The IPO of HHLA – A Case Study

Index

1. Introduction

2. Hamburg’s harbour
2.1. Location
2.2. Importance and potential

3. HHLA
3.1. History
3.2. Company Structure
3.3. Services
3.3.1. Container
3.3.2. Intermodal
3.3.3. Logistics

4. Initial Public Offer (IPO)
4.1. Decision Phase
4.2. Financing through shares

5. Motives for the IPO of the HHLA AG
5.1. Financial
5.2. Economical
5.3. Publicity
5.4. Political

6. HHLA share
6.1. Shareholder structure
6.2. The Offer
6.3. Fixed Price method vs. Bookbuilding
6.4. The Underwriters
6.5. Direct costs of an IPO
6.6. Indirect Costs of an IPO
6.7. The Greenshoe Option
6.8. Attractiveness of HHLA stock

7. Risks of buying Stocks from the HHLA
7.1. Market Risks
7.2. Competition
7.3. Supply Surplus
7.4. Higher market power due to aggregation of container carriers
7.5. Adaptation of the waterway

8. Conclusion

9. List of references
9.1. Printed sources
9.2. Web- sources

Table of Figures

Figure 1: Top 10 global container ports

Figure 2: Economic Effects (in million EUR)

Figure 3: Group Structure HHLA

Figure 4: Shareholder Structure before IPO

Figure 5: Shareholder Structure before IPO

Figure 6: The Lead Underwriter and Joint Global Coordinators at the IPO of HHLA

Source: Stock offer brochure from HHLA 2007

Figure 7: Splitting of IPO costs

Figure 8: Abb.: Indirect Costs of the HHLA IPO calculated first day of trading

Figure 9: HHLA stock fluctuations from IPO 20

Figure 10: DAX performance over the last 10 years

Figure 11: P/E Ratios of different harbour stocks

Abbreviations

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1. Introduction

Hamburg’s port, which is also knows as “Germanys gateway to the world” represents the biggest port in Germany and the ninth biggest in the world. Its continued growth is enormously important for the city and the entire metropolitan area.

Two third of all containers in the port are handled by the Hamburger Hafen und Logistik AG (translated: Hamburg port and logistics AG). It is therefore the biggest company in the harbour and has not only responsibility for its employees but for the whole city and even for the whole metropolitan area. In order to use its potential and to increase the container capacity of the harbour, to construct new hinterland terminals and to expand the geographical reach of the railway network the city of Hamburg had to think about new ways to acquire long-term capital. Hamburg senate decided for an IPO of the so far 100% state- owned company. The decision for an IPO entailed premises, obstacles and risks on the one hand but on the other had decisive augments. The implementation included motives but also preparatory program of analyses, calculations and options.

This term paper will illuminate why the expansion of Hamburg’s harbour is so important for the metropolitan area and why the Hamburger Hafen und Logistik AG (in the following HHLA) plays such a major role in this field. It will introduce the IPO process and indicate the motives for it. The paper “IPO of HHLA” will further attend the offering of HHLA shares, the costs and risks of it.

2. Hamburg’s harbour

Sarah Walter

The port of Hamburg is the largest in Germany and the ninth biggest in the world.^[1] In the following chapter we will point out the benefits, potentials and importance of the harbour for the Hanseatic City.

2.1. Location

Sarah Walter

With an extension of up to 40 km and an area of approximately 755 square kilometres, of which 60 square kilometres are covered with water, Hamburg is the second largest city in Germany^[2].

The city is located in the glacial valley of the Elbe and the estuary delta of Alster and Bille into the Elbe River^[3]. The port of Hamburg is an economically very interesting junction between shipping, trade and industry. Moreover, Hamburg disposes more ship financier than anywhere else in the world^[4]. The mouth of the Lower Elbe in the North Sea and is located about 110 km downstream. The River Elbe is in total 1,165 kilometres long, of which approximately 940 km are accessible^[5]. It leads from the Giant Mountains by the Central Bohemian Mountains to the Elbsandsteingebirge and finally reaches Cuxhaven in the North Sea. Through the many water channels and the easy access to the North Sea, Hamburg has an advance against other cities and harbours.

