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Shipping giant Maersk steams ahead with break-up plans

Container shipping

Shipping giant Maersk steams ahead with break-up plans

CEO transforms Danish conglomerate into leaner group in drive for profits and growth

Maersk chief executive Soren Skou aims to 'build a great company again' in a large-scale overhaul of the group © FT montage / Bloomberg / EPA

Few industrial groups have undergone so radical a break-up in recent years as AP Moller-Maersk, the world’s biggest container shipping line. The Danish group has lopped off its oil and gas and tankers businesses and is hoping to spin off its drilling rig unit this year.

But Denmark’s biggest company by revenues — now centred on container shipping and logistics — faces a demanding time. Not only is its core business of transporting seaborne freight under strain from the prospect of a US-China trade war and a slowing global economy, but its profitability and cost control have slipped too.

Difficulty unloading some of its businesses — its oil drilling unit is being demerged rather than sold outright — means that debt remains stubbornly high, and so Maersk could have to sit out the consolidation in the logistics industry despite its ambitions to become a container version of UPS or FedEx.

Soren Skou, who became Maersk’s chief executive in 2016 just as the break-up plans were announced, told the Financial Times that despite “road bumps” such as a 2017 cyber attack and weak demand for the past three years for its core shipping business, the break-up of the conglomerate was bearing fruit.

“It’s important to say that what we’re doing is a real transformation. The transformation word is used a lot these days. But we are transforming a big, old, global company for the purposes of setting it on a new growth and profit trajectory . . . We want to build a great company again,” he said from his office overlooking Copenhagen’s waterfront.

Analysts and investors have largely welcomed the focus on shipping, port terminals, and logistics over a sprawling conglomerate. But the share price today is largely where it was when the plan was announced amid concern about just how hard the container industry will be hit by trade tensions as well as concerns over the speed of the divestments and reorganisation.

“The break-up makes it more straightforward. The conglomerate was quite complex. [But] the separation of the energy assets has taken longer than expected despite a relatively strong oil market,” said David Kerstens, analyst at Jefferies.

Mr Skou underlined three chapters in Maersk’s transformation — the sell-off of its energy assets, a search for new capabilities, and a complete reorganisation of the rump business.

If and when Maersk Drilling is spun off later this year, the company will have completed about $18bn of transactions in the past three years. Its oil business was sold to France’s Total for $7.5bn, Maersk Tankers was offloaded to its controlling shareholder, and a sale of drilling was abandoned as the bids received were disappointing.

Only the fourth and smallest unit, supply services, is lacking a divestment plan. On the acquisition side, Maersk paid $4bn for Hamburg Süd, the German shipping group.

But its ability to do more deals is held back by its weakening credit rating. Mr Skou underlined that maintaining an investment grade rating — it is only one notch from junk by Moody’s and two by Standard & Poor’s — was critical.

“I would not want to take any deliberate decisions that make us less than investment grade rating. You can lose it if the markets are against you or the company doesn’t perform,” he said, adding that he would not want to lose the flexibility that allowed him to finance the Hamburg Süd deal within a week.

That leads him to rule out big, multibillion-dollar acquisitions. And it could even interfere with plans to return a “material part” of the shares it received from Total for its oil and gas business. “Let’s say we would not pay out a material part of Total, I don’t think we would be ready to do a big acquisition as a company. We need first to build a company that operates organically. So it would be small, bolt-on acquisitions to build up capability and scale,” he added.

Mr Skou is clear that any acquisitions would be to bulk up the non-ocean parts of the business, specifically land logistics and running companies’ supply chains or warehouses. He pointed out that only one in five Maersk customers use it for the land side. “One hundred per cent need a truck to get to and from the port,” he added.

But, while Mr Kerstens agreed with the focus on land rather than sea, the analyst expressed his surprise that Maersk was sitting on its hands for bigger deals just as consolidation sweeps the industry. The latest sign was Denmark’s DSV bidding about $4bn for Panalpina of Switzerland. But perhaps more serious for Maersk was news last year that one of its main rivals, CMA CGM, had bought a big stake in Ceva Logistics.

“I always thought Maersk would be getting involved in larger M&A. But the balance sheet is not strong enough to support M&A that replaces the revenues from the energy assets,” Mr Kerstens added.

Mr Skou has made top-line growth one of his priorities, and indeed revenues increased by 31 per cent in the third quarter of 2018 and by 12 per cent stripping out the effects of Hamburg Süd. But Maersk is estimated to have full-year revenues of about $40bn last year, a level it last reached in 2015, but well below the $60bn from 2011.

The third part of the new Maersk is an attempt to turn a conglomerate with eight divisions into one company. Mr Skou, a former head of the container shipping unit Maersk Line, said he used to have his own divisional functions of everything from communications and human resources to legal, only lacking finance.

“Now we are eliminating a big corporate layer we had on top of the divisions,” he said. About 500-1,000 job losses are involved but Mr Skou, somewhat surprised himself, said that employee engagement had risen after the cuts. “The whole purpose was not to make redundancies but to be organised as one company,” he added.

Mr Skou is insistent that Maersk will be a better company at the end of the process but acknowledged the tension between the short and long term. “When you are going through a transformation there is a balance between delivering every quarter and hopefully transforming so it will give better results in the future. Leadership is getting that balance right,” he said.

Outlook for shipping industry deeply uncertain

Container shipping is at the heart of both the new and old Maersk. But the outlook for the industry and its profitability is deeply uncertain.

Much of this has to do with whether trade tensions between the US and China will worsen. Soren Skou, Maersk’s chief executive, said that so far Maersk had felt little impact, apart from a surprising increase of goods flowing into the US as importers built up inventories. He acknowledged that this would have to be reversed at some stage.

On the profitability side, Maersk Line has long met its ambition to have an operating margin more than 5 percentage points above the average of its rivals. David Kerstens, analyst at Jefferies, now said the company was no longer best-in-class: “In the container shipping market, they have been struggling on the cost side compared with peers.”

There is little respite ahead on that front as new rules about low-sulphur fuel are expected to add more than $2bn a year in costs to Maersk. What will be decisive is how much of this the Danish group is able to pass on to customers — and that may depend on how healthy global trade is at the end of this year.

Mr Skou said he was grateful to have a long-term shareholder, the Maersk family who through various vehicles control more than two-thirds of voting rights, to help in a “period of uncertainty”.

But, speaking just before Christmas, he said he was “cautiously optimistic” about this year and next as an industry famed for building ships willy-nilly in the past potentially acts more rationally. “A key driver will be that not a lot of new ships will be delivered, not a lot of new capacity. Analysts forecast that demand will outgrow capacity, and it’s been a long time since we had that situation,” he added.

Richard Milne

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