances that OOIL would be run as a standalone business and that its stock market listing in the city would be maintained.

The shipping line was founded in the 1950s by Tung Chao-yung, whose son Tung Chee-chen is currently running the company. Tung Chee-hwa, elder brother of the current boss, also ran the family business for a while, before his appointment as Hong Kong’s first chief executive (i.e. leader) under Chinese rule in 1997.

Famously, a consortium featuring the top Chinese banks helped to bail the family out in the 1980s, when they got into financial difficulties. Now they seem set for a $1 billion payday, despite suggestions from some quarters that they are doing the deal reluctantly.

“The Tungs did not want to sell,” the Wall Street Journal cited a source as claiming. “But there was a lot of political pressure from Beijing to make it happen and at the end of the day they gave in with a fair price at hand.”

Some of the other commentary from the former British colony has been less respectful, seeing the bid as a reward for the family’s support for Beijing, and especially the loyalty of the territory’s former leader. “Tung Chee-hwa’s story is an inspiring one,” scoffed a columnist in am730, a local newspaper. “Even when your company is on the verge of going under, the motherland will throw you a lifeline and give you another chance if you love your country enough. That’s why so many Hong Kong entrepreneurs have been so patriotic.”

Cosco says that it has no immediate plans to acquire other assets and that it will focus on its integration of the OOIL business. But as it waits for approvals from shareholders and regulators, it also seems to be giving notice that the Chinese won’t accept European competitors dominating their home waters any longer.

WiC’s Focus edition on China’s rise in the world of shipping will be published later this month, on July 28.

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