NOL Neptune Orient Lines - UOB Kay Hian 2015-12-08: CMA-CGM Make A Pre-Conditional Offer You Can’t Refuse

NOL Neptune Orient Lines - UOB Kay Hian 2015-12-08: CMA-CGM Make A Pre-Conditional Offer You Can’t Refuse NOL NEPTUNE ORIENT LINES LIMITED N03.SI 

Neptune Orient Lines (NOL SP) - CMA-CGM Make A Pre-Conditional Offer You Can’t Refuse 

  • CMA-CGM has made a pre-conditional offer of S$1.30 per share for NOL. Offer is subject to approval from anti-trust authorities. 
  • Temasek will fully divest its 66.8% stake. 
  • The offer is 0.96x 9M15 book value, a premium of 92% to Hapag-Lloyd’s IPO valuation of 0.5x P/B. 
  • With no better deals on the horizon, shareholders are advised to accept the deal. 
  • Maintain HOLD with a revised target price of S$1.30. 


WHAT’S NEW 


• CMA-CGM make pre-conditional offer of S$1.30 per share. 

  • French company CMACGM has made a pre-conditional offer of S$1.30 per share for NOL, a 6% premium to its last traded share price of S$1.225. The offer is conditional on CMA-CGM acquiring antitrust approval from authorities in the European Union (EU), the US and China. CMA-CGM has until 7 Dec 16 (12 months) to acquire approval, but anticipates receipt of approval around mid-16. 

• Temasek to fully divest its 66.8% share. 

  • Temasek has irrevocably agreed to fully divest its 66.84% shareholding in NOL. The divestment of their share will result in the general offer, when made, becoming unconditional once acceptance has crossed the 50% threshold. 

• Formal offer to materialise only in 2016. 

  • No formal offer has been made yet, as the deal is subject to all conditions set out in the offer being met/waived. Only then will a formal offer be made for NOL. Till then, the deal is by no means done as a small likelihood exists that the authorities could scupper the deal. A timeline of the transaction is provided overleaf. 

• CMA-CGM plans to de-list NOL. 

  • The French intend to make NOL a wholly-owned private subsidiary and intends to de-list the counter once its shareholdings reach 90%. The stock will continue to remain listed if it doesn’t cross that threshold, by SGX rules. 


STOCK IMPACT 


• A fair offer for embattled NOL. 

  • The offer price of S$1.30 per share represents 0.96x 9M15 book value per share of S$1.36 and EV/EBITDA of 16.1x. The offer is the lower of the S$1.30-1.40 range we had highlighted in an earlier email note. Considering that Hapag-Lloyd’s IPO in Nov 15 was done at 0.5x P/B, the 92% premium in P/B multiple is generous by most measures. 
  • Actual details on how the S$1.30 offer price was reached were not given, besides management’s comment that various factors such as P/B multiples, profitability and synergies post-integration were considered. 

• Stock liquidity to be impacted. 

  • As stated in the press release, CMA-CGM expects to delist NOL if it reaches the 90% limit to start a compulsory acquisition. Even in the event that it does not reach 90%, we expect large acceptances of the offer, which would significantly impact trading liquidity. 
  • We do not expect a better offer to be made by CMACGM or any other liners in the near term amidst the gloomy container shipping outlook. 

• At least US$1b in assets to be sold. 

  • CMA-CGM has explicitly stated that at least US$1b in assets will be sold upon successful close of the offer. This is part of its strategy to help deleverage the combined group. 
  • Details were not revealed, but assets being considered for sale include NOL’s vessels and terminals. 

• Step-up agreement on NOL bonds to be honoured. 

  • Management said that the stepup agreement on two of the four outstanding NOL bonds will be honoured. The bonds in question are the S$400m 4.25% due 2017 and S$300m 4.40% due 2019 bonds. 
  • We note that a “Change in Control” clause exists in the former, which requires the Issuer to redeem all bonds at 100% on a change in control exceeding 50%, failing which the Issuer has to step up the prevailing rate of interest by 150bp. 

• NOL to eventually join CMA-CGM’s alliance. 

  • Until the successful closure of the deal, both NOL and CMA-CGM will function as separate entities, and honour obligations to their respective alliances. Upon completion of the deal, NOL will join CMA-CGM’s alliance. 

• To expand its shipping volumes with PSA. 

  • NOL currently has port agreements with Westport in Port Klang, and PSA of Singapore. CMA-CGM has stated that it intends to keep both in a dual-hubbing strategy, whilst increasing volumes in Singapore. 

• Combined entity to have 11.5% market share. 

  • The combined entity will have a combined fleet of 543 vessels, with a fleet capacity of 2.3m TEU, increasing its market share from 8.8% to 11.5%. 
  • The CMA-CGM-NOL combined entity will retain its position as no. 3, but further widen its lead against world no. 4 Evergreen. 
  • By trade routes, CMACGM-NOL will be no. 1 (from no. 4) by capacity on the TransPacific route, no. 2 (from no. 3) on the Middle/East India route and no. 4 (from no. 7) on the Intra-Asia route. 


EARNINGS REVISION/RISK 

  • No change to earnings forecast. 


VALUATION/RECOMMENDATION 


• Maintain HOLD, with target price raised to S$1.30. 

  • We raise our target price to S$1.30, reflecting CMA-CGM’s pre-conditional offer price. As a standalone entity, NOL’s earnings and business outlook remain weak and share price is expected to collapse if the deal falls through. 
  • The combination of NOL with CMA-CGM represents the best opportunity for earnings uplift. Given the weakening shipping outlook, we do not expect better offers to be made in the near term. 
  • Therefore, this is probably the one and only offer that will allow existing shareholders to exit and maximise their share value. 

• Accept the offer. 

  • Based on the aforementioned, shareholders should accept the offer. 


SHARE PRICE CATALYST 

  • None.



Foo Zhi Wei UOB Kay Hian | http://research.uobkayhian.com/ 2015-12-08
UOB Kay Hian SGX Stock Analyst Report HOLD Maintain HOLD 1.30 Up 1.06


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