UPDATE 2-Shipping line NOL faces profit squeeze amid Hapag bid

(Adds detail, shares, analyst comment, German newspaper pickup)

By Daryl Loo and Jan Dahinten

SINGAPORE, Aug 7 (Reuters) - Neptune Orient Lines said it could finance a multi-billion dollar bid for rival Hapag-Lloyd, in spite of a 19 percent profit fall due to higher costs and tougher conditions which prompted investors to dump its shares.

NOL management said its strong balance sheet allowed it to pursue a big acquisition, but had no comment on the specifics of last month's bid for the German group, which was put up for sale by its parent TUI (TUIGn.DE).

Analysts estimate the group could be worth $7 billion, more than twice NOL's $2.9 billion stock market value. A deal would create the world's third-biggest container shipping group.

The Financial Times Deutschland reported on Thursday that NOL and a Hamburg-based consortium had qualified for a second round of bidding after two unidentified parties dropped out. It said the two remaining groups would now take a closer look at Hapag.

"Due diligence has started this week," the newspaper quoted an anonymous source close to the talks as saying.

Speaking to journalists and analysts at a briefing, Chief Executive Ron Widdows declined to comment on the bid, but NOL said in a statement that it will invest to improve its shipping business.

NOL (NEPS.SI), 66 percent-owned by Singapore sovereign fund Temasek [TEM.UL], said its net profit for the April-June period fell 19 percent to $76 million, from $93 million a year earlier.

NOL shares hit an 18-month low on the news, dropping more than 8 percent. The stock recouped some of the losses and was 6.9 percent lower at S$2.56 by 0256 GMT.

LONG-TERM BET

In June, banking sources told Reuters that the Singapore state-controlled group was looking to raise $5-$7 billion in loans to finance a bid.

Widdows, in his first public appearance as CEO since his predecessor Thomas Held abruptly left the group last month, stressed the long-term benefits of a Hapag-Lloyd purchase even as analysts expect the outlook for container shipping to darken further due to a weakening economy.

Trade between Asia and Europe is slowing, compounding already weakening trade between Asia and the United States. (See [ID:nHKG306993] for a story on Asia's exports)

"NOL management, who have been one of the more bullish voices in container shipping, have turned increasingly cautious on the outlook and pointed out a rebound in 2009 is uncertain," said JPMorgan analyst Johnson Man Leung.

Quarterly revenues rose 24 percent to $2.24 billion, but costs rose faster, up 28 percent at $1.96 billion.