Current S$1.09
Target S$0.87
Previous Target S$0.87
Up/downside -20.2%
Media reports suggest that NOL is relooking at bidding for Hapag-Lloyd. We think that non-European carriers could struggle to swallow Hapag-Lloyd, and NOL will likely have to execute a rights issue to finance the purchase. An OOIL tie-up would be a far better alternative.
As such, we would be very cautious on NOL if the reports are correct, even if acquisition valuations are low. We maintain our UNDERPERFORM on NOL as spot freight rates continue to fall and the likelihood of successful freight rate restoration at the start of 2012 are very small.
What Happened
German newspaper Die Welt apparently reported that NOL has been meeting with Hapag-Lloyd shareholder TUI to discuss possibly buying the latter’s 38% stake in the German carrier. TUI has been keen to sell its stake to a trade buyer, after weak market conditions have effectively ruled out an IPO. However, talks with Omani and Chinese investors have failed. The other option is for TUI to put its stake to the Albert Ballin KG consortium from 1 Jan 2012.
What We Think
According to Alphaliner, TUI’s 38% stake is purportedly priced at €1.2bn (US$1.6bn), against only NOL’s US$681m in cash as at 30 Sep. A cash purchase by NOL may require NOL to execute a rights issue, as net gearing is expected to increase to 186% by virtue of its large capex programme alone. In addition, the Albert Ballin KG is obliged to sell to the buyer enough shares in Hapag-Lloyd so that the buyer will have majority ownership. This means that the total cost of the Hapag-Lloyd purchase could exceed €1.2bn.
Alternatively, TUI may swap its shares in Hapag-Lloyd for shares in the merged Hapag-NOL, but this may not be what TUI had in mind as it is seeking a complete exit from container shipping.
Any buyer of Hapag-Lloyd will have to contend with nationalistic sentiments in Germany, trade unions, pension liabilities, and the difficulties of restructuring two entities in different cultures.
What You Should Do
If true, a purchase of Hapag-Lloyd would be dilutive for NOL shareholders. We think that NOL will be far better off in an acquisition or merger arrangement with OOIL. NOL shares are currently suspended.
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