Hapag-Lloyd exposes UASC’s financial woes and $4bn debt ahead of merger

A dramatic 21-page dossier sent to Hapag-Lloyd shareholders ahead of the German line’s annual meeting on Friday reveals the true status of merger partner United Arab Shipping Company’s (UASC) finances while attempting to explain the benefits of the proposed union.

The sobering details, which uncover more than $4bn of debt incurred during a major fleet expansion program and a net loss of $384m last year, were described by analyst Alphaliner as “UASC’s dismal financial performance laid bare” in its latest weekly report.

The pan-Arab lines’ woes have continued into 2016 with a net loss of $201.1m for the first half of the year as container shipping markets struggled.

As a privately-owned company, UASC’s financial records have been a commercial secret until now. Its total financial debts as at June 30, 2016 were $4.06bn against an equity base of just $1.89bn.

With UASC’s equity position falling short of the minimum threshold of $1.95bn it had agreed with Hapag-Lloyd under the terms of the planned nuptials, it could make UASC liable to a compensation payment at the time of merger’s completion.

UASC’s operating loss of $299m and a net loss of $384m on revenues of $3.318bn in 2015 meant its negative operating margin of -9.0% was the worst of all the main carriers that published 2015 financial results, according the Alphaliner.

With an operating loss of $132m and a net loss of $201m on revenues of $1.53bn in the first half of 2016, things have improved in ranking if not financial terms. But its H1 negative operating margin of -8.6% betters only struggling Korean carriers Hyundai Merchant Marine (-18.5%) and Hanjin Shipping (-9.8%) and will be cold comfort to Hapaq-Lloyd’s shareholders who are themselves still ruminating the German lines’ $158m first half loss and 2016 profit warning.

Indeed, the “voluntary additional information” provided ahead of Hapag-Lloyd’s 26 August agm underlines the impact of UASC’s ambitious eco-conscious fleet expansion, the very feature Hapag-Lloyd has found so attractive in its well-documented courtship.

UASC has doubled capacity to 541,000 teu since January 2014 and leapt eight positions to be the 11th largest carrier globally as a consequence, according to Alphaliner. While the total value of the ships owned by UASC (its fleet numbered “around” 62 owned and chartered vessels as at March 31) has increased by $1.72bn since the end of 2014, its net debt has increased by $1.81bn.

“Over the same period, UASC’s total equity has shrunk from $2.46bn to only $1.89bn due to the heavy losses incurred despite the addition of these ‘eco’ ships,” Alphaliner said.

“UASC’s losses are expected to continue into the foreseeable future due to the overall weak market conditions and the carrier’s high gearing and debt servicing burden. Hence, the UASC shareholders had little choice but to accept a relatively low and lop-sided valuation in the final merger agreement with Hapag-Lloyd.”

UASC’s shareholders will take a 28% stake in the combined Hapag Lloyd-UASC entity, spilt on the Arab side between Qatar Holding (14.4%), Saudi Arabia’s Public Investment Fund (10.1%) and other minority shareholders (3.6%).

The German carrier admits the merger is “mainly driven by the interest in UASC’s substance, in particular UASC’s young, modern and highly efficient fleet, which ideally complements” Hapag-Lloyd’s fleet, which stood at 175 vessels with a total capacity of 955,485 teu as of 31 March this year.

Hapag-Lloyd has told shareholders “the efficient state-of-the-art ships of UASC” can be “operated within the network of Hapag-Lloyd and its alliance partners to create synergies” and increase productivity and efficiency immediately, as opposed to waiting up to three years for costly newbuildings and subjecting the company to risk given the long delivery periods.

“Therefore, the valuation did not focus on the earnings power of UASC on a stand-alone basis. The relevant relative values were rather determined in consideration of the question to what extent the transaction allows [Hapag-Lloyd] to use UASC’s assets in a manner that achieves value creation for Hapag-Lloyd’s shareholders,” Hapag-Lloyd said.

UASC’s operated capacity has increased 94% from 278,000 teu in January 2014 to 541,000 teu currently following a bullish newbuildings program comprising of 17 Ultra Large Containerships (ULCS) – six A19 Class (19,870 teu) and 11 A15 Class (14,993 teu) vessels. Only two of the A15 class boxships remain undelivered but are scheduled to be added to UASC’s fleet in the first quarter of 2017.

“Hapag-Lloyd thereby secures the large ships that it needs, especially for the Far East trade, in order to remain competitive in the shipping market and to achieve low transport costs per container,” Hapag-Lloyd shareholders have been told.

“Already before the proposed merger with UASC, Hapag-Lloyd had identified the need to invest in larger ship classes. Due to the investments already made by UASC in these ship classes, the combined entity will not need to make additional significant vessel investments in the years to come. Otherwise, Hapag-Lloyd would have had to make such investments alone.”



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