Hapag-Lloyd and CSAV have much to gain by joining forces operationally, but finding a satisfactory financial deal will be a lot harder.

The proposed merger between Hapag-Lloyd and CSAV ticks a lot of boxes operationally, which explains why many believe that some sort of Memorandum of Agreement (MOU) will eventually be signed. This could include anything from a straight takeover of CSAV by Hapag-Lloyd, assuming an acceptable price can be agreed, to the setting up of a joint company in which each partner would have a shareholding commensurate with its perceived value either by tradelane or on a global scale.

As shown in Table 1, there is little service duplication, so both carriers would benefit from improved economies of scale and geographic scope. Moreover, CSAV is a moderately sized player in South America, where Hapag-Lloyd is a much smaller competitor in terms of vessel capacity deployment (see table 2). This means that, by combining both companies’ South American cargo volumes, they should be able to more strongly set the agenda for jointly run services with other lines.

Table 1: Hapag-Lloyd and CSAV’s cargo mix Jan-Sept 2013 (teu)

Notes: *CSAV South America includes Mexico and Caribbean
Source: Hapag-Lloyd and CSAV

Hapag-Lloyd deploys no vessels between Europe/ECSA, Asia/ECSA or Asia/WCSA, for example, so competes only through slot charters or swaps involving other tradelanes, and CSAV is little better. Were volumes to be combined, their bargaining position would be increased considerably, and the extra vessels deployed would then enable them to set up more relay services between east-west and north-south services.

Table 2: Vessel capacity shares of South American routes

Notes: *01-11-13, + 01-07-13, Slot charters/swaps not included
Source: Drewry Maritime Research

In other words, Hapag-Lloyd’s mighty east-west schedules could be dovetailed into CSAV’s north-south services to set up a much improved global network.

Given both companies’ poor profitability in recent years, it would be easy to dismiss a MOU involving any exchange of cash as just wishful thinking. Like many other carriers, both companies were in the red in the first nine months of the year following a ruinous first quarter, and are likely to end the year that way (see Fig1). But Hapag-Lloyd has since been very positive about its desire for expansion, even going as far as to say recently that it wants to catch up with Maersk, MSC and CMA CGM – a move that would first entail leapfrogging over Coscon and Evergreen. Michael Behrendt, chairman of Hapag-Lloyd’s Executive Board, is reported to have told Reuters: ‘It is my goal that we catch up with the top three. I may not be able to achieve this during my time, but perhaps I can make a step in that direction.’

He also still maintains that Hapag-Lloyd’s acquisition of CP Ships in 2005 was a smart move, despite much of CP Ship’s cargo being leaked in the process.

Moreover, Hapag-Lloyd’s second largest shareholder (see Fig 2), the very rich Klaus-Michael Kuhne, has never made any secret about wanting to see Hapag-Lloyd become more competitive through expansion.

FIG1: COMPARISON OF HAPAG-LLOYD AND CSAV FINANCIAL RESULTS IN 2013

Source: Drewry Maritime Research

However, according to market sources, it was CSAV who approached Hapag-Lloyd this month for some sort of merger, suggesting that CSAV could want the deal as much as Hapag-Lloyd, providing an acceptable price can be agreed. Despite shedding much business in recent years in favour of returning to its core strength in South America, CSAV continues to haemorrhage money, so needs greater economies of scale. Moreover, it still has six 9,300 teu vessels due for delivery in 2015, which will be surplus to requirements without expansion.

Fig2: Hapag-Lloyd ownership structure

Source: Drewry Maritime Research

Fig3: CSAV ownership structure

Source: Drewry Maritime Research