Daily Management Review

Japan's major shipping companies to merge into "Union of Weak"


10/31/2016


Japan's biggest shippers have agreed to merge their container units to create the world's sixth-largest cargo carrier as the industry is reducing around the world, reports Bloomberg.



Nippon Yusen KK, Mitsui O.S.K. Lines Ltd. and Kawasaki Kisen Kaisha Ltd., which forecast losses for the year, will create a company to control 7% of the world market of container shipping. The deal is yet to be approved by regulators of the European Union, the USA, China and Japan.

The container transport market has been in decline after the global financial crisis of 2008, which led to a decrease in the volume of trade worldwide. The largest cargo carrier in South Korea, Hanjin Shipping Company, filed for bankruptcy protection after failed agreement with creditors on debt restructuring of $ 5.37 billion. Danish conglomerate A.P. Moller-Maersk Group also decided to restructure to cut costs.

Experts believe that the impending deal between Nippon, Mitsui and Kawasaki Kisen will be the reaction to the bankruptcy of the Hanjin, as in the domestic market in such a large company definitely will not be competitors have to compete only on a global scale.

Shares of Nippon Yusen rose 6.4% to 215 yen during today’s trading. This is the most noticeable growth in two months. Shares of Mitsui OSK jumped by 5.6%, up to a maximum in September. Papers of Kawasaki Kisen ended the day 0.4% higher after a long period of growth, which at times reached 10%.

The combined company with about 2 trillion yen ($ 19 billion) in turnover will be formed by July 1. It will become the largest shipping company in Asia after China Cosco Shipping Corp. 256 ships of the company will commence sailing in April 2018. Nippon Yusen will own 38% of the combined company, while Kawasaki Kisen and Mitsui OSK will take 31% each, according to the official statement.

Nippon Yusen, Mitsui OSK and Kawasaki Kisen will invest in the combined company a total of about 300 billion. According to forecasts, this could lead to synergies of 110 billion yen per year.

All three Japanese companies have already forecasted operating losses by the end of this fiscal year. Nippon Yusen expects a loss of 25.5 billion yen, Kawasaki Kisen - 44 billion yen and Mitsui OSK - 15 billion yen.

It is noteworthy that the convergence is taking place within "Alliance" agreement, already concluded in May this year. In addition to the three Japanese companies, it includes German Hapag-Lloyd AG, ranks fifth among the largest sea freight market with share of 7.1%. They are also joined by Hanjin and Taiwan Ming Marine. Total fleet operating under the agreement reaches 620 vessels, and takes 18% world market share. "The Alliance", concluded for 5 years, enters into force in April 2017, after authorization by the antitrust authorities. However, bankruptcy of Hanjin will probably make some changes in initial conditions of partnership.

Investors believe that "Alliance" is a "union of the weak", given that the market leaders have already entered into such an agreement. Ranked first with 15.5% of the world container traffic, Danish Maersk teamed up with the Swiss Mediterranean Shipping, holds second place and 13.5%. French CMA CGM and China Cosco Container, occupy third and fourth places respectively, are also partners. Those companies that do not take any of the alliances, according to industry experts, will soon be forced to go to regional transport markets, unable to bear the cost pressures. 

source: bloomberg.com






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