Big, Bigger, Biggest, Maersk

Would you rather spend money on ships or frozen pizza? For Maersk, at least, the answer is ships. The Danish conglomerate has made a $4 billion offer – pending approval from regulators –  to acquire Dr. August Oetker KG’s famous red shipping line, Hamburg-Südamerikanische Dampfschiffahrtsgesellschaft KG (Hamburg Süd).

“We want to focus on our traditional food business,” said August Oetker, a descendant of company namesake Dr. August Oetker. For reference, Dr. Oetker-branded frozen pizza is as ubiquitous in Germany as DiGiorno and Red Baron in the U.S.  “That is where we have our origins,” he told the press. “That is where we want to grow.”

In other words, offer accepted! Pre-heat that oven to 350 degrees!

Container Giant

As reported by the Wall Street Journal, Hamburg Süd had 2015 revenues of around $6.7 billion, so Maersk’s offer is approximately $0.60 for every $1 of Hamburg Süd’s revenue – not a great price, but also not demolition value. Nor is the deal an isolated event: It reflects how Maersk is breaking and remaking European shipping in its own image.

If the acquisition of Hamburg Süd goes through, the Danish giant will have taken over the biggest and, indeed, one of the oldest family-owned brands in German shipping, a fact not lost on the company’s founding family. “Maersk will preserve and grow Hamburg Süd,” August Oetker said, articulating his vision for his former asset. All 189 vessels owned or chartered in and 6,000 employees will become part of the Maersk Group’s portfolio. At least for now, it appears the change in ownership is not intended to trickle down to the operational level, but that remains to be seen.

When the integration of Hamburg Süd and Maersk is complete, the surviving European shipping lines will need to contend with a rival who is leaner, has a broader reach and has colonized even more niches. And owners, fresh from losing Hanjin, will need to suffer through one less charterer generating demand in the spot market. In Hamburg, shipbrokers have estimated that rate levels are 15 to 20 percent lower than they ought to be based on pure tonnage demand and supply – all because of increased market concentration among charterers.

In the Europe, North America and Far East to South America trades, respectively, the combined Maersk/Hamburg Süd entity will have 40, 18 and 32 percent market shares. Even more notably, after bringing Hamburg Süd on board Maersk will control 18 percent of the global container market.

Unintended Consequences

By now even the fiercest market advocates ought to be a little anxious. Given enough mergers and acquisitions, eventually market power will concentrate in a few hands. This is the opposite of what E.U. regulators had in mind when they repealed the block exemption for shipping conferences, E.U. Regulation 4056/86, in October 2008.

For the first few years, of course, owners gritted their teeth and charterers rejoiced at more competitive rates. But now it’s not about competing, since the competitors are gone. Rather, growth in revenue and profit comes from exploiting oligopolistic pricing. Capitalism, devoid of regulation and left to its own devices, has finally snowballed and all but destroyed the force that created it, the market mechanism itself.

So who will challenge Maersk? One thing is sure: Given rock-bottom freight rates, the likelihood that an investor will enter the market as an entrepreneur and create genuinely new competition, either by building or buying ships and starting a new company, is vanishingly small.

What we are left with, then, is existing carriers consolidating – not a great recipe for a long-term healthy market. CMA CGM kept its foot in the door of the Asian market with its takeover of Neptune Orient Lines (NOL). China Cosco Shipping Corporation, the result of the merger of China Cosco and China Shipping Container Lines, is in line to be the dominant Chinese carrier. And Kawasaki Kisen Kaisha (“K” Line), Mitsui O.S.K. Lines (MOL) and Nippon Yusen Kabushiki Kaisha (NYK) are currently orchestrating the creation of a Japanese behemoth.

Hapag-Lloyd’s merger with United Arab Shipping Company (UASC) was largely driven by the desire to gain access to UASC’s ultra-large container vessels (18,800 TEUs). Essentially, debt-encumbered Hapag-Lloyd was eager to get its hands on poorly performing UASC’s orderbook of desirable big ships but had to finance its gambit by giving up 28 percent of the equity in the combined entity to UASC shareholders. 

