Matson to acquire Horizon's Alaska operations

NOVEMBER 11, 2014 — Charlotte, NC, headquartered Horizon Lines (OTCQB: HRZL) looks set to soon disappear over the horizon and become a part of U.S.-flag shipping history. It is getting out the three Jones Act trades in which it operates. It plans to shut down its Puerto Rico service by the end of the year and sell its Hawii operations to the Pasha Group for $141.5 million. Separately, it has entered a definitive merger agreement under which its stock will be acquired by Matson (NYSE: MATX), which will include its Alaska operations and the assumption of all non-Hawaii business liabilities.

Matson will acquire Horizon for $0.72 per fully diluted common share, or $69.2 million, plus the repayment of debt outstanding at closing. The total value for the transaction is $456.1 million (before transaction costs), based on Horizon's net debt outstanding as of September 21, 2014, less the anticipated proceeds from the Hawaii business sale.

"The acquisition of Horizon's Alaska operations is a rare opportunity to substantially grow our Jones Act business," said Matt Cox, President and Chief Executive Officer of Matson. "Horizon's Alaska business represents a natural geographic extension of our platform as a leader serving our customers in the Pacific. We expect this transaction to deliver immediate shareholder value through earnings and cash flow accretion via significant cost and operating synergies. We are also encouraged by the long-term prospects of the Alaska market, which mirrors Hawaii in many operational ways, despite different underlying economic drivers. Both markets depend on reliable, superior and timely container cargo service as part of vital supply lifelines - hallmarks of the Matson brand."

Steve Rubin, President and Chief Executive Officer of Horizon, commented, "This transaction provides value for our shareholders while upholding our financial commitments. We wish the Matson team continued success in their new Alaska trade and we look forward to working with them to close this transaction and provide a seamless transition for our customers."

The Boards of Directors of both companies have unanimously approved the transaction, and Horizon shareholders representing 55 percent of the fully diluted equity, which also represents 41 percent of the outstanding voting common stock on November 11, 2014, have agreed to vote their shares in support of the transaction.

Matson will fund the transaction from cash on hand and available borrowings under its revolving credit facility. The transaction is expected to close in 2015 after the completion of Horizon's sale of its Hawaii Business, Horizon's shareholder approval, and other customary closing conditions.

Horizon says its decision to terminate its Puerto Rico service is independent of the deal with Matson that it will cease operations between the U.S. and Puerto Rico whether or not the transaction is consummated.

"We have a 56-year history in the Puerto Rico trade and truly value the relationships we have established," said Mr. Rubin, President and Chief Executive Officer of Horizon Lines. "Unfortunately, a combination of factors, including uncertain prospects for the Puerto Rican economy, losses over recent years and more expected going forward, aging ships that we cannot afford to continue to maintain or replace, and upcoming large capacity additions by two other carriers has led to this difficult but prudent and necessary decision."

In Puerto Rico, Horizon Lines has incurred substantial cumulative losses and negative cash flows in recent years, despite ongoing efforts to remain competitive. Horizon is currently serving the trade with two vessels built in the early 1970s that have become increasingly costly to operate and expensive to maintain. As recently as 2012, Horizon operated four vessels, but the company had been forced to remove two vessels from the Puerto Rico service due to prolonged falling demand and the need to cut costs.

As an example of the challenges this aging fleet has posed, last month the Company chose to cease operating its Horizon Discovery in the Houston to San Juan trade route and has entered into an agreement to scrap this vessel. The Horizon Discovery built in 1968, would have required substantial expense to dry-dock for maintenance as required by federal law. The two vessels Horizon Lines presently operates in the trade are both required to be dry-docked similarly during 2015 at an estimated combined cost of $16-20 million. Furthermore, other carriers are scheduled to introduce four new, efficient vessels into service that will greatly expand capacity, further burdening Horizon Lines' current, limited ability to offer ongoing service that can remain competitive.

Operations of the Puerto Rico service will be curtailed in a careful and orderly manner. The Company will cease liner service for domestic customers by the end of the year, however San Juan terminal services will continue to be provided into the first quarter of 2015.

The company is expected to incur restructuring charges between $90 million to $100 million related to terminating its Puerto Rico operations.

Horizon is effectively all that's left of the U.S.-flag operations of Malcom McLean's Sea-Land Service, Inc. which pioneered the marine container shipping industry on April 26, 1956, when the vessel Ideal-X sailed from Newark, NJ to Houston, TX. Maersk acquired the Sea-Land name in 1999 and for some time what is now Maersk Line operated as Maersk Sea-Land.

Maersk is reviving the Sea-Land brand for a new intra-Americas shipping line which will start operating under the legendary name in January 2015.

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