The port of Hamburg covers an area of 7399 hectares, of which 4331 hectares are land. In addition to this area, 919 hectares are still available for further investments and the enlargement of the harbour.^[6]

2.2. Importance and potential

Sarah Walter

The Port of Hamburg, also known as "Germany's gateway to the world", is the largest seaport in Germany. And, as measured by container handling 2007, with a record result of 9.89 million containers (TEUs) it reached number two in Europe and number nine worldwide^[7].

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Figure 1: Top 10 global container ports

Source: Hamburg Hafen Marketing e.V.

For some goods like e.g. carpets, it is the largest transhipment port worldwide.^[8] According to own papers of the Hamburg’s harbour it is further the largest import harbour for coffee in Europe.^[9] The cargo handling at the port of Hamburg doubled since 1990 from 61.4 million tones to 140.4 tones in 2007.^[10]

According to Hamburg’s Behörde für Wirtschaft und Arbeit (translated: Public Authority of Economic Affairs and Employment) around 133,000 jobs in the metropolitan region are directly and indirectly dependent from the port of Hamburg^[11], therefore the port is the biggest employer of the region and accounts 12.7 percent to Hamburg’s total employment. About one third of all employees live in Schleswig-Holstein and Lower Saxony, consequently the harbour contributes to more value and income in the entire metropolitan region.^[12]

The tax revenue of the harbour increased during the last years: The port dependent revenues climbed from 2004 to 2005 from 142 million Euros to 850 million - that equals 12.3 percent of the total tax revenue^[13]. Further the port contributes 11,500 million to Hamburg's value added^[14].

In addition to the thousands of jobs created by the port and an important contribution of Hamburg’s tax income and value added, the Hamburg Tourism GmbH reported a very positive trend in visitor numbers versus other German cities: 2006, 5.3 million guests visited Hamburg. When the Hamburg Tourismus GmbH enquired why all these people came to Hamburg, they found out that over 60 percent came to see the Port. Tourism brought in almost €5.58 billion in 2006, according to the Hamburger Tourismus GmbH^[15].

The port builds a certain atmosphere and this has a major influence on the face of Hamburg. According to a survey, carry through by the Statistikamt Nord, 90 percent of the inhabitants are happy to live and work in Hamburg^[16]. In addition to the many green areas of the city, the residents appreciate the water in and around Hamburg. They also welcome the international flair of the harbour. ‘The harbour is the heart of the city and the HHLA is its core item' Ole von Beust confirmed in an interview^[17].

The main target of Hamburg’s port policy is to ensure and develop the described effects. The potential amount of container handling is secured in the upcoming years, more precisely the ISL (Institut für Seeverkehrswirtschaft und Logistik) prognosticate a handling of 18 million TEU containers in Hamburg

(today: 9.89 million TEU)^[18]. The positive impacts of an expansion of Hamburg’s harbour and the potential effects for the Hanseatic city could be the following:

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Figure 2: Economic Effects (in million EUR)

Source: Hamburger Bürgerschaft, 2007.

Comparing the situation without and with the expansion of the harbour, it would be possible to create and secure up to 43,000 jobs and more than 5,000 million value added in the metropolitan area of Hamburg. Currently the port of Hamburg has a handling capacity of 9.2 million TEU. To convert this capacity to a demand of 18 million TEU, the harbour has to be restructured and new container terminals need to be built.

3. HHLA

Sarah Walter

The Hamburger Hafen und Logistik AG, also known as HHLA, is a port logistics company based in Hamburg. As the company is the foundation of this term paper we would like to introduce the company within the following chapter.

3.1. History

Sarah Walter

The Hamburger Freihafen- Lagerhaus- Gesellschaft (HLFG) was founded in 1885 to construct and operate a logistics centre for high-grade goods. On 630,000 square meters valuable commodities as coffee, tea, cocoa and spices were stored and factored. Development of innovative technologies for cargo handling, goods logistics and transport made Hamburg to one of the world’s leading ports by the end of the century^[19].

The HLFG developed and organized the quayside operation- first facilities for ships from overseas to discharge their goods directly across the quay walls. Before ships had been loaded and discharged out in the midstream on the Elbe. Quayside sheds had cranes and – a complete novelty - rail sidings on the spot. From 1939, the new company chose the name Hamburger Hafen- and Lagerhaus- Aktiengesellschaft (HHLA)^[20]. Nonetheless the HHLA formed a stock corporation; it went public many years later in 2007.

