A.P. Moller-Maersk received the first definitive word on its offer to purchase Royal P&O Nedlloyd this week with P&O’s early sale of its 25% stake in the company at Euro 56.25 per share – a Euro 0.75 discount to the offer price – through Nordea and Danske banks. This brings A.P. Moller’s stake in the conglomerate up to 45%.

Fresh on the heels of last week’s announcement that AP Moller would tender to acquire Royal P&O Nedlloyd, there were this week reports in the Daily Telegraph this week that the Singapore government investment vehicle, Temasek, which owns a 70% stake in rival Neptune Orient Lines, is speculated to be building a stake in P&O (which owns 25% of Royal P&O Nedlloyd). Although such reports have not been confirmed, analysts at Citigroup think it might make sense from a timing and strategic point of view, but not because Temasek is interested in outbidding the mighty Moller. Here’s their reasoning:

* Temasek owns the second largest port company in the world, Ports of Singapore

* Citi believes P&O Ports would be an attractive addition to the PSA, as it would further dilute the dominance of the transhipment port in Singapore, which currently accounts for over 60% of volumes

* It would also make PSA a more attractive company if Temasek  looked to IPO it in the future

* NOL has long been mooted in the press as an attractive merger  partner for P&O Nedlloyd (PONL) due to complementary route networks

* The recent announcement by AP Moller that it intends to make a  cash offer at EUR 57 for PONL may have forced Temasek’s hand

* Given the strong financial backing of AP Moller, entering into a  bidding war for PONL would not appear to be an attractive option; however, acquiring P&O would give Temasek a 25% stake in PONL, which could be enough to defend or discourage a bid from AP Moller

* This would give Temasek the option in the future to initiate a  merger between PONL and NOL

* Recent bid premiums have been in the range of 20-40%, which  would imply an offer of 340-390p would be needed to secure P&O

* There is no tangible evidence at the present time, but Citi believe this is a plausible scenario

* Citi maintains their Buy/ Medium risk (1M) recommendation for P&O and 315p share price target, rates P&O Nedlloyd Hold/ High Risk, price target EUR 57, and rates AP Moller Sell/ High Risk, target price Dkr40,000

French carrier CMA CGM told the industry press last week that it aimed to be the world’s third-largest container carrier by 2008. Well congratulations! As the container capacity graph on the first page of this issue shows, with the merger of AP Moller-Maersk and Royal P&O Nedlloyd, CMA CGM is set to become the world’s third-largest container line by as early as this summer. And the company still has 55 boxships set to be delivered over the next three years.

In early 2004, it became clear to us that 2005 would be the most active year of consolidation among shipping companies in history. Our belief was underpinned by the fact that shipping companies were generating loads of cash from both operations and the capital markets, the fundamentals for the shipping industry looked set to remain strong and shipyards were operating at or near full capacity. So, armed with loads of cash and good prospects, it is natural to expect that companies would look to reap operational and financial synergies and leverage through growth, and that that growth would come in the form of corporate deals rather than single vessel purchases. And that is exactly what has happened in virtually every sector of the international shipping industry.

In the latest and most dramatic example of this phenomenon, A.P. Moller-Maersk launched a takeover bid this week for 100% of the shares in Royal P&O Nedlloyd in the largest container shipping M&A deal ever. The takeover bid values P&O at Euro 57 per share, which represents a 41% premium to the then-current price and a 45% premium to the price over the last six months. The bid is also a whopping 130% over the rights issue price on the deal that received Marine Money’s Deal of the Year Award this year and values the company at 1.6x FY05E. Although we expect Royal P&O Nedlloyd shareholders and P&O shareholders, who own 25% of Royal P&O Nedlloyd, to vote in favor the deal, the European Commission may require Maersk to sell off certain routes in order to consummate the deal legally, which could in turn spark a series of smaller M&A deals.

Randy Sesson at Goldman Sachs is representing A.P. Moller on the transaction, JP Morgan is representing Royal P&O Nedlloyd and Citigroup is representing P&O.

The transaction is an important one for both AP Moller and the container market in general. As you can see from the graph on the first page, the deal solidifies AP Moller’s position as the world’s largest carrier by taking out the number 3 player and propelling itself to a size that is set to be more than double that of its next largest competitor. On the industry level, the good news is that it shows APM’s bullishness about the outlook for the market, even despite the enormous post-panamax containership order book and some gloomy forecasts by analysts. The loss of P&O from the Grand Alliance will have a negative impact on fellow members NYK, OOCL and Hapag-Lloyd, as Grand Alliance has historically been an effective competitor to Maersk although we can hope that the rationalization of tonnage might ultimately help lessen the blows of looming overcapacity. In a research note, Citigroup container shipping analyst Charles de Trenck said he thinks the deal might raise the ante for other container lines, perhaps suprring NOL to acquire Wan Hai Lines, which has loads of ships on order. De Trenck also surmises that Evergreen could potentially be hurt, so we would expect this transaction to cause a spate of mergers and acquisitions.

Like any truly good M&A deal, this one is beneficial to everyone involved. Shareholders in Royal P&O Nedlloyd get a great valuation for their shares at a time when many think the market might start to weaken. If they want to remain exposed to the industry, they can use their tender proceeds to buy shares in AP Moller. And for AP Moller, the deal is fantastic. With synergies of around $350 million and AP Moller’s P/E valuation of 10x, the company’s share price should increase by the entire purchase price of the new company. Adding in the $400 million of earnings that Royal P&O Nedlloyd is expected to generate in 2005 will bring the number to $4 billion. Put another way, one could make the argument that AP Moller is getting Royal P&O Nedlloyd company for free!