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STAR-BULLETIN / SEPTEMBER 2004 Matson's $365 million purchase of two ships, like the MV Maunawili, pictured, will inaugurate service to Guam and China beginning in February.

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Matson strikes
$365M ship deal

The purchase effectively sinks
OceanBlue, which had been
trying to buy the vessels

Matson Navigation Co., the state's largest ocean shipper, plans to spend $365 million for two new container ships and other assets to inaugurate service to Guam and China beginning next February.

The deal with Kvaerner Philadelphia Shipyard also delivers a death knell to start-up Hawaii shipper OceanBlue Express Inc., which had a preliminary agreement to buy those ships but was still rounding up financing. OceanBlue was being led by former Matson Chief Executive C. Bradley Mulholland.

"As it became apparent that OceanBlue Express was experiencing difficulties in removing contingencies relative to our preliminary agreement, we escalated our sales efforts," said Dave Meehan, president of Kvaerner Philadelphia Shipyard. "We are very happy that we have now concluded a contract with our old customer Matson."

Matson, a subsidiary of Alexander & Baldwin Inc., had been looking for ships for about two years because its 10-year cargo-sharing alliance is ending next February for weekly service to Guam. That agreement with American President Lines Ltd., which was not going to be renewed, allows the two companies to use each other's ships to haul cargo between Hawaii and Guam.

Matson's new investment in vessel, container and terminal assets is a cash-on- delivery deal, with the first vessel expected to be in service by this July and the second in June 2006. Matson will pay $315 million for the ships, including add-on items and interest.

Matson previously took delivery of two Kvaerner-built container ships, the MV Manukai and MV Maunawili, in 2003 and 2004 at $110 million each. The new ships will be similar to those.

"Matson's highest priority for the past two years has been the development of a viable replacement service for Guam," said James Andrasick, president and CEO of Matson. "We also have a continuing interest in expanding our reach into new markets and, at the same time, strengthening our service reliability to our home state of Hawaii."

OceanBlue's Mulholland was unavailable for comment. Timothy Repp, the company's chief financial officer, acknowledged that OceanBlue's venture had sunk before it had gotten started.

"Unfortunately, we don't have any ships to operate with," said Repp, who received word of the deal yesterday. "We had a financing contingency. We had to raise equity financing. Unfortunately, we weren't able to do it in a time frame that made sense."

A&B spokesman John Kelley said the company had explored purchasing or chartering ships from overseas as well as looking at the ships being built by Kvaerner. In the end, Kelley said, purchasing the ships from Kvaerner made the most sense.

"The fact was that we have a good customer base in Guam, and in February 2006 we lose the services of two of the ships," Kelley said. "Then the question was which shipping capacity would be available in a timely way at a reasonable return on investment to keep that service and, in this case, to expand to a new growth area."

Matson said the new weekly West Coast-Hawaii-Guam-China service will include stops in Honolulu, Guam, two ports in China and Long Beach, Calif., and will employ three existing Matson ships along with the two new ships.

"This opens up a growth opportunity," Kelley said. "We put even a larger number of reliable ships in the Hawaii service, we solve the dilemma on how to serve Guam and, at the same time, open a growth avenue for the company."

Matson still has the option to charter the new vessels instead of purchasing them. The company had that decision available when it reached a deal with Kvaerner for the previous two ships. Matson eventually bought those ships, but not before considering the economic impact of using its own union labor as opposed to using union workers from another operator.

Kelley said the new ships would create additional seafaring jobs at undetermined locations and that the purchase of the vessels would not affect Matson's rates.

He also said the expanded service will create a balanced trade in the company's trans-Pacific business.

"What this new trade does is to put Matson in almost the unique position to have revenue-bearing cargo coming to Hawaii, revenue-bearing cargo going to Guam and then, after a short distance from Guam to the Far East where there's not much cargo moving, you'll have the whole trans-Pacific where there will be a heavy load coming directly from China to the U.S. West Coast."

Allen Doane, president and CEO of A&B, said the parent company can fund the investments and related debt because it has a strong balance sheet, a capital construction fund to provide tax-advantaged funding of ships and strong cash flow from Matson's shipping business.

"At the same time, A&B has all the necessary elements to sustain its growth momentum in Hawaii real estate," Doane said.