NOL's allure as takeover candidate grows after unit sale

SINGAPORE (Bloomberg) - The shipping company that helped cement Singapore's status as a global trade hub may be shaping up as a takeover candidate.

The appeal of Neptune Orient Lines (NOL). has increased after it agreed to sell its logistics unit last month for US$1.2 billion to cut debt. Analysts project the company, which moves goods globally, will benefit from the U.S. economic recovery and return to profit in 2015 after four straight years of losses.

"They are a cleaner play on the expected rebound in global trade," Nicholas Teo, a market analyst at CMC Markets in Singapore, said by phone. "It's definitely a good point in the cycle" to buy a shipping company.

A sale may help Temasek Holdings, the Singapore state investment company that controls NOL, bolster returns. The US$1.8 billion container line's natural partner would be Orient Overseas International Ltd., controlled by the family of Hong Kong's first post-colonial leader, according to Credit Suisse Group.

NOL, created in 1968 and now Southeast Asia's largest container line, ran up US$1.2 billion of cumulative losses in the past four years as a worldwide surplus of vessels ate into container rates. Its net debt in the period almost doubled to about US$4 billion.

On Feb. 17, just days after reporting its latest quarterly loss, NOL said it would sell APL Logistics, its supply and freight-management division, to Japan's Kintetsu World Express Inc. The company said at the time it would consider all options for its liner business.

Temasek, which owns 67 per cent of NOL, has previously explored a merger for the shipping company, people with knowledge of the discussions said. Those talks broke down over issues including price and structure of a combined entity, according to the people.

The APL Logistics transaction simplifies NOL and means a sale of the company could be resurrected, said one of the people familiar with previous attempts to strike a deal. The person asked not to be identified because the talks were never made public.

A representative for NOL said in an e-mail that the company doesn't comment on market speculation, and plans to focus on returning its shipping business to "sustained profitability." A representative for Temasek also declined to comment.

Stanley Shen, a spokesman for Orient Overseas, responded to an e-mailed request for comment by replying, "How can you expect us to comment on rumors and speculation."

A combination with Orient Overseas, which has a market value of US$3.8 billion, makes sense partly because it, too, has tightened its focus on shipping after selling assets, said Timothy Ross, Singapore-based head of Asia-Pacific transport research at Credit Suisse.

"Now would be a good time for a deal," said Ross. "Scale is indubitably rewarded by profitability in the liner business."

While Temasek has been an NOL shareholder since 1974, the strategic importance of its stake has faded as the state investment company broadened its holdings, said Carmen Lee, head of research at OCBC Investment Research.

"Times have changed and they are also into other growth areas like tech, health care, consumer sectors," Lee said. "Shipping was viewed as a lot more strategic in the past."

Japanese shipping companies such as Mitsui O.S.K. Lines Ltd. and Nippon Yusen K.K. would also be among logical buyers as regional competitors, said Teo at CMC Markets.

Representatives for Mitsui and Nippon declined to comment.

NOL may appeal to a European suitor such as Hapag-Lloyd AG, Germany's biggest container shipping line, because of its trans-Pacific routes to the U.S., said Suvro Sarkar, an analyst at DBS Group.

"Temasek may want to dispose of it in due course," he said. "I wouldn't discount the idea, but the likelihood is still on the lower side." A representative for Hapag-Lloyd said the company doesn't comment on speculation.

After the sale of its logistics business, NOL looks more like a buyer of assets than a takeover target, said Rahul Kapoor, a Singapore-based director at Drewry Maritime Services Pvt. NOL has become a symbol of the Singapore shipping industry and an exit by Temasek is very unlikely, he said.

All the same, NOL's outlook improved last month when U.S. west coast dockworkers resolved a nine-month labor standoff that contributed to losses last year. NOL is projected to post annual profits through at least 2017, data compiled by Bloomberg show.

Temasek in 2004 paid $2.80 a share to raise its NOL stake to about 69 per cent from 30 per cent. The shipping company's stock closed Tuesday at 94.5 cents.

With prospects looking better for Neptune Orient, a merger involving the company is more likely, said Ross at Credit Suisse.

"Now is probably a time you get people coming to the table," he said. "I see Temasek now being prepared to be commercial, to find someone who has a track record better than their own in driving the business."