Cosco takeover of Orient Overseas affirms China’s trade ambitions

In May, Orient Overseas Container Line christened the world’s biggest container ship, the OOCL Hong Kong — a bold statement given the industry has been hit hard by overcapacity. Just two months later, the controlling family is selling the world’s seventh-biggest container shipping line to Cosco Shipping, its Chinese state-owned rival. The $6.3bn cash deal symbolises Beijing’s ambitions to dominate global trade, the deepening consolidation in this troubled industry and the eclipse of Hong Kong’s traditional role as China’s gateway. The proposed acquisition of Hong Kong-listed Orient Overseas (International) Limited (OOIL), which is OOCL’s parent company, will push Cosco from fourth to third in terms of global container shipping market share, increasing the pressure on its biggest competitors, Denmark’s Maersk and Switzerland-based Mediterranean Shipping Company. The deal is the fourth big consolidation announced in the past year and follows the bankruptcy of Hanjin, the South Korean shipping line, a trend one industry executive called “four weddings and a funeral”. “The competitive environment, persistent oversupply and resulting pressures on freight rates have driven industry consolidation,” says Mariko Semetko, an analyst at the debt agency Moody’s. “We expect that this trend will continue.”

At a time when Chinese regulators are asking for a cooler, more rational approach to foreign acquisitions, the deal — which is being funded by a bridging loan from the Bank of China — underlines Beijing’s desire to see Cosco become a dominant player in shipping and port operations. “This is a very significant acquisition for Cosco”, says Corrine Png, who runs the equity research house Crucial Perspective in Singapore. “The other companies should be worried because Cosco is only a few percentage points short of Maersk and MSC in market share and in five years they could be the largest player in the world. “Shipping analysts say the proposed acquisition, which was announced on Sunday and requires regulatory approval in the US and Europe as well as the backing of minority shareholders, will not only boost Cosco’s market share but also enable it to improve its efficiency thanks to OOIL’s superior IT and fleet management systems. Cosco, which was formed from the merger last year of two state-owned predecessors, is set to become the largest operator on the US-Asia route, while also taking advantage of OOIL’s foothold in the niche refrigerated container business and getting control of its state of the art, automated container terminal in Long Beach, California. “Cosco can learn a lot from Orient Overseas because it is a much better-run company,” says Ms Png.

The family of CC Tung, whose brother CH Tung was the first chief executive of Hong Kong after the handover of the former British colony to China in 1997, has agreed to sell its 68.7 per cent stake to Cosco and its junior partner in the acquisition, Shanghai International Port Group, triggering a general offer. The completion of the deal will mark the end of an illustrious history in shipping for the family business, which was founded by CC’s father CY Tung. Setting the stage for the ambitions of his sons, in the early 1980s CY Tung operated the world’s longest-ever ship, the supertanker named the Seawise Giant. A person familiar with the transaction says the Tung family came to recognise that it could not compete in a climate of overcapacity and consolidation, even though freight rates started to recover last year. “The current situation was just not sustainable and then this deal came along at the right valuation,” he says.

The sale of OOIL to a Chinese state-owned company underlines how Hong Kong, a semi-autonomous territory, is being eclipsed by the mainland, with the ports of Shanghai, Shenzhen and Ningbo already shipping more containers than Hong Kong. At a valuation of 1.4 times price to book, Cosco is paying a 15 per cent premium to the global sector average, which analysts say is a fair price given the possible synergies for Cosco. The Chinese group, which has also been buying ports around the world, including recent deals in Spain and Greece, will need approval from the Committee on Foreign Investment in the United States given OOIL’s US business. Analysts say there may be some opposition from rivals and politicians, given the growing climate of protectionism. But they expect regulators to approve the deal, given that Cosco and OOIL were already part of one of the main shipping alliances and that the enlarged Cosco will still only be the world’s third-biggest player.

Source: https://www.ft.com/content/11eca6ea-6545-11e7-8526-7b38dcaef614