Lower Profits Expected at Hapag-Lloyd Despite Merger Plans
Hapag-Lloyd AG's share price fell the most since its initial public offering in November as a forecast of lower profit and a share-sale plan overshadowed a final deal to join forces with United Arab Shipping Co. to become the world’s fifth-largest container carrier.
“The market was shocked by the revised outlook by the company,” Oliver Drebing, an analyst at Hamburg-based Alsterresearch, said by phone. Investors are still getting familiar with Hapag-Lloyd after its IPO and with the fact that shipping markets are volatile, he said. “Strategic aspects linked to the merger are more important in the longer term.”
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Germany’s biggest shipping line expects “clearly decreasing” earnings before interest and taxes in 2016 because of costs related to the UASC merger as well as freight rates that aren’t recovering and an increase in fuel costs, Hapag-Lloyd said in a statement. The German company originally was forecasting an increase in EBIT. Stock will be offered to current investors within six months after the UASC deal’s closing, with “some” of the main current shareholders in both companies committing to buying as much as $400 million, according to a separate statement.
Hapag-Lloyd's share price dropped as much as 11% to 16.725 euros, the lowest intraday price since April 21, and was trading down 8.4% as of 11:39 a.m. July 18 in Frankfurt. The stock has fallen 15% this year, valuing the company at 2.03 billion euros ($2.24 billion).
Shipping lines worldwide have been plagued by depressed freight rates as trade slowed after the global recession of 2008 and as larger vessels ordered before the crisis continue to enter fleets. The UASC merger, which the parties plan to complete by the end of 2016, will be Hapag-Lloyd’s second in two years, after its 2014 takeover of Latin American rival Cia. Sud Americana de Vapores SA’s container business.
Qatar Investment Authority and Saudi Arabia’s Public Investment Fund, the two largest shareholders in UASC, will become key owners of the combined carrier, together holding a 24% stake, according to terms of the deal. Hapag-Lloyd’s existing anchor shareholders, including billionaire Klaus-Michael Kuehne, president of Kuehne + Nagel International AG, the municipality of Hamburg and Chile’s CSAV shipping company, will remain in control of the carrier, which will keep its headquarters in the German city.
Hapag-Lloyd forecasts cost savings of at least $400 million per year as a result of the UASC combination, with one-third of the reductions possible next year, it said. The merger also will “save a significant amount of capital expenditure.”
Even though freight rates are expected to rise modestly over the next 18 months from recent all-time lows, the industry still will post substantial losses this year as carriers continue a price battle on the main east-west and trans-Atlantic trade routes to retain market share, Drewry Maritime Research said in July 5 report.
“There are distinct parallels between what is happening now and the depths of the 2008-2009 global financial crisis,” it said.
