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Citi reaffirms NOL sell recommendation on potential debt buildup

Citi reaffirms NOL sell recommendation on potential debt buildup

Singapore: Not everyone is enamoured with the idea of Neptune Orient Lines buying Hapag-Lloyd. The Singaporean line has had a 'sell' recommendation slapped beside it by US investment bank Citi. The bank is concerned at the debt NOL would have to assume to take the German line over. NOL is reportedly looking to raise $5-7bn to finance the takeover of the TUI affiliate.
Analyst Vincent Fernando says the valuations being put on Hapag Lloyd of $6-8bn would make it worth more than NOL in its entirety.
Were it to take over Hapag-Lloyd then NOL would assume a net debt to equity ratio of 1.9-2.6x from its present level of 0.14x, the analyst maintained.
"This would imply NOL taking on substantially more leverage than many peers are currently willing to bear," he suggested.
"Unfortunately, substantial new debt would add risk to NOL shares due to the fact that the returns on the acquired assets&could easily fall below NOL's cost of debt funding in a tough container shipping environment."
"Given the fact that many outspoken TUI shareholders are pushing for a strong valuation, we unfortunately worry that Hapag Lloyd's assets could end up being purchased at a premium to NOL's," he said.
"This could compound challenges to per-share returns for NOL shareholders such as weaker container shipping demand fundamentals, and potential problems managing costs of integrating Hapag Lloyd."
"Given that we are worried about profitability and returns for container shipping due to global growth concerns, we fell it's a risky time to be acquiring large amounts of new container ships especially if bought with an M&A premium." [26/6/08]


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