Red ink is the most common feature of most liner operators’ results in 2013 and it looks like there is more pain on the way prompting, in turn, more asset sales with container terminal assets high on the list.
CMA CGM and Maersk are the two notable exceptions in the liner operating sector that did turn in positive results in 2013 but, to a significant extent, CMA CGM’s results were due to the contribution made by the sale of 49% of its Terminal Link portfolio of terminals to China Merchants Holdings International (CMHI) for €400m.
This gave CMHI equity positions in 15 terminals around the world effectively giving it the status of a global terminal operator as opposed to one that had previously been largely China oriented aside from recent independent acquisitions in Africa.
Mediterranean Shipping Company as a private company does not disclose its financial results but it is noticeable that it too during the course of 2013 concluded the sale of 35% of its Terminal Investment Limited (TIL) arm which had at the time approximately controlling or joint controlling interests in 30 container terminals worldwide. This was sold to Global Infrastructure Partners (GIP) and a group of LP Co-Investors for a consideration of $1.9bn, including certain payments contingent on TIL’s future performance.
Undoubtedly the injection of this cash was well received by MSC given the recent weak freight rates and high cost of bunkers.
Follow the leader
Hanjin has also trodden a similar path. The company announced that IBK Securities Company and Korea Investment Partners Company (KIPC) has agreed to buy a 70% stake in its Total Terminals International Algeciras (TTIA) container terminal in Algeciras, Spain for Won180bn (€121.8m). This represents part of a comprehensive package of measures aimed to stabilise the company after its financial position deteriorated significantly in 2013.
They also include the sale of 76% of Hanjin’s dry bulk fleet (36 ships) to the equity fund Hahn & Co for Won300bn ($284m). Further sales from its container terminal portfolio are additionally possible given the continuing presence of negative conditions in the container liner market.
There has been some discussion on the valuation of these deals and particularly how the prices paid have dropped significantly in real terms since the ‘crazy days’ in 2007 when Deutsche Bank’s infrastructure investment arm RREEF acquired Maher Terminals for $2.7bn. At the time Maher’s New York facility handled around 1.5m teu and it was also preparing to open a new facility at the Canadian port of Prince Rupert.
This contrasts with the €400m paid to CMA CGM for 49% of its 15 terminals which are believed to have handled 8.5m+ teu in 2013 and perhaps even more poignantly with the €121.8m paid to Hanjin by IBK and KIPC for 70% of its TTIA facility which handled 1.21m teu in 2013.
It is manifestly clear that no-one is prepared to pay the prices that prevailed since 2007. A rule of thumb might be that terminal acquisition prices have halved since the financial crisis but some would argue that they are generally lower than this.
Balance sheet
Where purchases from shipping lines are involved it is also possible to apply the argument that where the line concerned is the dominant customer that the reality has to be factored into the valuation equation that the line will invariably have treated the terminal as a cost centre and not a profit centre in the way a ‘pure’ terminal operator would. This entails something of a cultural change following the acquisition as well as a ‘lock in’ agreement with the line to retain its business over a multi-year period.
The consensus of opinion among analysts is that there is no end in sight to the current bleak period in the container liner sector. Tuan Hua Joo, executive partner, Alphaliner, has suggested that we are now in the equivalent of a “capacity arms race” triggered by Maersk’s order for 20 Triple-E vessels in 2011.
Speaking recently at the TOC Container Supply China Conference in Singapore he elaborated: “Maersk miscalculated that it could push some of its competitors out of the way, but eventually it was forced to form the P3 alliance – taking the step that indicated there was something wrong.
“But,” he continued, “the independents aren’t giving up either, and the ‘arms race’ triggered by the Triple E orders is getting worse. The number of new ships is getting quite a scary picture, and next year it is going to get even uglier.”
Drewry Maritime Research is forecasting 5.7% global supply growth (container liner fleet) followed by 6.7% in 2015 with the delivery of 115 more ULCVs and a large number of vessels in the 8,000-10,000 teu category. In 2014 demand growth of just over 4% is anticipated and given these factors Drewry does not expect “any real opportunity for the industry to draw breath and recover until 2016 and”, it warns, “this is still dependent on what happens with the order book”.
Fire sale
The situation is so dire that some lines which have sold a large slice of their terminal assets in a previous downturn have been compelled to sell other assets. Hyundai Merchant Marine which announced a major organisational restructuring recently sold its LNG business for one billion dollars as part of plans to raise $3.17bn. Neptune Orient Lines sold its Singapore headquarters building early in 2013 raising $200m.
Clearly, the ‘family silver’ is for sale. The dire situation behind this is further amplified by Dynaliners, which noted recently: “The 2013 overview of the financial results of twenty main container liner operators show a pond of red ink… the positive income is concentrated on just two carriers: CMA CGM ($408m) and Maersk Line ($1.51bn). On the negative side, HMM ($657m), Hanjin ($644m), Zim ($539m) and China Shipping ($423m).
Recent experience coupled with the forward picture in the liner market thus suggests there will be ‘more to come’ as regards the sale of terminal assets. So where precisely will this take place?
Major lines own a myriad of small shareholdings in terminals some of which undoubtedly do not have the strategic value they once had and as such are eminently suitable for disposal although it is hard to imagine that there will be much interest in a broad context in the sale of such stakes. History shows that they normally go to the parent terminal operator if there is one.
Off centre
The dedicated terminals owned by lines in the US and in Asia are other candidates for sale but again may not be of major interest due to their cost centre orientation. There may also be some inclination to sell terminal stakes resulting from the new alliances formed. How essential, for example, is it for CMA CGM to retain a stake in the DPW Maasvlakte 2 terminal originally secured as part of its involvement in the New World Alliance?
There additionally promises to be the sale of terminal assets by second tier players, not the ‘big boys’ but operators engaged in secondary trade lanes who have probably been sitting on terminal assets for a long time but are now compelled to contemplate a sale and possibly a strategic partner to develop third party business.
Looked at in a macro context port terminal re-sales are now accounting for sizable activity in the container terminal acquisition sector. Signs are this trend will be maintained with a growing number of financial entities involved as well as the traditional industry players.