HHLA was one of the first German port operating companies to cater for the needs of the forklifts developed in the USA. In 1967, Hamburg became Europe’s top fruit importing port with almost 2,000,000 tons of fresh fruit^[21]. The same year brought a revolution in cargo handling with normed steel boxes to Europe: the container^[22]. The harbour company recognized its potential and acquired special container gantry cranes. Constant developments like electronic data processing in 1975, radio data transmission systems that optimized container positioning in 1984 and the first terminal in the world to use satellite data to position containers precisely in 1995 made the port of Hamburg to one of the most successful ports in the world^[23].

After World War II, the Iron Curtain deprived Hamburg of its natural hinterland in Central and Eastern Europe. Growth picked up speed again in the nineties, especially in hinterland rail traffic. While fast growing flows of goods produced traffic jams on the roads to Eastern Europe, containerized traffic rail links offered an alternative. HHLA grasped its opportunity, acquiring strategic stakes in companies in this growth sector. Its third core activity, transport of seaborne goods between the port and its hinterland was now systematically expanded.

HHLA completed its strategy of linking German seaports and the hinterland with a complete range of container rail services^[24].

Hamburg has regained its traditional strength as a rail port, with one in every eight freight railcars today running through the country’s largest port. Nowadays the HHLA is the largest terminal operator at the port of Hamburg. Its customers include 18 of the 20 world's prime container shipping lines and has about 4000 employee^[25].

3.2. Company Structure

Sarah Walter

From 1971 the HHLA embarked as a commercially independent entity and a state-owned body. A new group structure was born and the concentration laid on the four segments - Container, Intermodal, Logistics and Real Estate^[26].

Beginning of 2007 the HHLA was divided into the two sub- groups Port Logistics and Real Estate. HHLA’s core business, port logistics, was restructured for the stock flotation in November 2007. The Class A shares listed on the stock exchange belong to the sub-group Port Logistics and only entitle shareholders to participate in the result and net assets of these operations^[27]. Further information's about the shareholders structure brings chapter 5.2.

Port Logistics is made up of the Container (chapter: 2.3.1), Intermodal (chapter: 2.3.2) and Logistics (chapter: 2.3.3) segments. When the Group was reorganized, the holding company was also attributed to the sub-group Port Logistics, but it does not compose an independent segment under International Reporting Standards (IFRS).

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Figure 3: Group Structure HHLA

Source: HHLA annual report 2007 p. 63

The sub-group Real Estate includes HHLA’s properties, which are not specific to port handling, i.e. parts of Hamburg’s Speicherstadt or the Fischmarkt Hamburg-Altona GmbH. The performance and the financial result of Real Estate are represented by the Class S shares. The S shares are not traded on the market and are held to 100 percent by the City of Hamburg^[28].

3.3. Services

Sarah Walter

HHLA offers its clients different services along the entire logistics chain from quay- to landside. The Group’s numerous subsidiary companies and affiliates are organized in the following four segments: (Please see Group structure HHLA above)

3.3.1. Container

Sarah Walter

The three HHLA Container Terminals (Altenwerder, Burchardkai and Tollerort) handle two-thirds of all containers in the Port of Hamburg. HHLA also operates an efficient container terminal in Odessa. The segment also includes companies providing a large variety of services require for containers and for port handling of ships^[29]. With its €693 million in revenues or 59 percent of the total revenue the container segment presents biggest piece of the business of the HHLA.^[30]

3.3.2. Intermodal

Sarah Walter

The word ‘Intermodal’ means the ‘transport of goods in the same load unit by means of transport modes, whereas the load unit, but not the goods itself, are interchanged between the transport modes’^[31].

HHLA subsidiaries and affiliates provide a comprehensive network of Intermodal transport services between German seaports and their hinterland. The company links over 15,000 locations in the main economic centres of Germany, Austria and Switzerland, offers a shuttle train from Hamburg and Bremerhaven and therefore ensure the link with Eastern Europe^[32]. With its €332 million in revenues or 28 percent of the total revenue the container segment presents second biggest piece of the business of the HHLA.^[33]

3.3.3. Logistics

Sarah Walter

Hamburg shelters the HHLA Frucht- and Kühl- Zentrum, the German market leader for fruit handling and logistics. HANSAPORT has brought coal and ore handling to perfection, while HHLA Rhenus Logistics offers high-grade contract logistics. Specialized in consultancy companies, HPC and its subsidiaries HPTI and Uniconsult operate worldwide^[34]. With its €119 million in revenues or 10 percent of the total revenue the container segment presents biggest piece of the business of the HHLA.^[35]

4. Initial Public Offer (IPO)

Sarah Walter

In the following a definition of IPO and privatisation will be given. The sub- chapter 3.1. Decision Phase and 3.2. Financing through Shares describes why HHLA preferred going public instead of choosing for a partial sale.