Subjected to only some perfunctory scrutiny by E.U. regulators, who secured the concession that UASC would give up its interests in cargo-pooling arrangements in the Atlantic trades, this act of corporate gerrymandering was also given a green light.

This behavior has a parallel in Roman history. When Attila led the Huns west, they first clashed with, defeated and then displaced the weaker tribes in their path, causing populations to flee and ask for the right to settle within the borders of the Roman Empire as allies. The displaced tribes sought to combine forces against the approaching Huns.

Seen as a desperate scramble to scale up in anticipation of ultimately having to confront market leader Maersk, the frenzied pace of mergers and acquisitions in shipping today does not reflect long-term strategic planning by careful corporate stewards but rather an attempt at self-preservation. If carriers can grab a plank first and stay afloat longer than the next guy, maybe they will eventually be carried to shore when the tide rolls in.

Beyond Containers

Maersk, however, is not only a force in containers. It is also involved in port operations (APM Terminals), towage (Svitzer) and salvage (Ardent), liquid bulk cargo (Maersk Tankers), Ro-Ro carriers (Höegh), and offshore service and supply (Maersk Supply Service). Practically no aspect of maritime business is not touched by the Danish conglomerate. An example of this catch-22 is a container line, ostensibly competing against Maersk, having to use Svitzer tugs (now conveniently in over 100 ports!) to assist its ships to berth. Even when you win, you lose.

The natural response to a broad spectrum threat like Maersk is to grab hold of whatever business is within arm’s reach. Tug and tow companies have different (and longer) histories than many container lines, but these local, family-owned, equity-heavy and smaller-scale operations are facing the same uncertain future with an even smaller margin for error.

An example is the announced takeover of another old German brand, Unterweser Reederei (URAG), which has been operating out of Bremen since 1890. In December 2016, Boluda Corporacion Maritima S.L. (Boluda), a Spanish towage and salvage company half the size of Svitzer, announced its acquisitions of URAG and Lütgens & Reimers L&R (in Hamburg) pending regulatory approval.

Boluda has 200 tugs. URAG has 20. Together, the two companies have 220 tugs – still only half the size of Svitzer. Boluda’s angle is presumably geographic as the Spanish company is chiefly active in South and Central America and Africa. However, Boluda has been expanding more into Europe lately with a growing presence in France, Portugal, Italy and now Germany. Thanks to URAG, it will hit the ground running with existing contracts that need to be serviced, approximately 20 vessels, and about 120 sailors who are ready to work. Boluda has stated that it wants to retain URAG as an independent brand, just as Maersk has claimed about Hamburg Süd.

Prior to the acquisition, URAG had been facing stiff monthly losses of roughly €500,000 per month. URAG’s parent company, Linnhoff Schiffahrt, gave up trying to backstop URAG’s losses.

URAG’s fate was foreshadowed and perhaps sealed by its aggressive price-cutting, both in its home ports and in its attempted expansion into other German ports. In an effort to take work from its German competitors like Bugsier and Fairplay in Hamburg, Hans Schramm in Brunsbüttel, as well as from its foreign competitors in German ports like Kotug and Svitzer, it began offering its services well below cost – a fact that has not gone unnoticed by German regulators.

Boluda will therefore face the fact that the relationships and contracts it is acquiring will come with potentially high and recurring long-term losses. Boluda will struggle in its endeavor to expand into the German market on the basis of the strategy it inherited from URAG and, furthermore, may be in for a significant culture shock when it comes to dealing with German competition regulators.

URAG’s pain was compounded by the loss of contracts to Svitzer for towage of Maersk ships. Svitzer had, predictably, been granted an exclusive right to tow Maersk vessels berthing in Bremerhaven. Previously, these Maersk assists had been provided by a joint venture between URAG and Bugsier. Svitzer now also has an exclusive right to assist Maersk vessels in the Free and Hanseatic City of Hamburg.

From January/February 2017 Edition

BY Erik Kravets

Erik is a maritime lawyer based in Cuxhaven, Germany and a frequent contributor to the online MarEx Newsletter.