SINGAPORE (BLOOMBERG) - China is the new leader of shipping trade to the Americas.
State-owned Cosco Shipping Holdings' US$6.3 billion (S$8.8 billion) offer to buy Hong Kong's Orient Overseas International would create an entity that is the biggest shipping company moving boxes to the North American continent from Asia, beating Copenhagen-based AP Moller-Maersk and France's CMA CGM. The takeover, announced on Sunday (July 9), would also create the biggest sea-box carrier through the Pacific Ocean.
The consolidation may help raise container rates on the Americas route - the second-busiest in the world - a critical piece in the survival of the shipping industry that has been battling slumping charges and overcapacity. Earlier this year, Maersk and Hyundai Merchant Marine said they had managed to get higher fees from customers during their annual rate-negotiation talks on the trans-Pacific routes. Moving goods to Europe from Asia is the world's biggest shipping trade route.
The Cosco-Orient Overseas combination would have the capacity to move a weekly average of 77,208 containers between Asia and North America, based on end-May data from Alphaliner, a shipping data provider. In the Asia-Europe trade lane, the combination will become only the third biggest.
Cosco's offer to buy Orient Overseas was at a 49 per cent premium, based on the average 20-day trading price before the announcement. That is the biggest for a major container-shipping deal since 1997, when Hong Kong passed from British hands to China. In the same year, Singapore's Neptune Orient Lines bought APL for US$833 million, offering a premium of 57 per cent.
The controlling shareholders of Orient Overseas have accepted Cosco's offer at HK$78.67 a share, which still needs regulatory approvals and consent from Cosco's investors. The family of Mr Tung Chee Hwa, the first chief executive of Hong Kong, holds about 69 per cent of the shipping line.
Shares of Orient Overseas surged as much as 25 per cent, the biggest intraday gain in eight years, and traded at HK$71.60 as of 10:15am in Hong Kong. Cosco shares jumped as much as 12 per cent.
The enlarged company will operate more than 400 vessels with capacity exceeding 2.9 million twenty-foot equivalent units, including order book. Cosco has a market share of 8.4 per cent while Orient Overseas has 3.2 per cent, according to Alphaliner. Their combined 11.6 per cent share would make the merged entity the third-biggest container-shipping company, overtaking CMA CGM with 11.2 per cent, according to the shipping data provider.
The shipping industry is "fragmented", and consolidation can help transform the business to the benefit of customers, Maersk, the world's biggest container operator, said on Monday in reaction to Cosco's takeover. There is a consolidation wave in the industry and it is difficult to say how big it will be, the company said.
A representative for Hyundai Merchant said the company is "closely monitoring to see how this development will impact the industry".
Earnings of shipping companies will improve in the second half of the year, "driven by higher trans-Pacific annual contracts", said Mr Andrew Lee, an analyst at Jefferies in Hong Kong.