30-04-03 In a major deal closely watched by the shipping industry, Neptune Orient Lines (NOL) is selling its oil tanker division to Malaysian International Shipping Corporation (MISC) for more than $ 1 bn (S$ 1.77 bn) including debt -- a figure that beats market expectations by a good margin.
The deal for the sale of American Eagle Tankers (AET) includes a cash payment of $ 445 mm, a cash dividend payment of $ 75 mm, and up to $ 500 mm in assumed debt by the time the deal is closed by end-July. NOL will also get to keep AET's profits from Feb. 8, 2003, to the closing date of the deal, which analysts estimate will come in at about $ 30-50 mm.

The agreement also calls for additional cash payments by MISC -- a subsidiary of Malaysia's state-owned oil company Petronas and one of the world's top three LNG carriers -- if AET achieves unspecified performance targets over the next two years. NOL chairman Cheng Wai Keung said the Malaysian corporation's offer was the best on the table among the five global tanker companies known to be bidding for AET. The fact that MISC would also bring over AET's management was a key factor in the decision, Mr Cheng added.
AET CEO Joseph Kwok and his management team -- together with a part of NOL's ship management subsidiary -- will also join MISC, as will nearly 700 ship-based staff on AET's 29 Aframax tankers and two very large crude carriers. Up to 20 shore-based staff will be redeployed within the NOL group and a “handful” will be retrenched, said Mr Cheng.

The sale is subject to shareholders' approval at NOL's AGM on May 28. Mr Cheng said the divestment was a strategic move to allow NOL to focus on its core container shipping and logistics businesses. “It would also significantly strengthen the group's balance sheet and enable resources to be focused on driving sustained profitability from our core capabilities,” Mr Cheng added.
The proceeds from the sale of AET, once described by former NOL CEO Flemming Jacobs as the “jewel” in NOL's crown, will be used to pare down the group's $ 2.8 bn debt, cutting its net gearing by nearly half. Mr Cheng also said he expected NOL to return to profitability for financial year 2003 based on AET's sale, improved container freight rates and cost cutting. “We can safely say this year, we will be in the black,” he said.

Market expectations of AET's sale price has been around $ 700-800 mm, with analysts pointing to timing of the sale in a currently buoyant tanker market as the key reason for the better price. Looking on the surface of it, it looks like a reasonable deal and it should be taken fairly well by the market as it provides clarity to NOL's future,' said UBS Warburg analyst David Lepper. “Given that the charter rates are running fairly high, it's a reasonably good period for them to be selling it,” he said.
Analysts will be focusing on the charter rates in the coming months to see where the final price will end up, he added. In a recent research report, Mr Lepper had revised upwards his 2003 earnings forecast for AET to $ 356 mm, based on rising Aframax charter rates. Similarly, ING Financial Markets analyst Peter Williamson said that NOL's deal is above expectations.

Because AET's market has entered a cyclical upturn, Mr Williamson said it made sense for NOL to cash out of the business while the going is good. “It doesn't make sense for them to hold on with the escalating debt burden at this level plus the existing debt on the balance sheet,” he said.
The burning question for many has been why NOL would sell off the one clearly profitable part of its business. “The liner side has immense earnings capability but it entered a cyclical downturn and it emerged at that point that AET was the only profitable unit within the business. But as we enter a cyclical upturn for the liner business, that will change,” he said.

In 2000 when the group's earnings were healthy, the liner or container side of the business was the major contributor, not AET, which is in the oil tanker side of the business. “If they are going tobe a leading player in one of these businesses, it has to be the liner side that they concentrate on,” Mr Williamson added.
The divestment decision was made after a six-month review of AET following the withdrawal of its planned listing last year due to weak market conditions.