OOIL deal: Proof Hong Kong families have a price

The sale of the Tung familly's empire to COSCO illustrates Hong Kong's tycoons' willingness to cash in via sales to Chinese SOEs, 20 years after the handover.

A company inextricably linked to Hong Kong’s first chief executive Tung Chee-hwa is to be sold to its biggest Chinese rival in a deal that perhaps serves as a metaphor for the city's relationship with China, 20 years since it was returned to Beijing rule.

According to a joint statement on Sunday, China’s largest state-owned shipping conglomerate Cosco Shipping Holdings Co. Ltd has agreed to buy Orient Overseas International Ltd (OOIL), the world’s seventh-largest container shipping company and a key asset of the Tung family, for HK$49.23 billion ($6.30 billion).

Together with junior partner Shanghai International Shipping Group (SIPG), Cosco has offered to acquire all of OOIL's issued shares at HK$78.67 per share. Assuming the all-cash offer receives regulatory clearance, Cosco will hold 90.1% of OOIL with SIPG holding the remaining 9.9%.

It is the largest transaction by value in the shipping industry since 2003 and “shall go down in history” as it offers a price that meets the expectation of both OOIL’s shareholders and the Chinese government, Han Ning, China director for Drewry Shipping Consultants, told FinanceAsia

The Cosco-OOIL deal forms part of China’s Belt and Road Initiative, which aims to build a vast international network of land, sea and air passages from China to Europe and Arica. Once it swallows up OOIL’s container shipping routes and networks, Cosco will overtake France’s CMA CGM SA to become the world’s third-largest container shipping.

The combined company will operate more than 400 vessels with a capacity exceeding 2.9 million twenty-foot equivalent units, including pre-ordered vessels.This will translate into a 12.8% global market share, according to Drewry’s Han.

Cosco will also benefit from OOIL’s efficient operation and strong presence on routes from Asia to Australia.  

A “very large” Chinese bank will provide a 100% banking facility in the form of a bridge loan, a source familiar with the matter said but declined to divulge any further details.

In January, Cosco secured a $26 billion multiyear financing deal with China Development Bank.

The Tung family founded Orient Overseas Container Line (OOCL), the shipping subsidiary of OOIL, in 1969. The business was on the edge of bankruptcy when it was ran by the second-generation heir Tung Chee-hwa in the 1980s until it was saved by the Chinese government through pro-Beijing businessman Henry Fok. Tung became close with Beijing afterwards and was later appointed as Hong Kong’s first governor when the former British colony was handed back to China in 1997.

“OOCL’s former boss Tung Chee-hwa has a lot of political ties with Beijing,” Han said. “So emotionally speaking, as long as the price is reasonable, people will expect OOCL to be sold to a Chinese company.”

The price represents a 31% premium to OOIL’s closing share price on Friday and values the company at 1.4 times its book value. That compares with Denmark-based shipping giant Maersk Line's offer to acquire Hamburg Süd in December, which valued the German container shipping line at a price-to-book ratio of 1.3.

Andy Tung, chief executive of OOIL and son of Tung Chee-hwa, said in the statement that he’s confident that Cosco will be “the right partner”.

“We are proud of the business we have built and the people who have been building it,” Andy Tung said in the statement. “This decision has been carefully considered and we believe it helps ensure the future success of OOIL”.

The Tung family – with a 69% stake in OOIL – will earn $4.35 billion in cash by selling the business.

The deal illustrates how some third-generation family businesses are looking to exit their businesses through sales. In that regard, they often prefer Chinese SOE buyers because they can offer higher prices and keep on the existing management, according to the source familiar with the matter.

It is “inevitable” that more and more Chinese players will seek to establish footprints in Hong Kong and clean up fragmented industries such as shipping, the source said.

Investment bankers also expect to see more M&A deals between the Chinese mainland and Hong Kong since the city is an alternative, nearby source of potential acquisitions at a time when Beijing scrutiny of cross-border transactions has increased and capital controls have been tightened.

Container shipping moves around $1 trillion worth of manufactured goods every year. The industry has witnessed a wave of consolidation since the bankruptcy of South Korea’s Hanjin Shipping last August, with individual players struggling to remain profitable and teaming up through vessel-sharing alliances.

Cosco and OOCL are in the same alliance. Their combination, however, will put pressure on rivals such as CMA CGM, which is in the same alliance but will find it difficult to expand through M&As.

“There are not many assets that remain in the market that can be purchased,” said Han. “But the deal will put pressure on (Cosco’s competitors).”

UBS AG is serving as financial advisor to the Cosco and SIPG, with JP Morgan serving as financial advisor to OOIL.

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