Nov 1, 2016

Japan's Big 3 integrate containership businesses

(From left)Eizo Murakami, president of K Line, Junichiro Ikeda, president of MOL, and Tadaaki Naito, president of NYK

Japan's three largest operators (Japan's Big Three), comprising Kawasaki Kisen Kaisha (K Line), Mitsui OSK Lines (MOL) and Nippon Yusen Kaisha (NYK), announced on Oct. 31 that they will integrate their liner containership businesses on the premise that they will secure the necessary permits from the relevant authorities. The integration will also affect their overseas terminal businesses. The total fleet scale of the three operators stands at about 1.4 million TEUs, so their integration will catapult them into becoming the sixth largest firm in the world in the containership business. They expect to rake in integration result of approximately Y110 billion per annum through the generation of synergy based on the best practices of the three operators and the use of merits of scale. They plan to establish a joint venture company on July 1, 2017 and then kick off services through such company on April 1, 2018. Investment amount will reach about Y300 billion, including investments in-kind such as ships and terminal shares, with NYK to take a 38% stake in the venture and K Line and MOL to hold a 31% stake each. Japan's containership operators will then shift into a single-company system.

Japan's Big Three entered into a business integration agreement and a shareholders' agreement in relation to the integration of their liner containership businesses according to the resolutions of their board of directors meetings that each of them held on October 31. On the same day, Eizo Murakami, president of K Line, Junichiro Ikeda, president of MOL, and Tadaaki Naito, president of NYK, held a joint press briefing at the Keidanren Kaikan in Tokyo and announced the integration.

At the press briefing, Murakami claimed that, "This is such a major decision for our company. We will spin off the liner containership business, which is one of our main thrusts. The operation style of our containership business will change, but just like in the past, we will be targeting sustainable growth as a comprehensive shipping company that carries out various businesses." Meanwhile, Ikeda commented that, "This will be a historic turning point for us. We are committed to ensuring that the integrated company will be successful and that we will build a sound containership business, and we vow to extend steady support to this venture." Naito, touching on the moves toward integration among containership operator worldwide in recent years and the history of consolidation among Japanese containership operators, said that, "We are extremely happy that we managed to realize this venture through only our powers as private entities. We will become a single liner operator in Japan. It is important to build a strong and sound company as we do not want see a Japan without a liner operator."

Japan's Big Three envision the liner containership business as a growing industry, but the supply-demand balance in this segment has been significantly deteriorating in recent years owing to the weakening growth in cargo demand and the increase in the supply of ships as the market sees the completion of large-size boxship newbuildings. As a result, the slumped state of the market prevails. Under these circumstances, companies in the global containership industry have been and are moving to boost their competitiveness by expanding operation scales. Under the awareness that "the structure of the industry itself will significantly change," Japan's Big Three decided on the above business integration in a bid to realize stable and sustainable operation in the liner segment through infrastructure that assumes a key role in trade and social life.

With regard to the source of competitiveness and earning capacity of their containership businesses, Japan's Big Three pointed out that it is a multiplication of "efficient business management (best practices)" and "business scale (economies of scale)." Hiroki Harada, corporate officer of NYK, said that, "The three companies have pushed for initiatives to maximize output by ensuring the most effective combination of the three elements of ships, boxes and people. But the current business scale is not adequate. With this, the three firms will fuse together to secure scale and then pursue the scales of the major players abroad."

The integrated company aims to realize synergistic effects and stable revenues/profits by mapping out the creation of new synergies enhancement in business efficiency through the combination of each company's best practices, and realizing merits of scale by integrating the business scales of the three partners in the venture.

As regard the scale of the integrated company, simple aggregation of the three companies indicates that their sales stand at Y2,040.3 billion (Y614.9 billion for K Line, Y719.1 billion for MOL and Y706.3 billion for NYK; all of which were recorded in fiscal 2015 that ended in March this year), while their operation volume totals 1,382,000 TEUs (357,000 TEUs for K Line, 517,000 TEUs for MOL and 508,000 TEUs for NYK; all figures as of October 2016), and the number of ships under their operation stands at 256 units (66 ships for K Line, 92 ships for MOL and 98 ships for NYK as of the end of September 2016).

With regard to their current standing in the global market in terms of operation scale, MOL holds the 11th spot, while NYK and K Line rank 14th and 16th, respectively. Their combined fleet scale stands at about 1.4 million TEUs, accounting for around 7% share in the global fleet and sixth largest fleet in the world. Now when combined with their 23 newbuildings of about 360,000 TEUs on order, their fleet scale will expand to about 1.8 million TEUs, which is likely to further raise their ranking in the global market.

Japan's Big Three will establish an integrated operating company and integrated holding company where they will directly invest. The actual business will be run by the integrated operating company and will be controlled by the integrated holding company.
Each of Japan's Big Three operates their respective comprehensive shipping businesses and they intend to continue to carry out their other businesses after the above integration.

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