Rumours are getting strong that the Chinese Government is due to approve the merger of China’s two biggest shipping lines China Ocean Shipping Co., or Cosco Group, and China Shipping Group Co.
Both state owned companies’ involved in container-shipping operations will create the world’s fourth-largest container-shipping line. The plans would also cover other overlapping business divisions that include commodities shipping and oil-tanker operations, in a bid to streamline operations and improve competitiveness, the people said.
“The thumbs up from Beijing could come by the end of the year or in January, and a formal announcement of the merger will follow,” one of the official confirmed “It’s been a complicated matter, with one of the priorities being to avoid any layoffs from the merger overlaps.”
The value of the merger is estimated between $10 billion and $20 billion, based on the market capitalization of the two parent companies’ listed units and after any divestitures. Over the past five years, the container units of both companies have incurred losses totaling $911 million,
The tie-up is part of Beijing’s strategy to consolidate in hopes of creating bigger and stronger national champions that can better compete abroad. In creating a global shipping giant, a merger could also touch off consolidation in the highly fragmented world of container shipping.
Cosco Container Lines operates 175 container vessels and China Shipping Container Lines operates 156, making them the world’s sixth- and seventh-largest container companies, handling about 8% of global volumes. China Shipping Group controls CSCL.
The size of the merged entity would trail only Denmark’s A.P. Møller-Maersk A/S, Geneva-based Mediterranean Shipping Co. and France’s CMA CGM SA. Container-shipping rates have tumbled as available ship capacity exceeds demand by 30%. On some routes, freight rates barely cover fuel costs.
China’s major container lines have been hard hit by the economic slowdown in China, compounded by the persistent global oversupply in shipping capacity. Chinese government is also pushing two other state shipping companies, China Merchants Energy Shipping Co. and Sinotrans & CSC Holdings Co., to merge some units.
Xu Jianhua, a professor at Shanghai Maritime University stated “The cost of merging the two companies will be far more than the benefit,” citing China’s poor record in the government-directed merger of China National Foreign Trade Transportation Corp. and China Changjiang National Shipping Group Corp. in 2009.
The deal hasn’t had the synergy effect as expected, Mr. Xu. Continued. Instead, the combined company has been struggling with declining profit for years. Analysts also pointed to the hurdles the companies may face from minority shareholders of their listed units, who will have to give approval to the tie-up.
The listed units of both shipping groups, which include China Cosco Holdings Co. and China Shipping Container Lines Co., have halted share trading since August. The companies have said their controlling shareholders are considering a significant matter that may involve “relatively complicated” asset restructuring of the two groups.