Industrials

Andy Mukherjee is a Bloomberg Gadfly columnist covering industrial companies and financial services. He previously was a columnist for Reuters Breakingviews. He has also worked for the Straits Times, ET NOW and Bloomberg News.

Neptune Orient, the shipping line that's tracked Singapore's rise to global trade prominence for almost a half century, is up for sale. But for Temasek, the city-state's investment arm, offloading its majority stake amid the worldwide overcapacity of vessels, might be horrible timing.

Better for Neptune Orient's minority shareholders would be for Temasek to use the staying power accorded by its S$266 billion ($187 billion) portfolio to get a slice of a bigger shipping line with a better chance of surviving the present gloom.

Neptune shares jumped to their highest level since mid-May on Monday after Southeast Asia's biggest container shipper said it was in preliminary talks separately with CMA CGM and A.P. Moeller-Maersk. Speculation Neptune will change hands has brought year-to-date gains to almost 30 percent, compared with an 11 percent decline in the Straits Times Index.

Neptune Orient's desire to become a part of a bigger operation isn't hard to decipher. Global trade has been dismal since 2012. Worse, despite a recovery in the U.S. job market, and extraordinary monetary stimulus in Europe and Japan, the outlook for shipping is still bleak. Nils Smedegaard Andersen, the chief executive officer of Maersk, told Bloomberg News he's ``a little bit more pessimistic'' about 2016 than most forecasters.

The funk is an existential threat to a relatively small player like Neptune, which controls less than 3 percent of the global market, a third of CMA CGM's share. Maersk, the industry leader, has almost 15 percent. Cargo rates on Neptune's trans-Pacific business, which accounted for about 40 percent of the company's $1.2 billion in revenue last quarter, are down 18 percent versus three years ago. Volumes on that route have plunged by almost 23 percent over the same period. In the peak pre-holiday stocking season, Neptune had a net loss of $96 million -- its 15th unprofitable quarter in five years.

Deep Diving
Neptune Orient Lines' shipping volumes and rates on the decline
Source: Bloomberg, company financial accounts

Even so, this may not be the ideal time for Temasek to accept an all-cash deal. In 2004, the investment firm paid S$2.80 per share to raise its stake in Neptune Orient to 68.6 percent. It still owns near 67 percent, but the stock's now trading at close to S$1.10. For there to be a half-decent takeover offer, the capacity overhang in the industry needs to go. There's no sign of that yet -- last quarter saw a 9 percent surge in the global fleet size as demand remained flat.

Should the recently agreed Trans-Pacific Partnership trade accord lead to a revival in shipments to and from Asia, it would make sense for Temasek to keep some skin in the game. An all-stock deal would leave the investment company with a smaller stake in a more viable operator. Similarly, Singapore will want to ensure that the island's container port, operated by Temasek-owned PSA International, doesn't get bypassed by Neptune's new owner.

Neptune probably doesn't have a future as a standalone business. But its minority shareholders might get a raw deal if they're forced to settle for chump change instead of a shot at owning a piece of the bigger entity that swallows it.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Andy Mukherjee in Singapore at amukherjee@bloomberg.net

To contact the editor responsible for this story:
Katrina Nicholas at knicholas2@bloomberg.net