Cosco set to become third largest shipping operator after deal to acquire Orient Overseas
Acquisition would bring to a close the family dynasty of Hong Kong’s first chief executive, Tung Chee-hwa
Shares of China’s Cosco Shipping Holdings climbed on Monday after announcing a deal to buy rival Orient Overseas International Ltd (OOIL), a move that would see the state-owned shipping operator leapfrog from sixth to third place globally if approved.
Hong Kong-listed Cosco shares gained 5.4 per cent to close at HK$4.3 on Monday while OOIL recorded its biggest daily gain in eight years, up 20 per cent to close at HK$72.
The share gains came despite the requirement for regulatory approvals and consent from Cosco’s investors before any deal goes ahead.
Chinese shipping giant Cosco has offered OOIL HK$78.67 per share, a premium of 31 per cent over the latter’s closing price of HK$60.00 on its last trading date on Friday, according to documents filed by the companies with the Hong Kong and Shanghai stock exchanges on Sunday. Cosco said it would finance the deal with a bridge loan from Bank of China.
“The price is quite reasonable,” Xu Zunwu, general manager of Cosco Shipping Holdings, said in Hong Kong on Monday. “The deal will improve our operating efficiency and profitability.”
OOIL’s listing status and global headquarters’ functions and presence in Hong Kong will be maintained, but the HK$49.23 billion (US$6.3 billion) acquisition would bring the curtain down on a Hong Kong family dynasty. The deal would see the family of former Hong Kong Chief Executive Tung Chee-hwa relinquish control of the shipping and logistics firm they founded in 1969.
“Hong Kong’s importance as a gateway to China is gradually diminishing as China’s manufacturing facilities continue to move inland and as [it] forms more direct trade and transport links with the rest of the world,” said Corrine Png, chief executive of Singapore-based transport stock researcher Crucial Perspective. “The transaction tries to mitigate this by keeping the well-established and symbolic OOCL brand and team and keeping its listing status in Hong Kong but the fundamental challenges remain.”
The combined market share of the new entity would be 11.6 per cent, putting it third globally, behind Denmark’s Maersk and Switzerland’s Mediterranean Shipping Company, according to data from Alphaliner. The enlarged company would have capacity exceeding 2.9 million twenty-foot equivalent units (TEUs). Cosco currently has a market share of 8.4 per cent.
“Cosco Shipping Holdings is the biggest winner in this transaction,” said Png. “OOIL could potentially contribute half of Cosco’s recurring profits in the next two to three years based on our estimates.”
For the shipping industry, Xu said the pressure on oversupply is easing. “The shipping industry is improving after hitting bottom last year,” he added. “We do not have plans to acquire other assets so far and we will focus on integration of the OOIL business.”
Png expects the coming two years will see more deals struck in the shipping industry, but “target companies are likely to be smaller players compared to OOIL”, she said. “The global container shipping industry is on the mend from this year, the liners’ profitability will improve, easing the pressure to consolidate or exit the sector.”