Conditionally yours

07 May 2017Print

Maersk Line’s $4 billion takeover of Hamburg Süd included some concessions in certain trades. Where does that leave the combined entity?

On 28 April the boards of Maersk Line and the Oetker Group approved the sale of North-South trades specialist Hamburg Süd to the former for a sum of euro 3.7 billion ($4.06 bn). Under the terms of the agreement, which is still subject to regulatory approvals, the two brands will continue to be run separately with Hamburg Süd staying in Germany and keeping its existing management.

Following completion of the transaction, expected by the end of 2017, Maersk Line said that it expects to realise operational synergies in the region of $350-400 million annually over the first couple of years. The cost savings are expected to come from integrating the two networks with more direct port-to-port calls and less need for transhipment. Additionally, APM Terminals, Maersk’s terminal operating sister company, will benefit from extra volumes, particularly in Hamburg Süd’s Latin America stronghold.

“By keeping Hamburg Süd as a separate and well-run company, we will limit the transaction and integration risks and costs while still extracting the operational synergies. The acquisition of Hamburg Süd will therefore create substantial value to Maersk Line already in 2019," said Søren Skou, CEO of Maersk Line and A.P. Moller - Maersk.

When complete, the transaction will see the combined entity control approximately 19% of the world’s container fleet capacity, based on today’s shares, putting further distance between the Maersk group of carriers and MSC in second place (15%).

As it grows ever larger, Maersk Line’s ability to consume its competitors in one bite is reducing as the likelihood of regulators around the world intervening to put some brakes on that growth increases. The takeover of Hamburg Süd was unconditionally cleared by the US Department of Justice in March, but the European Union Commission felt obliged to place conditions that will restrict capacity in some trades, before it also approved the transaction.

Table 1: Services affected by EU Commission conditions placed on Maersk Line takeover of Hamburg Süd

Source: Drewry Maritime Research

Specifically, the EU conditions will see Hamburg Süd withdraw from four services connecting Europe/Med with the Middle East and with Latin America (see Table 1). The German carrier can continue to operate these services during an unspecified notice period to ensure an orderly exit and give its partner carriers time to find alternative solutions.

The European Commission explained that without these conditions the proposed transaction would have resulted in anti-competitive effects. However, analysis of the two-capacity in the affected trades (see Table 2) shows that even after these conditions are applied the combined entity will still exert significant influence.

Table 2: Market shares in deep-sea trades of Hamburg Süd, as of April 2017

Note: Based on two-way capacity with deductions made for wayport trades; includes subsidiaries
Source: Drewry Maritime Research

For example, Hamburg Süd’s share in the Europe-East Coast South America trade – based on two-way capacity as of April 2017 - will be trimmed by about 7 percentage points, but even after you add what’s left to Maersk’s existing share that would give the combined carrier half of the trade’s capacity. A bigger loss will occur in the Europe-West Coast South America trade where the EC conditions will remove all trace of Hamburg Süd, although Maersk Line will maintain its market leading 28% share.

The EC’s decision to ask Hamburg Süd to exit the Europe-Middle East trade is perhaps the most puzzling as it only has a very small 2% share, but it must have been felt that Maersk’s existing leading share of 30% was already bordering on the upper-limits of acceptability.

Away from the deep-sea trades, Maersk Line has decided to offload its Brazilian cabotage operator Mercosul Line – acquired in 2015 as part of the takeover of P&0 Nedlloyd – to appease regulators in that country. Together with Hamburg Süd-subsidiary Alliança the share of the Intra-Brazil market controlled by the combined entity would have been an estimated 80% without the sale.

Table 3: Takeovers involving Hamburg Süd since 1998

Source: Drewry Maritime Research

The attractiveness of Hamburg Süd as a takeover target was always obvious. The German carrier has turned itself into one of the most recognisable North-South trade specialists in the industry; delivering exceptional growth rates fostered by a keen appetite for M&A (see Table 3). The company made itself a relatively easy fit for any major line that was looking to expand its North-South horizons, while its virtual absence from the East-West markets avoids the need for scrutineering by competition authorities as far as those routes are concerned. While it flirted with moving into East-West trades, its owners clearly decided that the investment required to make the step up was too rich.

Figure 1: Hamburg Süd container carryings, 1996-2016 (million teu)

Source: Drewry Maritime Research

Figure 2: Hamburg Süd Group revenue, 2010-2016 ($ million)

Note: Conversion from local euro currency into US dollars based on average exchange rate for year
Source: Drewry Maritime Research

The Oetker Group has only ever published the most basic of information about Hamburg Süd’s performance – namely annual sales and liftings – but even these demonstrate the remarkable ascent of the company. Since 1996 container volumes have grown on average by 16% per annum to reach 4.4 million teu last year. Sales in the liner division have dipped marginally in each of the past three years, but they remain consistent, averaging $6 billion pa in the 2010-16 period. Having inspected the books more closely than we are able, Maersk Line clearly believes even better is yet to come.

Our view

It is an inevitable consequence of the concentration occurring in the container sector right now that each new transaction will come under closer scrutiny by competition authorities. The concessions forced upon Maersk are not so harsh as to prevent them being the market leader in the majority of trades shared with Hamburg Süd.