One hundred and fifty million dollars buys a liner carrier a fairly large container ship these days.
But it also apparently buys a nice chunk of one of the world’s largest lines itself.
When the French government’s sovereign wealth fund, Fonds Stratégique d’Investissement (FSI), agreed in mid-October to plunge $150 million into the French liner carrier CMA CGM, it gave an interesting and infrequent insight into the value of a line these days.
FSI’s investment netted it a 6 percent share in the carrier. Some back-of-the-napkin math means the line as a whole is valued at around $2.5 billion. That, of course, doesn’t account for the debt FSI also assumes with its ownership stake, as Simon Heaney of Drewry correctly pointed out to me. With CMA CGM having debt of about $5 billion, that would put the effective valuation of the line probably closer to $7 billion, or more.
What does that mean? For a little context, there’s this from Fadi Issa, CMA CGM’s managing director in Turkey.
“For an Asia-Europe string, 12 ships of at least 12,000 TEUs are needed and that is an outlay of at least $1.4 billion,” he said at a conference in October on Mediterranean shipping. “But to be competitive, at least three strings are needed, raising this investment level to $4.2 billion. Then there are the containers that are needed to support the ships — up to 18,000 TEUs for each unit at a cost of $400 million.”
At the end of October, CMA CGM had 31 ships deployed on the Asia-Northern Europe trade, according to the BlueWater Reporting service of American Shipper
affiliate ComPair Data
According to Issa’s figures, that’s an outlay of roughly $3.7 billion for one trade alone, at current prices. I have no clue what the price was that CMA CGM agreed to actually pay for each of those vessels, nor where they are in terms of the re-payment on those vessels, but it’s safe to assume the line still owes a fair share on those ships. Every single CMA CGM ship deployed on the Asia-Northern Europe trade was built since 2007, with most of them being built more recently.
The point is this: the cost of vessels on one trade far exceeds the post-debt valuation of the company, which is the sort of weird development you only see in international transportation.
For instance, imagine if the Coca-Cola Co.’s valuation was less than the value of its bottling plants in one region, or if Exxon’s valuation was less than the value of one of its oilfields.
Liner shipping is a service, not a tangible product, so let’s ask whether Facebook’s valuation (despite its flat IPO) is worth less than its server farms?
Liner carriers are asked to make huge, long-term gambles on markets, and then take whatever profits they glean if they win their bets, and gamble again. Freight rates have stayed remarkably stable for decades, while the size and cost of new ships grows ever larger.
All of that feeds into a scenario where a company that’s dominant in its field — CMA CGM is, after all, the third biggest liner carrier in the world — is valued at a fraction of the investment it takes to even keep its seat at the table on one of its core trades.
As of early November, CMA CGM had a fleet of 407 vessels, and less than 20 percent of its fleet capacity is allocated to the two-way Asia-Northern Europe trade.
But only 89 of those ships, accounting for barely one-third of total fleet capacity, are owned. The rest are chartered and don’t impact the company’s valuation in terms of its asset sheet.
This is just a rough estimate of mine, but CMA CGM’s owned fleet is probably worth $8 billion to $10 billion, depending on the level of depreciation. For sure, the fleet is worth less than the aggregate purchase price, in part due to depreciation and a poor current market for vessels.
With strained cash flow in two of the last three years and debts of $5 billion, one could look at those hard assets (or whatever of them CMA CGM owns) as a bright spot.
But say, purely for hypothetical terms, CMA CGM was to liquidate its fleet in the next month. Who would be the buyers? Who needs ships? Who needs big ships? Who has the cash on hand, or the means to finance such purchases? In short, the true value of its fleet might not be represented well in the current market, such as it is, and that will inevitably affect the company’s valuation.
So will the pessimistic outlook the ratings agencies have on the container shipping industry. These agencies (whose perspectives, it should be said, are far from bulletproof) largely ignore the unusual circumstances that underlie the liner shipping industry in terms of national and shareholder backing. They see an industry struggling with new levels of demand and overburdened by debt.
“Asset values are currently extremely low,” said Esben Christensen, a director in AlixPartners’ global maritime practice. “This combined with high debt levels at CMA CGM drives valuation to extremely low values. If LTV (loan to value) is high, which is likely in this case, it will negatively impact valuation. Also, keep in mind more than 50 percent of CMA CGM capacity is (time charter) and therefore will not drive asset value.
“Trailing EBITDA and free cash is likely low and extremely volatile,” he added. “That will also impact valuation. Depending on how extreme these two factors are, I am not that surprised with this valuation. That said, when the market turns and asset values rise, this could be a very profitable investment by the government. I suppose that is the ‘cost’ to CMA CGM of receiving additional working capital.”
Five years ago, liner carriers and ports envisioned a sustained period of container volume growth, one that has dramatically failed to materialize. But perhaps the pessimism of today will likewise give rise to a more promising future for carriers. With ship orders finally drying up and economies bound to recover at some point, vessel valuations and container demand could well rise, heralding an era which the valuation of a container line is actually higher than the value of its assets.
It is possible.