Cosco buys Orient Overseas
Bigger is better in the world of container shipping where supersized ships and high-profile takeovers have been key themes as the leading lines jostle for position. In Cosco’s case that has meant a longstanding interest in Orient Overseas Container Line, the eighth biggest carrier worldwide in capacity terms.
After months of speculation that it was going to make a bid for the Hong Kong-headquartered line, Cosco finally made its move early in July, just as this publication was going to press. The $6.3 billion offer will catapult the Chinese carrier into third place in the world’s container fleet.
Cosco executives are waiting for the green light from investors and regulators but in the meantime, how well does the bid stack up against the claim that China is intent on greater control of the seas?
‘China Inc’ in action
Evidence of the involvement of the Chinese state in the Orient Overseas bid is fairly compelling. The offer is being financed with $6.5 billion in capital from Bank of China, a state-owned lender, and Cosco has been joined by state-owned Shanghai International Port Group as a junior partner. Cosco is rumoured to be interested in taking a stake in SIPG, which controls the world’s busiest container port and Cosco’s ports division partnered with SIPG earlier this year to channel more traffic between Shanghai and Piraeus. A fuller collaboration between the two companies would put them in position to provide a fully integrated trade lane into Europe – container boxes loaded by SIPG in Shanghai, shipped on Cosco vessels, and unloaded at Cosco-controlled Piraeus.
“SIPG’s involvement in the Orient Overseas deal is therefore not a left-field move but very much further evidence of the consolidation and intertwining of Chinese-owned port sector activity,” reports Drewry Maritime Financial Research.
Of course, Orient Overseas is already reputed to have close ties with Beijing, despite being run from Hong Kong by the Tung family for almost half a century.
A consortium featuring mainland banks helped to bail the family out when it got into financial difficulties in the 1980s and Tung Chee-hwa – who was running the shipping line at the time – was later appointed as Hong Kong’s first leader under Chinese rule.
That led to sniping in some of the city’s media that Cosco’s bid for Orient Overseas is a reward for the family’s loyalty. “Tung Chee-hwa’s story is an inspiring one,” scoffed one local columnist. “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.”
The struggle for scale
Orient Overseas is widely regarded as an excellent candidate for a takeover, 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 line that will give up third spot in the global rankings.
But the backdrop to the bid is the frenetic round of consolidation across the industry. All of the leading carriers have been active in acquiring smaller rivals and Drewry expects that the top seven lines will control at least three-quarters of the container fleet by 2021, compared with 37% in 2005.
China’s container shipping world took its own merger medicine last year with the combination of Cosco and China Shipping, and shortly before it made its offer for Orient Overseas, Cosco gave notice that it was anticipating a net profit of about Rmb1.85 billion ($272 million) in the first half of 2017, compared to a net loss of about Rmb7.21 billion in the corresponding period last year.
Better conditions in the market had helped, it admitted, but there were encouraging signs that the merger with China Shipping was paying dividends in higher freight rates and surging cargo volumes.
Company strategists will be hoping for the same again with the Orient Overseas deal. If the takeover goes through, the combined entity will control the biggest share of trans-Pacific trade and the third-largest share in Europe-Asia trade, the two key routes. The larger entity will strive for lower unit costs and improved pricing power, steering more of its business towards terminals in which it has ownership stakes and driving a harder bargain at third-party ports.
Any more acquisitions ahead?
Cosco is running out of options for where it might look next for takeover targets as the group of medium-sized global carriers has largely been taken out.
The remaining Taiwanese lines like Evergreen and Yang Ming seem problematic in political terms and seem more likely to be pressured into domestic marriage by Taipei officials.
A bolder possibility is an investment in CMA CGM, one of Europe’s heavyweight lines. Conveniently Turkey’s Yildirim Holding wants to offload its 24% stake in the Marseille-based giant, although the French authorities aren’t likely to be as laissez-faire as Hong Kong’s in welcoming Cosco’s attentions. A fuller merger between two of the world’s leading container lines might find it harder to get regulatory approval too.
Cosco might still explore the possibilities of taking a stake in the French shipper and a bid would be a clear signal that the Chinese want more control over the shipping world.
“Over the coming months the Chinese will no doubt test the resolve of the French to block sales of CMA CGM shares to China,” predicts Olaf Merk, a respected commentator, on his industry blog. He also thinks that France could play the national card in nixing Cosco’s interest. “The French state might even consider buying shares in CMA 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,” Merk says.
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