CMA CGM’s Acquisition of Neptune Orient Lines Would Push Up Leverage
Last Monday, French container shipping company CMA CGM S.A. (B1 stable) announced a pre-conditional
voluntary general cash offer to acquire Singaporean counterpart Neptune Orient Lines Limited (NOL,
unrated) for $2.4 billion (SGD1.30 per share). Although the proposed deal makes strategic sense for CMA
CGM by strengthening its position as the world’s third-largest player, it is credit negative for the company
because its leverage would initially increase substantially as a result of the transaction being fully cash and
debt financed. Following the announcement, we changed the outlook on CMA CGM’s B1 rating to stable
from positive and affirmed its ratings.
Under the proposed deal, CMA CGM would acquire 100% of NOL for $2.4 billion and assume NOL’s
financial net debt, which totalled $2.6 billion as of 30 September 2015. The acquisition, which will be
funded with a mix of cash and bank financing from a syndicate of international banks, would materially
increase CMA CGM’s leverage (i.e., gross debt/EBITDA, including our adjustments) to approximately 5.5x in
2016 (pro forma for a full-year of NOL’s cash flows) from 4.2x for the last 12 months to September 2015.
CMA CGM intends to review the combined company’s assets and make disposals totalling at least $1 billion.
Assuming the company is successful in these efforts, it will contribute to CMA CGM’s leverage declining to a
level in line with its B1 rating, namely 4x-5x, within 18 months after the NOL deal closes.
Temasek Holdings (Private) Limited (Aaa stable), NOL’s largest shareholder with a 67% stake, has
irrevocably undertaken to tender all of its shares into the offer. However, the acquisition still needs
regulatory approvals from the European Union, US and China, which we expect by mid-2016, before CMA
CGM can launch its offer for NOL.
The proposed transaction involves some execution risk, including a successful sale of assets, NOL’s exit from
alliances such as G62 (which could take up to 12 months), and NOL’s subsequent entrance into CMA CGM’s
alliances. NOL’s weak performance over the past years, with negative core EBIT since 2011, and the
challenging market environment in container shipping, where freight rates have continued to decline in
2015, also pose downside risks.
Still, we understand the strategic rationale behind the proposed deal because it would strengthen CMA
CGM’s business profile. Acquiring NOL would increase CMA CGM’s capacity by approximately one third:
currently, CMA CGMA has a capacity of 1,781 thousand twenty-foot equivalent unit (TEUs), and NOL has a
capacity of 618 thousand TEUs. This would consolidate its position as the third-largest player in the
container shipping segment, narrowing the gap with Maersk Line, the market leader owned by A.P. Møller
Mærsk A/S (Baa1 positive) and Mediterranean Shipping Company (unrated).
Acquiring NOL would also strengthen CMA CGM’s position on certain routes, particularly Transpacific and
intra-Asia routes, increasing its geographic diversification. We expect that the proposed transaction will
generate material cost synergies, notably related to network optimisation and headcount reduction, which
has been the case in previous acquisitions in the sector. We estimate that cost synergies will reach 2%-3%
of the combined group’s revenues.
Last Monday, French container shipping company CMA CGM S.A. (B1 stable) announced a pre-conditional
voluntary general cash offer to acquire Singaporean counterpart Neptune Orient Lines Limited (NOL,
unrated) for $2.4 billion (SGD1.30 per share). Although the proposed deal makes strategic sense for CMA
CGM by strengthening its position as the world’s third-largest player, it is credit negative for the company
because its leverage would initially increase substantially as a result of the transaction being fully cash and
debt financed. Following the announcement, we changed the outlook on CMA CGM’s B1 rating to stable
from positive and affirmed its ratings.
Under the proposed deal, CMA CGM would acquire 100% of NOL for $2.4 billion and assume NOL’s
financial net debt, which totalled $2.6 billion as of 30 September 2015. The acquisition, which will be
funded with a mix of cash and bank financing from a syndicate of international banks, would materially
increase CMA CGM’s leverage (i.e., gross debt/EBITDA, including our adjustments) to approximately 5.5x in
2016 (pro forma for a full-year of NOL’s cash flows) from 4.2x for the last 12 months to September 2015.
CMA CGM intends to review the combined company’s assets and make disposals totalling at least $1 billion.
Assuming the company is successful in these efforts, it will contribute to CMA CGM’s leverage declining to a
level in line with its B1 rating, namely 4x-5x, within 18 months after the NOL deal closes.
Temasek Holdings (Private) Limited (Aaa stable), NOL’s largest shareholder with a 67% stake, has
irrevocably undertaken to tender all of its shares into the offer. However, the acquisition still needs
regulatory approvals from the European Union, US and China, which we expect by mid-2016, before CMA
CGM can launch its offer for NOL.
The proposed transaction involves some execution risk, including a successful sale of assets, NOL’s exit from
alliances such as G62 (which could take up to 12 months), and NOL’s subsequent entrance into CMA CGM’s
alliances. NOL’s weak performance over the past years, with negative core EBIT since 2011, and the
challenging market environment in container shipping, where freight rates have continued to decline in
2015, also pose downside risks.
Still, we understand the strategic rationale behind the proposed deal because it would strengthen CMA
CGM’s business profile. Acquiring NOL would increase CMA CGM’s capacity by approximately one third:
currently, CMA CGMA has a capacity of 1,781 thousand twenty-foot equivalent unit (TEUs), and NOL has a
capacity of 618 thousand TEUs. This would consolidate its position as the third-largest player in the
container shipping segment, narrowing the gap with Maersk Line, the market leader owned by A.P. Møller
Mærsk A/S (Baa1 positive) and Mediterranean Shipping Company (unrated).
Acquiring NOL would also strengthen CMA CGM’s position on certain routes, particularly Transpacific and
intra-Asia routes, increasing its geographic diversification. We expect that the proposed transaction will
generate material cost synergies, notably related to network optimisation and headcount reduction, which
has been the case in previous acquisitions in the sector. We estimate that cost synergies will reach 2%-3%
of the combined group’s revenues.
