However, we foresaw possible changes in the line of command in November, when I wrote: “…perhaps we should prepare for a different Mærsk – one which may involve a different-looking management team”.
As rumours about divestment and new investment continue to swirl around Maersk following the sacking of group chief executive Nils Andersen, I have no doubt the Danish powerhouse will act sooner rather than later.
And where the axe will fall on its vast asset portfolio is a particularly important value-driver.
First, how serious is Maersk about a break-up?
Judging from the reaction in the financial markets, not very – although a radical corporate restructuring appears to have become more pressing.
Based on its standard deviation, Maersk stock has become more volatile since 16 June, surging from Dkr7,820 to Drk9,140 in less than a week, just before Brexit, yet it still traded around the mid-point of that range last Friday, when it closed at Dkr8,475 – a level broadly in line with its share price at the end of 2015.
Back then, however, a corporate reshuffle of any kind was inconceivable.
Now, if short-term swings in stock prices carry some significance – and they do at times, in my experience – investors are either unimpressed about the prospects of a leaner Maersk emerging or simply do not believe it will follow that route.
Nonetheless, Maersk could be on the verge of pruning its corporate tree, as market observers speculate that some of its assets could soon be on the block – there are no sacred cows in the portfolio, apparently.
Before Maersk informed us that it might reconsider its corporate structure, we entertained a fascinating thought experiment, carried out with the help of vesselsvalue.com, suggesting the shipping assets be separated from the reminder of its portfolio.
But market reports since have been even more creative, after the most recent events in Copenhagen, with articles suggesting its logistics arm, Damco, would be a chief divestment candidate. According to ShippingWatch, for example, its parent will either have “to invest big-time in forwarding company Damco or divest it entirely”.
“The conglomerate’s history seems to indicate a sale,” it added.
However, Damco – a tiny unit in the assets base – is the beating heart of Maersk. Its track record, as Maersk says on its website, “starts early in the 20th century, when two new freight forwarding companies were established in Europe”, when “AP Møller and his father, P Mærsk Møller, founded a shipping company in 1904 in Svendborg, Denmark, with a single freighter”.
Yet the reason Damco will not be sold, in my view, is less romantic and more driven by financial awareness: any “new Maersk” would have to absorb less capital than it does currently, if it is serious about delivering shareholder value. Hence, the most obvious divestment candidate remains its container shipping unit, followed by APM Terminals, Maersk Drilling and Maersk Oil.
Gauging a sale
All leading freight forwarders, including Damco, operate in a highly fragmented market where core margins and volumes are under pressure, but most of them are coping well, as proved by their financial strength in past few quarters.
Life wasn’t easy at Damco until a year ago – and challenges still persist, of course – and its turnaround seems to be paying dividends, so any additional investment from its parent would likely carry lower risk than capital allocated to any other parts of the business, given Damco’s total capital requirements.
On the face of it, Maersk would be insane to get rid of Damco, even if Damco was fully valued by a trade buyer at, say, between $1bn and $2bn, or up to 8% Maersk’s current market cap – because, in this market, Maersk must shrink across units where heavy investment has become heavier than in the past due to their lower earning power and reduced cash flow generation.
Alternatively, it could retain control of Damco in a partial spin-off while asking investors to take the risk of a partial float – forwarders trade at rich multiples, but once again, more critical decisions have to be taken elsewhere.
A SWOT analysis performed by Transport Intelligence in its Global Freight Forwarding 2016 report, which included the contribution of The Loadstar team, pointed out that Damco clearly has “the capability to manage client supply chains in a 4PL capacity”, as evidenced by a first-quarter agreement with Syngenta, while its “diverse client base across core vertical sectors served alongside its ability to develop long-term relationships with key clients is a key strength” – its top 25 customers have an average contract life exceeding 10 years.
And as part of a huge conglomerate – “ownership by Maersk Group offers security and gives Damco real strength in sea forwarding” – which combines with the ability to manage complex logistics, boosting the development of cross-border e-commerce supply chains, as evidenced by Damco’s establishment of its China B2C Logistics service.
Exposure to China, South Asia and South-east Asia – all markets where Damco has a long-term involvement – is another attractive feature, despite recent headwinds there.
Finally, its recent financial figures clearly indicate that Damco might have found a true leader in Hanne B Sørensen, and its recovery could be sustained.
Of course, there are still risks, but so what?
Not only is Damco a unit that absorbs the lowest amount of invested capital at group level – at $224m in the first quarter, it trailed Svitzer’s $1.2bn – but also the improvement in terms of returns has been by far the most significant across Maersk’s vast assets portfolio in the past quarter, and the odds are short that second-quarter results next month will please investors and market observers alike.