The world’s largest container shipping company is enjoying calm seas and a prosperous voyage. Container freight rates are at record highs as global supply chain disruptions push demand up. Maersk is doing its best to ensure continued headwinds with its latest acquisition.
The Danish giant will buy LF Logistics, the global freight management unit of Hong Kong supply chain group Li & Fung, for $3.6 billion. It will provide Maersk with a new and additional revenue stream from ground transportation. But the deal will also make Maersk, a member of the shipping world, even stronger.
Li & Fung is dying like Maersk wax. It was once the largest sourcing company in the world. However, LF Logistics’ $3.6 billion valuation is more than double that of Li & Fung in its $930 million acquisition last year. Li & Fung has been caught up in a decades-long downward spiral, failing to adapt to the online shift in sourcing and distribution of consumer goods. The deal gives it a good outlet.
The transaction made Maersk difficult. Inland transport is in short supply, giving Maersk pricing power through its network of more than 200 distribution centers across Asia, including China, Singapore and Australia.
LF Logistics is headquartered in Hong Kong, an important Asian maritime and logistics hub that controls trade to and from mainland China. Its assets include freight forwarding, customs and commercial services and consolidation businesses.
Integrating these will streamline Maersk in Asia, reducing costs. The domestic logistics business, purchased at a business value to ebita ratio of 14.4x, will be a useful addition to Maersk’s flagship line, about 80% of which is occupied by service sea logistics. Maersk’s 70,000 customers, including the world’s largest corporations, will benefit from a fast service for global transactions.
On the other hand, the acquisition will further focus Maersk’s market power.
There is now closer scrutiny of global shipping alliances and the dominant position they give to members. The US has spent two years investigating allegations of price fixing against major container shipping lines. It closed the case without paying a fee in 2019.
Competition regulators, annoyed by inflated shipping prices, would do well to scrutinize this acquisition. Maersk shares are up two-thirds this year. A recent rally shows that freight rates are set to stay high, whether by sea or by land.