Industrials

David Fickling is a Bloomberg Gadfly columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.

It's cheaper to put your belongings on a container ship and send them around the world for a year than to stick them in a land-based self-storage facility, according to freight forwarders Flexport. So it's a good time for Singapore's state investment company Temasek Holdings to bail out of the city-state's shipping line, Neptune Orient.

Taking On Water
Neptune Orient's trailing 12-month revenue is slumping
Source: Bloomberg data

France's CMA CGM will pay S$1.30 cash a share for the container line, Neptune Orient said Monday, valuing the business at S$3.4 billion ($2.4 billion). Temasek will get about S$2.3 billion for its 67 percent stake.

That looks like a less-than-spectacular 16 percent premium to the shares' volume-weighted average price of S$1.12 over the past 30 trading days. But take a look at the six weeks to Nov. 6, when news of CMA CGM and Maersk's interest in the company leaked, and you get a much more attractive picture, with an admirably conventional 30 percent premium to the S$1.01 average.

A glance at Neptune Orient's earnings also suggests Singapore Inc. got out at a decent multiple, with the takeover likely to transact at 16.1 times trailing 12-month Ebitda. Just one marine transportation deal worth more than $1 billion has occurred at a higher multiple over the past five years, according to data compiled by Bloomberg -- the cosy reunion of billionaire John Fredriksen's two Frontline tanker businesses. Taking marine transport deals at all values during the period, the median multiple of 48 deals is just 7.3 times:

Shipping Costs
Ebitda multiples of marine transportation deals since 2010
Source: Bloomberg data
Note: Deals worth S$1 billion or more have been charted

Why should CMA CGM be paying so much for Neptune Orient, if it's such a bad business? It helps that the French company is owned by the family of founder Jacques Saade. That means it doesn't have to answer to external shareholders for its short-term performance, and can afford to take a few years of weak results if it's in the group's long-term interest.

With a wave of consolidation underway in the shipping market, Saade is fighting to hold onto his number-three position. Shares of China's major container lines, China Shipping Group and Cosco, have been suspended since early August after Bloomberg News reported that they were being set up for a state-brokered merger. Add the Chinese companies' current fleets to their order books and they'd overtake CMA CGM, according to shipping-data company Alphaliner. By buying Neptune Orient, Saade maintains his edge and builds up his presence on routes between Asia and the U.S.:

More Cargo
Major container lines, by twenty-foot equivalent units
Source: Alphaliner, http://www.alphaliner.com/top100/
Note: CMA CGM-Neptune and Cosco-CSCL deals haven't been finalized

You get a similar picture by looking at the major inter-company alliances that now dominate shipping. China Shipping is teamed up with CMA in the Ocean Three alliance at the moment. Its erstwhile partner Cosco shares the CKYHE alliance of container lines with four other Asian shipping companies. Should China Shipping quit Ocean Three to team up with Cosco post-merger, the French company risks being sidelined. "Scale is more critical than ever," CMA CGM said last month after announcing it was in talks with Neptune. 

Investors should be glad that Saade's around to take the business off their hands. For a quarter of a century, the world's shipping container fleet has been growing faster than the value of exports. The industry is now so glutted that Maersk is the only major shipping line that's returning its cost of capital, according to data compiled by Bloomberg -- and that company typically makes less than half its operating income from its eponymous shipping line.

Room in the Hold
The world's container fleet has grown much faster than the exports it carries
Sources: World Shipping Council, Drewry, Florens, OECD, Bloomberg data
Note: 1990 values = 100


Container lines face three years of financial pain as slowing world trade collides with a flood of new capacity from new, larger ships ordered when volumes looked healthier, according to maritime data company Drewry. Neptune Orient is wise to seek a safe harbor away from choppy public markets.

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

(Adds announcement of deal in second paragraph.)

To contact the author of this story:
David Fickling in Sydney at dfickling@bloomberg.net

To contact the editor responsible for this story:
Paul Sillitoe at psillitoe@bloomberg.net