NOL asks HSBC for independent advice

The independent directors of NOL mandate HSBC as independent financial adviser in the face of Temasek''s takeover bid.

Neptune Orient Lines (NOL) yesterday announced that it had appointed HSBC to the role of independent financial adviser to the independent directors of the company. HSBC's role will be to evaluate the merits of the mandatory conditional cash offer made by Temasek Holdings for all the shares in NOL.

This offer was made on 3 August and so the appointment of HSBC came on the ninth day of proceedings. The ball is now back in Temasek's court as it has until 24 Augustto send its detailed takeover offer to NOL's shareholders. HSBC will then have until the 6 September (or14 days after the posting of the offer document) to mull things over before making its recommendation to the board.

As things stand at the moment, HSBC can only really have one recommendation: namely that they reject the offer of S$2.80 a share given that NOL's shares have been trading at around S$2.90 since the offer. Traders in the market think that perhaps Temasek might up its bid and some think that a rival bid could emerge.

Even at S$2.80 a share, NOL is undoubtedly cheap. It is the sixth largest container shipping fleet in the world and in 2003 was the most profitable in Asia. Yet with its shares at $2.70 (where they were the day before the offer was made), the company is only trading on a PE multiple of 4.5 times.

Moreover the company has very little debt, having spent much of the past year reducing its gearing level from around 360% to a level of 27% now.

With figures such as these the company is clearly very attractive to potential buyers. However, Temasek's motives for making the bid have been the subject of much conjecture. Some believe that Temasek was goaded into action when it heard that a rival shipping company was preparing its own bid. Others believe that NOL has acquisition plans of its own, but given the dim view the market takes when it comes to Singapore companies expanding overseas, Temasek felt that NOL could better achieve these goals if it were private. The third possible impetus could be that Temasek wants to create a more synergistic shipping company through amalgamating parts of NOL in shipping, PSA in ports and Sembcorp Marine in shipbuilding and services.

However, others say that Temasek does not actually want to take full ownership of the company.If Temasek really wanted to privatize NOL, it would probably have gone about the offer in a different way, probably through a voluntary offer. The fact that it has launched a mandatory conditional offer at such a low price suggests that Temasek might really want to get only 51% of the company and leave the rest in the market. This will give it the power to make changes at NOL while not necessarily privatizing the whole company.

Whatever its motives - and Temasek is not saying - the fact that Temasek has made its bid has in the eyes of some commentators reduced the likelihood that another bidder might emerge. Not only does Temasek now own 30% of NOL, which in any other bid would be enough to win, but also who would want to go head to head with the deep pockets and prickly nature of the Singapore government?

But NOL's numbers are just so beguiling that other companies must be looking at the asset. Not only is it cheap and under leveraged, but the assets it owns, namely ships, are truly global and can be moved anywhere in the world.

Market rumour has so far concentrated on two possible candidates, Cosco of China and Hutchison Whampoa of Hong Kong. Cosco's business has hitherto concentrated on exports out of China. It is said to be upset that it gets little of the import business into China and so NOL would help fulfill its ambitions to cover both sides of the China trade.

Hutchison Whampoa in recent months has shown a distinct appetite for the shipping sector. In the second quarter it bought a 12% stake in Korea's Hyundai Merchant Marine and in June it took a $100 million stake in the IPO of China Shipping. Neither Cosco nor Hutchison have made any public comment on possible acquisition plans.

Then there are the private equity buyers, for whom this deal would be ideal. With such low levels of debt on the books of NOL, leveraging the company post acquisition could largely pay for the acquisition. The additional debt, in turn, could be paid back by the huge cash flows that are flowing through the company. One analyst has predicted that up to a third of the acquisition cost could be paid off within the first year by cash flow from existing operations alone, if one assumes a S$4 billion price tag, with S$2 billion of shareholders funds sitting on NOL's books.

For such a bid to materialize, it would probably need some kind of management support, which given the opposition to such a bid from Temasek, might be hard to find. The question becomes, would any one of these potential bidders really want to get into a fight with Temasek? Still, deals like this don't come along often. Potential acquirers might fear Temasek's wrath, but greed - the traditional counterweight to fear - might prompt them into action.

If they do, then HSBC will really start earning its fee. The mandate is good start for the bank as it increases its investment banking focus on the region. In June, the bank hired Chang Tou Chen from Citigroup to be its head of Southeast Asian corporate finance. Chang is a highly regarded banker with good corporate contacts. He recently advised MISC of Malaysia on its acquisition of AET from NOL and as such knows the NOL Group well.