China shipping firm Cosco to buy HK rival OOIL for $6.3bn

September 2017 | DEALFRONT | MERGERS & ACQUISITIONS

Financier Worldwide Magazine

September 2017 Issue

China’s largest shipping firm, Cosco Shipping Holdings Co, is to acquire Hong-Kong based rival Orient Overseas International Ltd (OOIL) for $6.3bn.

The deal, announced in July, will see Cosco pay $10.07 per share, a 38 percent premium over OOIL’s closing price on Friday 7 July, the last trading day before the deal was announced. It is the latest in a succession of consolidation deals in a global shipping industry that has struggled to stay afloat amid sluggish trade and depressed prices.

Cosco, together with Shanghai International Port (SIPG), agreed to buy a combined 68.7 percent stake from OOIL’s controlling shareholders, giving Cosco and SIPG a 90.1 percent and 9.9 percent stake respectively in the new company. “Cosco Shipping Holdings believes this acquisition will enable both Cosco Shipping Lines and OOIL to realise synergies, enhance profitability and achieve sustainable growth in the long term,” said a joint statement from Cosco and OOIL. “Upon completion of the offer, the combined Cosco Shipping Lines and OOIL will become one of the world’s leading container shipping companies with more than 400 vessels and capacity exceeding 2.9m teu including orderbook.”

The transaction is subject to antitrust review by Chinese, European and US authorities, according to a filing with the Hong Kong Stock Exchange, as well as shareholder approval. In late July, regulators at the Shanghai Stock Exchange (SSE) held up the acquisition until Cosco was able to do a better job of explaining its takeover bid to its shareholders. The SSE asked Cosco to provide further disclosures and explanations, and though the regulator is not likely to derail the transaction, the request will require Cosco to explain why it believes OOIL is worth a $6.2bn outlay. Synergies, in particular, are an area that the SSE is keen for Cosco to explain. According to the statement announcing the deal, there will be a $2.69bn “synergy effect” which will account for 43 percent of the total $6.2bn valuation of the deal, and the SSE want the specifics of how these synergies will be realised when the merger is completed.

By acquiring OOIL, Cosco will create the world’s third largest shipping operator. Currently, Cosco is the fourth largest with 317 ships and an 8.4 percent share of global container traffic. The addition of OOIL will give the company a total market share of 11.7 percent. The newly combined company would have the capacity to move a weekly average of 77,208 containers between Asia and North America, according to Alphaliner. “In addition to this increase in scale, both parties will benefit from access to a combined and complementary global sales network and customer base, shipping network optimisation, as well as advanced IT systems, to further drive synergies and operational efficiency,” the joint statement said.

OOIL reported a loss of $219.2m last year. It cited an overabundance of capacity, slow growth and rising fuel prices, as well as freight rates that sometimes dipped below those seen in 2009 during the financial crisis.

Cosco is no stranger to consolidation in the shipping sector. The company itself was created by a $20bn merger and restructuring of two state-owned shipping giants – China Shipping Group and China Ocean Shipping Group, and the pace of consolidation has sped up in recent years. Industry leader Maersk acquired Hamburg Süd for $4bn in April 2017. There is also a proposed tie-up between Japan’s three biggest carriers. However, as more market share is becoming concentrated in the hands of a select group of industry giants, the pace of dealmaking will begin to slow.

For some analysts, the consolidation of Cosco and OOIL may be a tactical decision aimed at furthering China’s ‘one belt, one road’ policy, through which the Chinese government had pledged to invest $120bn to improve the country’s trade links with Europe, Africa and Asia.

Richard Summerfield