Merger moves forward between Qatar Navigation and Qatar Shipping Company

24 February 2010

Qatar’s Qatar Navigation and Qatar Shipping Company (Q-Ship) have agreed to an initial share swap proposal for their alliance, but details on final structure await shareholder approval

The government of Qatar unveiled a plan to merge two of the country’s largest maritime companies, in late 2008. Following that announcement, things went quiet.

But last month the two companies finally broke their silence and announced the merger is moving forward.

After a lengthy hiatus, the boards of directors of both firms have now given formal backing to the government-led initiative. The two boards voiced support for a proposed share swap, based on an exchange ratio of 2.2 shares in Qatar Shipping for each share in Qatar Navigation.

Beyond this, the two companies and their advisers are holding cards close to their chests. Towards the end of March the two firms are expected to convene extraordinary general meetings to present the detail of the merger proposal to their shareholders for approval.

The details, which had yet to be finalised as MEED went to press, include how to structure the new company, finalising terms and conditions of the merger, securing approval from the two firms’ existing shareholders, and tying up legal and regulatory issues.

Company ProfileQ-ShipQatar Navigation
Net profit for nine months to September 2009QR 518.7mQR 429.8m 
Operating incomeQR 199.2mQR 878.83m
Earnings per share* QR 4.72QR 5.97
*at September 2009  
Source: Q-Ship/Qatar Navigation, October 2009

External advisers

Despite the lack of detail, the two companies have now agreed in principle to move the merger forward. “The evaluation phase of the proposed merger process has been completed and the next step for the implementation has now begun,” they announced in a joint statement released at the end of January.

The proposal to merge the two companies came in response to the global economic downturn –  shipping lines’ cargo volumes slumped by an estimated 20 per cent worldwide in 2008.

Seeking to protect Qatar’s shipping industry from the downturn, ministers created a steering committee and put together a team of external advisers to drive the proposed merger forward, led by the Doha branch of the UK’s HSBC Middle East and London-based maritime analyst, Drewry Shipping.

Advisers to the steering committee comprise law firms Latham & Watkins of the US, the local Mohammed Al-Marri and the UAE’s Al-Tamimi & Co, and accountancy firm Ernst & Young.

Q-Ship is holding independent consultations with US consultants Booz & Company and Morgan Stanley, while Qatar Navigation is taking advice from the local QNB Capital, US’ Oliver Wyman and Gulf Ventures Corporation of Bahrain.

Now, we have sold half our fleet, and the cost of buying new ships is a fraction of the price at which we sold

Kamal Kothari, chief executive officer of Q-Ship

However, September 2009 brought a change within the steering committee, when chairman Mohammed al-Shirrawi retired as director of finance at Qatar Petroleum (QP). Abdul Rehman Ahmad al-Shaibi, previously director of project finance at QP, took over as chairman of the steering committee and director of finance at QP.

The proposal to merge the two companies took many in the shipping industry by surprise. Qatar Navigation is already a majority shareholder in Q-Ship, with a 15 per cent stake. QP holds an 18 per cent stake in Q-Ship.

The remaining shares are split between private shareholders with 40 per cent and corporate shareholders with 27 per cent. Although both companies are diversified Qatari conglomerates, historically they have been keen to stress their differences as companies that occupy different market niches in the maritime sector, and serve a different range of geographical and industrial customers.

While Qatar Navigation is a key provider of domestic maritime infrastructure and services, Q-Ship specialises in energy transport and positions itself in the global market.

Key fact - Q-Ship is back in acquisition mode, and is watching the market closely for an overseas deal

Founded in 1992, Q-Ship is listed on the Qatar Exchange. It owns and operates a mixed fleet of vessels that work across the liquefied natural gas, crude oil, petroleum product, liquefied petroleum gas (LPG) and general bulk liquid trades, as well as a fleet of offshore support vessels. The company is emerging from a period of divestment in which it sold half its fleet before January 2008. According to Kamal Kothari, chief executive officer of Q-Ship, the decision to sell tonnage pre-empted the global recession.

Divestment has left the company with a fleet of just seven wholly-owned crude oil, petrochemical and LPG carriers. These are leased on time charters of between two and five years to customers that include Canada’s TK Shipping, Qatar Fertiliser Company, France’s Total and the US’ ExxonMobil Corporation.

Now, however, despite the looming merger, Q-Ship is back in acquisition mode. It is seeking overseas investment opportunities.

In August last year, it set up a limited liability company, Pacific Marine Services, with an initial QR200,000 ($54.9) investment.

