Fairfax Financial Holdings Ltd. is doubling its investment in Seaspan Corp. as the container ship company seizes a bigger market share with the purchase of a Chinese fleet owner.
Fairfax will invest another US$250-million in Seaspan, an independent box-ship owner and operator that on Wednesday said it is buying Greater China Intermodal Investments LLC from Carlyle Group.
The deal boosts Fairfax's exposure to the ship leasing business at a time when ocean trade and vessel values are rising even as charter rates remain low.
Paul Rivett, president of Fairfax, said the Toronto-based company believes the global marine market has "significant" room to increase in value. Supply and demand for ships that carry much of the world's consumer goods and manufacturing components have returned to balance amid industry consolidation, which "bodes well for for firming rates and improving profitability and free cash flow," he said.
"The market has been beaten down with the global recession, but we believe it has bottomed out and we see significant upside in rates and consolidation from this low base," Mr. Rivett said.
The addition of Greater China Intermodal's 18 container ships increases Seaspan's fleet to 112. The deal boosts Seaspan's average ship size and reduces the average age, said Bing Chen, chief executive officer of Seaspan, on a conference call to discuss the deal with analysts on Wednesday.
Greater China Intermodal will add US$180-million to US$200-million in yearly earnings before interest and other expenses, Seaspan said.
Mr. Chen said growth in ocean trading is at the highest level since 2011, and is expected to be just under 5 per cent in 2018 before hitting 5 per cent in 2019.
"After several years of decline, the global shipping industry is beginning to recover. We should see stable growth in the coming years," Mr. Chen said.
The company now commands 8 per cent of the world container shipping market with contracts worth US$5.6-billion. Its biggest customers are liner companies Cosco, Yang Ming and MOL and other shipping giants that control 80 per cent of the market.
Greater China Intermodal was formed in 2011 by a consortium of investors that included Carlyle Group and Seaspan.
Seaspan said it is buying the 89 per cent of Greater China it did not already own from Carlyle Group and smaller investors for US$380-million. The deal values the company at US$1.6-billion, including US$1-billion in debt and US$140-million in future ship payments, Seaspan said.
The value of the world's container ship fleet plunged to about US$100-billion from US$150-billion between 2015 and 2016 in a shipping crisis spurred by too many vessels chasing declining amounts of cargo, said Claudia Norrgren, associate director of Vessels Value in London.
Values edged higher lately as the fleet shrank because some companies merged or failed, and others sold vessels for scrap. The flurry of bankruptcies, takeovers and alliances has slashed the number of large shipping lines to 10 from 25 or 30.
But low charter rates persist amid depressed prices to carry containers overseas.
An index of global container shipping rates compiled by Drewry Shipping has declined by 25 per cent in the past 14 months. It costs an average of US$1,375 to ship a 40-foot cargo box on most transocean routes, the British consultancy said.
David Sokol, chairman of Seaspan, said the deal capitalizes on lower values, noting that two years ago the same purchase would have been worth US$1-billion more. He did not rule out more deals. "Waiting until the market makes sense is what we're going to do," Mr. Sokol said.
Seaspan is headquartered in the Marshall Islands, a tax friendly country in Oceana that operates one of the largest ship registries. Seaspan's share price on the New York Stock Exchange rose by more than 10 per cent to US$6.27 on Wednesday. . Before the shipping crisis took hold in mid-2015, one Seaspan share was worth about US$20.