Analysis: Hapag-Lloyd IPO is looming – but leave it to the professional investors

06/10/2015

It has been a long wait, but the official announcement of the IPO of Hapag-Lloyd came on 28 September – the deal has not launched yet, but we are almost there.

Confirming that the company is preparing its initial public offering, it said it “expects total gross proceeds in the equivalent euro amount of US$500 million from the IPO.” It’s still work in progress but there are more details to report now than at any given time over the last decade.

The fourth-largest container liner shipping company in the world said that “$400 million will stem from the sale of newly issued shares to institutional and retail investors”.

It said: “In addition, the core shareholders Kühne Maritime and Compañía Sud Americana de Vapores (CSAV) are participating in the IPO with US$100 million by placing cornerstone orders of $50 million each.”

Hapag-Lloyd chief executive Rolf Habben Jansen noted that Hapag was “especially pleased about the investment of our core shareholders which underlines once more their confidence in the future of the company.”

Ultimately however, it would seem Kühne Maritime and CSAV had little choice on whether to commit more funds to the carrier.

In fact, without earlier investments Hapag-Lloyd could have ceased to exist some time ago, and it is evident that shareholders might have to pour cash into this money pit for a very long time – just as we argued almost a year ago.

In December 2014, soon after the merger with CSAV was completed, Hapag wrapped up a €370m capital increase that saw CSAV committing €259m, while Kühne wrote a cheque for €111m.

What lies ahead for the value of the holdings of CSAV, Kühne and institutional investors isn’t really of interest – they are well acquainted with the risks involved – but I do wonder whether retail investors and employees will get their fingers burned if they join the IPO or invest in Hapag at a later stage.

Quite simply, my personal advice to them would be to leave the risk to professional investors who have no alternative choice but to participate in the fundraising.

Value

Even following the IPO, Hapag’s capital structure will not be properly balanced based on its projected cash flow profile, while bullish statements from management seem to be all we have now to gauge the investment opportunity with regard to a business whose float has been in the making for almost a decade now.

Here’s the first warning sign – it doesn’t look like the IPO will be fully underwritten by the eight banks that make up syndicate – Berenberg, Deutsche, Goldman, HSBC, Unicredit, DZ ING and MM Warburg & Co. This is a rather large group of banks for a relatively small placing, considering that their total exposure would have been only $50m each.

Hapag is lucky to have the support of a large pool of relationship banks, which became clear on 1 October when the shipping line secured a $372m long-term credit facility supporting the purchase of five new vessels ordered in April 2015 and to be delivered by May 2017 at the latest – but this alone is not enough to justify a high valuation for its equity.

“German-Chilean Hapag-Lloyd AG has mandated investment banks Deutsche Bank, Goldman Sachs and Berenberg to advise on an initial public offering that could value the world’s fourth-biggest container-shipping company at more than €5bn billion, according to people familiar with the matter,” The Wall Street Journal reported on 15 July, when the volatility index (VIX) stood at a lowly 13.2.

Equity prices are intimately tied to the level of broader market volatility, and the VIX has ranged between 20 and 40 since 20 August. For Hapag and its shareholders life becomes uncomfortable if the VIX stays above 30 for a prolonged period of time.

Both the secondary bond and equity markets have sent very mixed signals with regard to the pricing of risk over the last eight weeks or so. While deals are getting done in primary, the cold wind blowing from China could easily spoil the plans of ambitions bankers and investors.

True, Hapag itself is doing better now than this time last year, but it doesn’t take much to understand the risks involved, some of which are implicit in Hapag’s IPO statement – for example: “The container trade sector is expected to continue growing highly correlated with global GDP growth.”

Which is precisely what is currently unnerving investors.

I would have expected more than vague statements arguing that “the fundamentals around supply and demand are expected to improve in the coming years, which would provide cyclical upside to the industry.”

As Hapag says, the compound annual growth rate (CAGR) in global container volumes is expected to decline by almost one full percentage point against the CAGR of 2010-2014, which is not ideal for a company that is financially weaker than its three largest rivals.

“This would put the forecasted rise in worldwide transport volumes in container liner shipping for 2015 and 2016 above the forecasted rate of growth for global GDP growth,” the group said, but the risk is skewed to the downside when it comes to global GDP forecasts from the IMF, which believes that global growth will remain moderate at 3.3%, with uneven prospects across the main countries and regions.

Coupled with that is the fact that the relationship between GDP and container volumes – which has traditionally seen the latter as a multiple of the former – has become increasingly unstuck since the financial crisis and specialist liner analysts are now openly questioning if the multiple should be any higher than 1:1.

Equally, downgrades to forecasts have become depressingly routine since late 2014. Hapag says that synergies from its merger with CSAV are now expected at $400m annually, but regardless of bullish projections the valuation of some of its peers indicate that any enterprise value (EV) higher than €3.6bn at IPO would be incredibly demanding and difficult to maintain over time – particularly considering that over 50% of its EV would be represented by net debt.

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