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Karma and Comfort for Orient Overseas

The container line once helped by China fetched a generous price.
Chris Ratcliffe/Bloomberg
At Closing, May 23rd
74.60 HKD

Karma can hurt. At least this pain comes at a comforting price.

Cosco Shipping Holdings Co. agreed to pay $6.3 billion to acquire Orient Overseas International Ltd., the Hong Kong container-shipping group that China reportedly helped bail out from the verge of bankruptcy in the 1980s.

Swallowing Hong Kong's largest box mover catapults the state-owned Chinese company to the world's third-biggest shipping line, and the largest serving the Asia-North America route. Perhaps more importantly, it tightens China's control of the ports and shipping lines that turned Hong Kong into a global trade hub.

Rich Offer

Orient Overseas shares rose 123 percent in the last year, compared with a 21 percent gain in the broad market

Source: Bloomberg

The deal itself wasn't a shock. The shipping industry has been reckoning with depressed demand and low rates for years, leading to billions of dollars in bankruptcies and consolidation in a global container fleet now controlled by just three main groups. Orient Overseas, the ninth-biggest line with a market share of less than 3 percent market, wouldn't have been able to keep sailing solo.

What did surprise investors was the eye-popping price, which represents an 112 percent premium to the stock's one-year trading average. The transaction is the largest by value in shipping since 2003, when A.P. Moller Group merged two publicly traded companies to create the Danish conglomerate A.P. Moller-Maersk A/S. 1

Cosco's initial bid for Orient Overseas more than six months ago hovered around the $4 billion mark, according to the Wall Street Journal. That figure hardly budged as recently as June, and for good reason: Most shipping deals in the last two years or so have been done at a price-to-book ratio of about one. 

CMA-CGM SA's acquisition of Neptune Orient Lines Ltd. was done at a ratio of one, and Maersk's purchase of Hamburg Sud represented a 1.3 multiple, according to Jefferies Group LLC research. 

Cosco is set to pay around 1.4 times Orient Overseas's book value.

Slumping Fortunes

Revenue shrank 11 percent from the year before at Orient Overseas as the global shipping industry suffered

Source: Bloomberg

A company in a weakened position has few chips to bargain for a higher offer. And it's not as if there was a white knight for Orient Overseas, whose year-on-year revenue dropped by 11 percent in 2016 and 8 percent the year before.

Picking Up Speed

Cosco's $6.3 billion purchase of Orient Overseas comes at a premium to recent shipping deals

Source: Jefferies and Bloomberg

Family history might count more than leverage, though. Orient Overseas has been controlled by the pro-Beijing Tung family since 1947. The founder's son and former chairman Tung Chee-hwa was Hong Kong's first chief executive after the 1997 handover to China.

It's unlikely the third-generation CEO, Andy Tung, would have been prepared to lose control of the family empire without holding out for a handsome reward for shareholders.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
  1. M&A screen based on pending, completed or proposed deals larger than $1 billion among 1,058 companies classified as transport-marine companies by Bloomberg.

To contact the author of this story:
Shelly Banjo in Hong Kong at

To contact the editor responsible for this story:
Paul Sillitoe at

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