Unifeeder & DP World: The curious marriage on the short seas

Unifeeder & DP World: The curious marriage on the short seas

Profitable growth in the maritime shipping industry is a precious commodity. The old thinking of getting bigger through mergers or acquisitions prevails. Stronger and larger players try to translate the size into lower costs and lower rates. This holds true for carriers, ports and freight forwarders alike.

Past years were all about stronger carriers swallowing their weaker siblings, ports with strong balance sheets buying weaker ports in need of investments, and cashed up logistics companies buying smaller players to complement their networks. Those acquisitions were always framed as being important to creating better and more efficient supply chains, yet none has proven to deliver on this promise.

The end of 2017 brought something potentially disruptive and game changing. Soren Skou, the CEO of Maersk, announced a major refocusing of the carrier-centric business into a supply chain-centric business combining the carrier, terminal and logistics operations under one roof. While skepticism about success of such vertical integration abounds, there was a lot to like in the announced strategy. Removal of overlaps and inefficiencies promised lower cost business, while continuing to provide the same level of customer services, superb door-to-door integration, and guaranteed transit times.

Other carriers took note of Maersk’s move, but none followed with a great fanfare. There were no acquisitions of terminals or logistics companies made by any of Maersk’s competitors. In successive quarterly earnings calls Maersk didn’t emphasise the importance of that strategy, nor examples of real game change for the business or their customers. It looked like the search for the holy grail of integrated supply chains orchestrated by the maritime giants was put in a holding pattern.

Just a few days ago, this situation changed and not thanks to another carrier. The salvo has come from a port operator. Surprising industry watchers, DP World, one of the world’s largest port operators, has announced the acquisition of Unifeeder Group, a Danish feeder and short seas shipping company. The key justification for this acquisition must have been a plan to capture a larger share of the margins in the end-to-end supply chain execution.

For a long time I advocated that ports take more aggressive actions in expanding services aimed at improving supply chain execution outside of ports’ gates. Except, I argued that ports should expand by building new disruptive services on the basis of the data they have about the shippers, the carriers and the cargo. The margins on such digital services would be similar to the margins seen in gateway port operations. It has never crossed my mind that a port would instead expand by acquiring metal. A shipping company would give an arm and a leg to generate margins of the port operators. So what is a highly profitable company doing acquiring a much less profitable company in a very different industry? Let’s walk through various aspects of this deal.

Unifeeder calls on number of ports mostly in northern Europe and is an undisputed leader in feeder and short sea services in the Baltic Sea countries. It generates respectable, but not stunning, profit for this type of business. It has not been known for ambitions to vertically integrate all components of the maritime supply chain. The nomination of Nils Smedegaard Andersen as the chairman of Unifeeder’s board could have changed some minds. Andersen, an alumnus of AP Moller Maersk, could have dreamt of replicating Maersk’s strategy, but in this situation it was the terminal operator that made the acquisition of a carrier, not the other way around.

By acquiring Unifeeder, DP World gains control of the calls made by Unifeeder vessels on DP World’s European terminals, but in the process loses an ability to extract higher rates out of the carrier.

The business of feedering is tough. Mainline contracts are short term, the rates are not generous, margins are thin, and optimising yield is notoriously difficult. The situation in short sea transportation, the smaller market segment of Unifeeder, is better, but not by much. There are margin upsides from optimising yields by picking up better routings and better allocating capacity to demand, just like the big guys do. Yield optimisation requires aggressive negotiations on port fees and terminal handling charges. It is incredibly hard to see any significant profit and revenue upside for DP World.

Financial aspects of this deal are even more tricky. The price tag of EUR660m (US$764m), about 3xEBIT, is in line with the rule of thumb 2.5-5 times EBIT guide for the selling price of a healthy business operating in a healthy industry. But one would be really challenged calling shipping a healthy industry. Highly commoditised, margin poor and whiplashed by low customer loyalty, the industry needs all the help it can get. On this deal, it would have made more sense for DP World to pay 1-1.5x EBIT, or somewhere in the range of EUR300m.

Someone in this deal is counting their lucky stars. Time will show what DP World had on their minds when making this decision. This could act as a growth strategy template for other terminal/port operating groups. Or it could easily turn into one of those MBA horror business stories of misguided expansions.

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7 Comments

  1. Diran Majarian
    August 10, 2018 at 6:21 pm

    Nicely put! Agree entirely with your point of view. Nordic Capital make a good decision to cash out and got a good price. DP will find it quite difficult to extract any value from this transaction because of the acquisition price and conflicts on port charges that play an important role for Unifeeders to be competitive in a business with razor thin margins.

    Now they are talking about going globally on the feeder business, but Northern Europe has comparatively better pricing than Southeast Asia, where there are better growth prospects but also considerable competition and fewer entry barriers.

    1. Kris
      August 13, 2018 at 5:56 pm

      Agree Diran. South East Asia has plenty of highly competitive feeders and short sea specialists well established & fighting for business X-press Feeders, MCC, APL, ANL Magsaysay, too many to count. It will be hard for DP World to recover the premium they paid or apply their excellent business process execution from port operation to shipping line operation (preventing outflow of expertise from the carrier, they will not be able to rationalise by cutting costs across people and services)

  2. Andrew Craig-Bennett
    August 10, 2018 at 10:25 pm

    I wonder if Dubai are seeing something that we are missing? Brexit, maybe? If the UK’s ports jam solid, as seems quite possible, the NW Europe feeder / short sea sector could look quite different.

    Mind you, I reckoned that they paid roughly double the going rate per berth to get London Gateway up and running, but they went ahead with it so they may just be thinking in petrodollar time scales.

    1. Kris
      August 13, 2018 at 6:07 pm

      Cheers Andrew. Thanks for your comment. That was my first thought too, but I went over possible outcomes and upsides and I cannot say there us a larger game there invisible to anyone else. Baltic Sea ports are definitely their playground to lose, but brexit will do much to increase the upside looking at current examples (e.g. Maersk cancelling mainlline service to Southampton has not resulted in dramatic increase in short sea/feeder growth) . Even if there is an upside, it could come from smaller shipments of greater variety attracting ro-ro guys to expand, especially playing up complexity of inland connection, not just port to port. Stena, DFDS, BG Freight, P&O Ferrymasters and others are not asleep either

  3. charles baker
    August 11, 2018 at 2:42 am

    It certainly looks like a radical move from DPW, who also don’t seem to be in need of a feeder company to assist them in raising ustilization at their NEUR ports which are doing pretty well. Maybe another geography – as well as the interest in carrying 3.0MTEU – is an additional strategic consideration.

    In these times of bluff and double-bluff resulting in peace summits in Singapore, I guess we will have to watch this space for the answers!

    1. Kris
      August 13, 2018 at 6:13 pm

      Interesting thinking Charles. Thanks. I know this will be a bit of a waiting game, but competitors are not sleeping either. Baltic Sea is critical and further expansion across North Europe and further south will be equally important. Optimization of scheduling, vessel leases and matching to precisely understood demand a.k.a. wide-ranging yield optimization will help, but losing ability to squeeze the terminal on rates is a real hndrance in my opinion

  4. Tobias Koenig
    August 15, 2018 at 2:18 am

    Kris, I think that you might have the EBIT wrong. According to the Annual Report 2017, the EBIT is shown as DKK 200MM.