According to Achleitner^[36], Initial Public Offering (IPO) means initial placing of enterprise’s shares on an organised capital market. Privatisation takes place when an economical activity that was initially state monitored becomes controlled by the capital market^[37]. A functional capital market especially arranges for enterprise’s efficiency in costs and quality^[38].

Considering that the investigations of a port are long term oriented and usually not financeable by the current income it is necessary to acquire capital^[39]. Ole von Beust, Hamburg's mayor, assumed in an interview with the Wirtschafts Woche (2007) that the upcoming investments in Hamburg’s harbour would be a huge burden for the budget of the city and could not be financed on its own. Privatisation makes it possible to receive the equity which is required for the investments^[40] and to maintain the HHLA as a profitable business.

4.1. Decision Phase

Sarah Walter

At the end of February 2007 the decision of an IPO of the state owned company HHLA was made by the Free and Hanseatic city of Hamburg (FHH). Ole von Beust announced that within the same year 30 percent of the shares should be listed on Frankfurt’s Stock Exchange^[41].

[...]

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^[1] Acc.: www.manager-magazin.de

^[2] Acc.: Meyer, 2007, p.14

^[3] Acc.: Kunadt, 2006, p.5

^[4] Acc.: Kunadt, 2006, p.6

^[5] Acc.: Meyer, 2007, p.14

^[6] Acc.: Kunadt, 2006, p.6

^[6] Acc.: Meyer, 2007, p.14

^[7] Acc.: www.hamburgische-buergerschaft.de, Teilbörsengang der HHLA, p. 2

^[8] Acc.: www.hamburg-nachrichtena.de

^[9] Acc.: www.hafen-hamburg.de

^[10] Acc.: www.hafen-hamburg.de

^[11] Acc.: BWA Kompakt, 2006, p. 5

^[12] Acc.: BWA Kompakt, 2006, p. 5

^[13] Acc.: www.abendblatt.de

^[14] Acc.: www.hamburgische-buergerschaft.de, Teilbörsengang der HHLA, p. 2

^[15] Acc.: Hamburg-Tourismus, 2006, p.6

^[16] Acc.: Statistikamt Nord, 2006

^[17] Acc.: Wirtschaftswoche, 2007

^[18] Acc.: www.hamburgische-buergerschaft.de, Teilbörsengang der HHLA, p.1

^[19] Acc.: www.hamburgische-buergerschaft.de, Teilbörsengang der HHLA, p. 2

^[20] Acc.: www.hhla.de

^[21] Acc.: www.hhla.de

^[22] Acc.: www.premiumcapital.de

^[23] Acc.: www.hhla.de

^[24] Acc.: www.hhla.de

^[25] Acc.: www.hamburgische-buergerschaft.de, Teilbörsengang der HHLA, p. 2

^[26] Acc.: www.hhla.de

^[27] Acc.: www.hhla.de

^[28] Acc.: www.hhla.de

^[29] Acc.: www.hhla.de

^[30] Acc.: HHLA Analysts’ Conference 31. March 2008 p. 10

^[31] Acc.: Stemmler, 2008, p. 98

^[32] Acc.: www.hhla.de

^[33] Acc.: HHLA Analysts’ Conference 31. March 2008 p. 10

^[34] Acc.: www.hhla.de

^[35] Acc.: HHLA Analysts’ Conference 31. March 2008 p. 10

^[36] Acc.: Achleitner, 2002, p.242

^[37] Acc.: Achleitner, 2002, p.242

^[38] Acc.: Ewers, 1995, p. 114

^[39] Acc.: Schramm & Eberl, 2001, p.9

^[40] Acc.: Schramm & Eberl, 2001, p.10

^[41] Acc.: Wirtschaftswoche, March 2007