Fitch: Mergers and Acquisitions Trump Alliances

  • Business & Finance

Mergers and acquisitions (M&A), rather than more popular alliances, are inevitable to address overcapacity and drive further cost savings in container shipping, rating agency Fitch Ratings says, adding that the last week’s merger talks between Hapag-Loyd and United Arab Shipping Company (UASC) show that M&A are gaining momentum.

Fitch claims that container capacity remains fragmented, highly competitive and plagued by overcapacity although just four alliances – 2M, CKYCHE, Ocean Three and G6 – dominate over Far East-Europe trade routes. This is because alliances operate within a limited scope and lack full coordination of networks and fleets, and exploitation of resources, limiting their ability to manage capacity and cut costs.

Alliances have proved popular because of their flexibility and because many shipping companies are either family- or state-owned. However, as market conditions are now unsustainable with low freight rates and inability to obtain bank loans this trend is expected to continue to drive merger and acquisitions because they can reduce costs more effectively, increase utilization rates and support more disciplined capacity management, the rating agency points out.

According to Fitch, a good example is a recent merger between China’s COSCO and CSCL which created the world’s fourth-largest container shipping company, and the planned acquisition of NOL by CMA CGM.

The potential merger between German-based Hapag-Lloyd and UASC would create the fifth-largest container shipping company with a 7.2 percent share of global fleet capacity, strengthening Hapag-Lloyd’s position in Asian and Middle Eastern routes, the agency says.

The recent M&A activity is also prompting a significant shake-up of alliances, according to Fitch. Last week, container shipping majors CMA CGM, COSCO Container Lines, Evergreen Line and Orient Overseas Container Line announced their plan to form a new alliance, the Ocean Alliance.

Formed from the main entities from the G6, Ocean Three and CKYHE alliances, the new group will have a market share to rival the 2M alliance.

Consequently, such situation is likely to put further pressure on the financially weaker companies and result in a reshuffle of the remaining alliances, the rating agency estimates and says that the long-term agreement between UASC and CSCL for deployment of mega ships on certain trades is expected to remain in place.

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