NOL is holding an exclusive discussion with CMA CGM with the purpose of voluntary offer for the former's business. Following the news, the share price of NOL surged to S$1.23, a level not breached since Feb 2013. Speculation on the possible sale of entire NOL business has been rife after the sale of its most profitable Logistics business segment earlier in the year. The profit on sale bolstered the balance sheet by more than $900m, which narrowly escaped the SGX listing gallow of 3 consecutive years of losses.

1) Shipping industry is bleeding with no sign of healing

Against a backdrop of weakening global demand, shipping capacity continues to expand, pressuring freight rates to historical lows. Lower bunker cost provides a form of respite from the freight rate bloodbath. However, the overall operating cost has not improved significantly, chipping away earnings that are in so dire need to par down debts in this highly-leveraged industry. Back then, the NOL Board's rationale was for management to concentrate on liner business upon the conclusion of Logistics segment to Japanese firm Kinetetsu. This was a tall order for NOL as even the world's largest liner Maersk revised their profit guidance downwards. Consolidation in the industry is still in its early stage and I see more mergers and acquisitions coming our way, as there is not any imminent sign of recovery.

2) CMA CGM does not have money

CMA CGM and Maersk earlier reported interest in NOL, but the latter pull out leaving CMA CGM in exclusive talk with NOL. From a liner perspective, expanding fleet presence despite making losses with the market freight rate makes business sense in driving competitors out. If Maersk were to buy NOL, Maersk expanded capacity along major trade lanes could drive CMA CGM out. Hence, CMA CGM has to compete with Maersk for this NOL capacity that is available to the market. In a twist of event, Maersk pulled out of the deal, leaving CMA CGM as the sole negotiator. In our opinion, if Maersk were serious of the deal, the decision to pull out would not be in a matter of days after NOL went public with that information. I believe Maersk played CMA CGM out to soak up NOL assets. Now, suppose that CMA CGM decided to go-ahead with the deal. It was reported by CIMB that Temasek rejected S$1.50/share bid for NOL, representing a 25% premium to its last close, and about 15% above NOL's net asset value. Where is the money going to come from? CMA CGM bonds are teetering on junk status, and for the company to go public at a time when Hapag Llyod is would not fetch a strong valuation for the former. Simply put, it takes a huge load of convincing the market that the enlarged CMA CGM-NOL will stand out as a profitable liner when others are threading on losses.

3) Expectation mismatch

Other than network synergy on consolidation, it is difficult to understand why a seasoned and more established CMA CGM would like to purchase a loss-making business above the net asset value of NOL. The cost-saving is unlikely to be substantial because CMA CGM is a much larger entity than NOL. The portfolio of 8 terminals NOL has may interest CMA CGM in expanding its terminal footprint. These terminals are valued at about $840million based on an estimated FY14 EBITDA of USD 70million at 12X EV/EBITDA. However, stripping terminals business out of NOL portfolio leaves the company with a really ugly portfolio of vessels that will continue to bleed cash. It is therefore in the interest for CMA CGM to buy the terminals-only segment as opposed to NOL intention to package good and bad apples together for a better price.

How will the story develop?

In all likelihood, I believe at the end of the exclusivity period, CMA CGM decides not to proceed, and the share price of NOL tanks to where it was at about S$1. In a wild shot, Maersk may subsequently enter into an exclusive discussion with NOL. Knowing the true value of NOL's business, Temasek may then be willing to accept the best Maersk can offer to exit this poor investment. Maersk, with its financial prowess backed by its stronger balance sheet (compared with CMA CGM) would then have greater strength to wrestle CMA CGM on key routes. Win-win situation. Till then, rough ride for investors.

Mr Y is an investment analyst with a global consultancy firm. His years of equity coverage experience spans across consumer and maritime industries. He is a CFA charterholder and enjoys writing articles in relation to equities.

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