“Charter rates for all vessels were high between 2006-08, so one of the key elements of our business strategy was to sell our ships and not to order any new vessels,” says Kothari. “Now, we have sold half our fleet, and the cost of buying new ships is a fraction of the price at which we sold.

“Q-Ship’s activities included tankers, product carriers, LPG carriers and nine joint ventures in the energy sector. The market has gone from boom to slump – a year ago, there was some $70m of bulk carrier tonnage on order. By December 2009, the value of orders had halved to $35m. A 50 per cent drop in vessel prices means better value for buyers.”

Acquisitions would be funded through the company’s own assets and with debt. Among the niches that Q-Ship is examining are crude carriers, product tankers and dry bulk carriers.  Last August, it won a five-year contract to transport aggregates for Qatar Quarries, but it owns no bulk carriers. An acquisition in this niche would make sense.

Exclusive contracts

Kothari also hints at opportunities beyond the shipping sector, pointing to Q-Ship’s 2004 acquisition of Qatar Engineering & Construction for $11m.

“We turned it around to become profitable in two or three years and sold it last year for $110m,” he says. “We are now watching the market closely, with a view to strategic acquisitions. These will not be driven by a specific time-frame – it’s all about the right opportunity at the right price.

“To add value, we need to remain global in outlook. We are an opportunity-driven company, and will add value and expertise to the right acquisition.”

In contrast to Q-Ship with its global interests, Qatar Navigation operates primarily in the home market. A diversified conglomerate founded in 1957 and listed on the Qatar Exchange with a market capitalisation of QR4.8bn, Qatar Navigation’s interests span maritime services, real estate and general investments. It employs 2,500 people. Qatar Navigation’s main maritime activities include container and bulk shipping, logistics and stevedoring at the local ports of Doha, Mesaieed and Ras Laffan. The company dominates Qatar’s containerised imports and exports, handles feeder traffic to and from the UAE and is agent in Qatar for more than 50 shipping firms.

It holds exclusive contracts with major national exporters such as Qatar Petrochemical Company and Qatar Chemical Company and operates a fleet of service vessels through its subsidiary, Halul Offshore Services Company – a 50:50 joint venture with Q-Ship.

Qatar Navigation also leases equipment to companies such as QatarGas, RasGas and Maersk Oil. Unlike Q-Ship, Qatar Navigation has expanded its fleet. In September last year, Qatar Navigation took delivery of the second of four new container feeder ships ordered from South Korea’s Dae Sun Shipbuilding & Engineering. The new carriers will more than double the company’s container fleet capacity to 7,210 from 2,810 containers.

The reason the proposed merger between Q-Ship and Qatar Navigation took many by surprise is that both companies are profitable. Q-Ship’s most recently published full-year figures for 2008 show the company turned a profit of QR518m, a 16.6 per cent drop on 2007’s record QR621.4m profit.

In February, Qatar Navigation announced it had achieved net profits in 2009 of QR472m, with total assets of QR7.2bn and total equity of QR5.9bn. With the merger evaluation completed in January, the companies and their advisers now need to complete legal and financial closure. Once this is done integration of the two firms could begin as early as this summer.

Shipping analysts are watching the deal’s progress with interest. The downturn has made investors cautious and banks reluctant to finance new deals. The Gulf region recorded about $11.3bn-worth of mergers and acquisitions last year, down from $13.2bn in 2008.

Shipping sources in Qatar maintain the merger between these firms is essentially government-led. Qatar Navigation and Q-Ship are joint venture partners in Halul Offshore Marine and majority shareholders in Qatar Gas Transport Company (Nakilat), each holding 15 per cent stakes.

These common interests aside, the two shipping giants operate in different segments of the maritime industry. 

Nevertheless, with global shipping in the doldrums, the government clearly sees the merger as the best way to protect national shipping interests, consolidating assets and reducing its exposure to a downturn in trade. The merger will also create economies of scale and make it possible to streamline departments that overlap, such as administration, and create savings.

While Q-Ship managed to reduce its general and administrative expenses from QR53m in the first nine months of 2008 to QR31.8m for the same period in 2009, Qatar Navigation’s general and administrative costs rose 8 per cent to QR61m during the same period.

“The state of Qatar decided in November 2008 that the two companies should merge,” says a shipping manager close to the discussions. “The merger is now undergoing due diligence, under guidance from HSBC.

“Once that process has been completed, the merger will almost certainly go ahead and the process seems to be very much on track.”

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