The $2-billion (U.S.) sale of CP Ships Ltd. to a German transport giant that runs the Hapag-Lloyd AG shipping line will create the world's fifth-largest container shipper and could boost Canadian trade with China and Europe.
British-based CP Ships and TUI AG of Hanover, Germany, jointly made the weekend announcement after speculation swirled for weeks that numerous global suitors, including ones in China and France, had their sights trained on the takeover target.
The board of directors at CP Ships met in Toronto on Saturday and unanimously recommended acceptance of the friendly offer from the Germans.
"It creates a much better mix than either of the companies has on their own," CP Ships chief executive officer Ray Miles said in an interview yesterday after he flew back to London from the Toronto meeting.
Hapag-Lloyd is much stronger on transpacific routes than its rival. Amid the China trade boom, CP Ships has been criticized for missing the boat on the huge volume of consumer goods shipped to North America from China, and also shipments of Canadian resources to hungry Chinese markets.
But Mr. Miles said the merged entity is poised to prosper with Hapag-Lloyd's strength in trade with China and CP Ships' transatlantic lanes, including those between Montreal and European markets.
"We are culturally a good fit and it represents the building of a stronger, better business by the two combining with a broader mix of trade lanes. Our trade lanes are complementary and don't have a heavy degree of overlap."
CP Ships, registered in New Brunswick, belonged to Canadian Pacific Ltd. until the conglomerate dissolved in 2001.
TUI approached CP Ships about a possible deal in the spring, and the two sides engaged in preliminary talks in late May and June. Hapag-Lloyd emerged as the favoured suitor and it went full steam ahead last week with acquisition talks codenamed Project Maple.
CP Ships, which has roots in Canada dating back to 1886, runs key operations at the Port of Montreal and has traditionally relied on transatlantic shipping lanes for its growth. CP Ships directors met Aug. 11 in Montreal to approve second-quarter financial results, which showed a $33-million profit.
Hapag-Lloyd is the 13th-largest container shipper in the world, as measured by shipping capacity. After the acquisition of CP Ships, which ranks No. 16, the combined entity will catapult to fifth spot.
The takeover bid by TUI amounts to $21.50 (U.S.) a share in cash for CP Ships. That's up 9.7 per cent from closing price of $19.60 for the shares Friday on the New York Stock Exchange and represents a 25-per-cent premium over their average closing price in the past three months. TUI also stands to inherit $300-million in debt from CP Ships, assuming the sale closes in the fourth quarter as scheduled, subject to regulatory approval.
On the Toronto Stock Exchange, CP Ships rose 36 cents (Canadian) to close at $23.60 on Friday. CP Ships shares have surged 40 per cent since late April, when rumours surfaced of a possible takeover bid from Shanghai-based China Shipping Group Co., controlled by the Chinese government.
Gaining popularity quickly in the shipping industry are huge vessels carrying more than 8,500 containers, measured as TEUs, or 20-foot equivalent units. Most of the 82-vessel CP Ships fleet is in the range of 2,500 to 4,200 TEUs.
Hapag-Lloyd's 57 vessels have a much larger capacity than CP Ships, but the German firm will be counting on many of its rival's smaller ships to serve as a feeder network to key ports, Hapag-Lloyd spokesman Horst Monsees said yesterday during a visit to Toronto.
In total, the combined entity will have 139 container ships, with another 17 on order.
Mr. Miles, 61, said he has agreed to help during a transition phase with Hapag-Lloyd.
CP Ships shares slumped 36 per cent last year as investors punished the company for overstating its profit and succession planning ran aground, with Frank Halliwell resigning as CEO in December.
Mr. Halliwell joined CP Ships in 1991, became chief operating officer in 2001, and then took over as CEO in May last year.
Mr. Miles had been CEO for the 16 years prior to Mr. Halliwell's appointment to the top executive job.
"We had a very difficult 2004 with the restatement of our financial results and the departure of our newly appointed CEO," Mr. Miles said yesterday. "We had to get the senior management of our company really working as a team, and I think we succeeded in improving to a stronger base. From there, we then were able to negotiate this latest transaction."
He said CP Ships and its financial advisers are confident that they've received the best offer possible from all interested suitors.
"We're comfortable that we have seen enough of what potential there might be with other players," he said.
Hapag-Lloyd CEO Michael Behrendt said there could be one-time merger costs of $122-million (U.S.) in 2006, but he expects that integration may yield savings of roughly $220-million annually by the third full year after the takeover.
Michael Frenzel, CEO of tourism and transport giant TUI, said that, amid industry consolidation, he's looking forward to seeing Hapag-Lloyd expand with its pending CP Ships purchase and speed up growth plans for shipping routes.
"These two organizations in Canada and Germany -- and the people behind them -- are a good match," Mr. Frenzel said during a conference call from Hanover.
Brent Jang