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Concerns about how the Cosco deal for OOCL came about

Concerns about how the Cosco deal for OOCL came about

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Few people have tracked the highs and lows of Cosco and OOCL more closely than Charles de Trenck over the years. Today he runs the rule over Sunday’s merger news.

It’s nice to sometimes say ‘been there, done that’. Splash readers had a great chance to get back in or buy for the first time shares in OOIL the day after Hamburg Sud was bought by Maersk. We didn’t have to have a green light from Cosco or have information from China-related parties that Cosco had created an SPV in the BVI on May 8 as an acquisition vehicle for OOIL. We just knew in our bones it would be Cosco, or perhaps CMA CGM, that would take out OOIL.

Now that TUI has sold out of Hapag-Lloyd, and China has stepped in to finance some ships for Hapag, people will be thinking they should reload. In this case, we should note:

1) The OOIL deal is not yet approved and the statement that the Hong Kong share listing is set to remain is probably there to deal with regulator upcoming concerns;

2) Letting Hapag go to Maersk, Cosco or another would probably further raise systemic risk concerns among regulators;

3) Hapag should have a different set of valuation and analytical parameters, especially given that shares are relatively less liquid than OOIL shares have been. At the very least, liquidity should be monitored given that its recent average share volume has been about 77,000 shares a day. Hapag shares have already about doubled, and if Cosco is not paying 40% above book, then Hapag’s current approximate 25% discount to book may indicate less upside than our getting at least +50% in OOIL (and +100% or more for some investors) based on the Hamburg acquisition date and various exit opportunities.

Back to OOIL, I do have a few concerns.

• How could the Tungs/the company deny that Cosco was making an offer even a few weeks ago.

(A: Because they could? Because they could slip between disclosure requirements based on outside counsel recommendations?)

• How could OOIL continue trading even though Cosco went through a charade of getting a lengthy suspension of trading in Shanghai. Why not have suspended Cosco in all markets as well as OOIL as soon as an SPV in the BVI was set-up?

From the offer document:

“COSCO SHIPPING Offeror was incorporated in BVI on 8 May 2017 and was acquired by COSCO SHIPPING Holdings for the sole purpose of making the Offer and holding OOIL Shares.”

(A: Lack of coordination and proper/clear rules between HK-China on takeovers? Also note heavy rumours of China buying into OOIL shares while OOIL shares continued to trade prior to announcement?)

• Why bring in SIPG? Why leave the shares trading in Hong Kong when the offer price is so far above that even the Tungs likely accept the deal, when Cosco supposedly claim to expect shares to continue trading?

(A: This is pretty easy to see, I believe. SIPG coming in helps to show resolve on dealing with OOIL’s port assets, especially Long Beach. It also shows Cosco willing to bring in outside expertise it doesn’t have. From a political perspective, this likely won’t help with US authorities and we are going to have to sit through a debate on who could take over the port assets. I suspect there may be some unannounced deals and discussions. Putting out a public comment on OOIL’s share counter continuing to trade in Hong Kong. The offer price contradicts the statement, in my view.)

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Charles de Trenck

Charles de Trenck began his study of China in 1980 and eventually got in on the ground floor in China's equities boom of the early 1990s through work in Hong Kong and China shares. By the mid-90s he shifted to containerised trade, ports and shipping, eventually leading Citi to #1 rankings in Asia transport equities.

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1 Comment

  1. M.T. Vassel
    July 12, 2017 at 3:07 pm

    One could argue that the OOIL’s divestment of some of its port assets in NY/NJ way back in 2006 was the initial phase of restructuring for this acquisition. They must have been keenly aware that US approval of Cosco ownership for Howland Hook and Global was unlikely.

    Further, if they had to bring in SIPG for port expertise, what does that say about Cosco Pacific and its present valuation?