February 14, 2018
Breaking up is all the rage. It may seem an odd message around Valentine’s Day but in the corporate world, splitting up conglomerates has never been hotter.
Siemens and General Electric, perhaps the leading industrial conglomerates, are the most visible examples, pursuing strategies that only a few years ago would have been considered too radical to contemplate. The break-ups are egged on by activist investors such as Cevian Capital, which has even touted this era as the “end of conglomerates”.
However, sometimes it is worth stepping back and considering the rationale for breaking up again. Take Maersk.
The Danish group four years ago had its fingers in many pies from wholly-owned businesses in container shipping, oil and gas and drilling rigs as well as being the main shareholders in Denmark’s biggest bank and supermarket chain. So some greater focus seemed necessary.
The stakes in Danske Bank and Danske Supermarked were the first to go. But the biggest step came 18 months ago when Maersk announced it would sell off all its energy businesses, leaving it to concentrate purely on shipping and logistics.
The break-up reflected internal frustration that the energy businesses had not worked as a “natural hedge” to the shipping unit. The idea had been that when the oil price was high, Maersk would earn additional money from energy while suffering from high fuel prices for its gigantic container vessels. Conversely, low oil prices should have proved a boon for shipping.
In recent times, it failed to work out like that as container shipping remained bedevilled by overcapacity and weak global trade in the aftermath of the 2008 financial crisis. On the day Maersk announced its break-up, Brent crude was trading at about $47 a barrel.
Today, however, Brent crude is trading closer to $70 a barrel. That helped Maersk’s oil business, which it has agreed to sell to France’s Total for about $7.5bn, almost triple its profits from 2016 to last year, consolidating its position as the conglomerate’s most profitable unit. At the same time, some of the old worries about container shipping have returned, with Maersk’s share price falling more than a quarter in the past six months.
Some investors query just how well the break-up is going. “Obviously, we would prefer to allocate capital ourselves,” says one Danish investor. “But to get rid of a business that was your main source of profits and where you could use its cash flow in the rest of the company, well, that’s brave. I still worry that the container shipping industry will not be as rational as they think.”
Soren Skou, Maersk’s chief executive, is having none of it. He argues that having a pure focus on shipping and logistics is still the right strategy. Maersk remains exposed to the rising oil price, he adds, through a 3.8 per cent stake in Total that it is due to receive when the deal goes through later this quarter.
His vision is of making a container as easy to order and deliver from one side of the world to the other as a parcel, using Maersk Line for shipping, its APM Terminals unit for ports, and Damco for freight forwarding. But while Maersk Line is undoubtedly the big beast of its industry, carrying almost a fifth of seaborne freight, it lacks scale in other parts of the supply chain.
It remains exposed to the oil price — higher bunker prices caused Maersk Line’s fuel bill to increase by more than 50 per cent last year. A similar increase of $100 a tonne in fuel costs would hurt earnings by $500m, it warned.
Maersk’s streamlining is also a bet that the container shipping industry will not repeat its own mistakes. Deep-pocketed unlisted family and government-controlled companies have long behaved irrationally, ordering vessels even when demand slows.
Many remain sceptical that the industry can change its thinking, but Mr Skou argues that increasing consolidation means the biggest players have a growing interest in doing the right thing.
Still, the market seems sceptical. Mr Skou is under pressure to show that breaking up is not hard to do.