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August 9, 2008

Container shipping:
Hapag-Lloyd bid

Singapore’s NOL takes risk, get shortlisted Singapore-based Neptune Orient Lines has made the shortlist in the bidding for bigger rival Hapag-Lloyd in a risky deal that could cost the Singapore firm as much as $7 billion, said Reuters on Friday.

NOL, whose market capitalisation is around $2.6 billion, said on Friday it plans to combine its APL unit with Hapag-Lloyd, a unit of Germany’s TUI , to form the
world’s third largest container shipping company and benefit from increased economies of scale and synergies.

NOL, 66 percent owned by Singapore state investor Temasek, and a group of Hamburg investors are the only bidders left in the race to buy Hapag-Lloyd, sources told Reuters on Thursday.

Some analysts have criticised NOL’s bid for Hapag-Lloyd, citing the high cost involved at a time when shipping firms are reeling from high fuel prices and a slowing global economy.

UBS on Friday downgraded NOL to “sell” from “neutral”, citing the Singapore company’s weaker-than-expected second quarter earnings and expectations of a considerably tougher second half.

“We also believe the integration costs associated with the potential acquisition of Hapag-Lloyd could be negative for earnings,” UBS analysts Alex Chang and Ronald Keung wrote in a note to clients.

NOL chief executive Ron Widdows however downplayed the concerns, noting the company had taken a relatively bigger risk when it purchased APL in 1997 as the US container shipping firm was much larger than NOL at that time.

Reuters quoted Widdows as saying, “We approached this acquisition with great care. It’s an opportunity and it could well be transformational.”

“You would not do this unless you are absolutely certain the risk profile was wise.”

APL, the world’s seventh largest container line with a market share of about 3.6 percent, is marginally smaller than Hapag-Lloyd, which is ranked number five
with a share of 3.9 percent, according to data from AXS-Alphaliner.

In contrast, APL’s container shipping revenues were more than double NOL’s when the Singapore firm bought the US company in 1997.

Widdows, who joined APL in 1980 before it was taken over by the Singapore firm, has prior experience with mergers and acquisitions, having led the team
responsible for integrating of NOL’s and APL’s operations in 1999.

He declined to provide more details of NOL’s bid citing confidentiality undertakings, but hinted that the price offered for Hapag-Lloyd could be lower than expected.

“It is premature at this point to be too concerned about the numbers because it is not clear if the company is going to be sold,” he said when asked the
purported price tag of 5 billion euros ($7.66 billion).

Reports have repeatedly suggested that TUI is considering calling off the planned sale because of the low value of the bids received.

NOL submitted an indicative non-binding bid to acquire Hapag-Lloyd to TUI AG last month.

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