By Jonathan Saul and Arno Schuetze
LONDON/FRANKFURT (Reuters) - The world's no. 3 container shipping line, CMA CGM of France, has made an exploratory approach to German rival Hapag-Lloyd <HLAG.DE> over a possible merger as players in the sector hunt for tie-ups to beat depressed conditions, finance sources say.
Three finance sources with knowledge of the matter, who declined to be named due to market sensitivity, said CMA CGM had initiated discussions in recent months with Hapag-Lloyd, which is ranked fifth globally, to look into some form of share merger of the two groups.
"The idea which has been proposed... would be a non-cash merger," one source said.
Key Hapag shareholders had rebuffed the proposition, which would narrow the gap to market leader Maersk Line <MAERSKb.CO>, the sources said.
A Hapag spokesman, asked whether such a deal had been discussed, said: "These market rumours are without substance."
A CMA spokesman declined to comment.
Hapag-Lloyd shares, which had been trading lower, surged by more than 10 percent following the Reuters report and were 3 percent higher at 1250 GMT.
The global container shipping sector continues to struggle with an oversupply of vessels that has plunged the sector into an almost decade-long slump, its worst on record, forcing some companies out of business and others to combine forces to benefit from economies of scale.
Hapag in late June slashed its full-year profit forecast, saying that freight rates had recovered more slowly than expected while fuel and charter costs had ballooned.
A trade spat between China and the United States, which has escalated into an outright commercial war, is also adding to cost worries as trade-route demand becomes more unpredictable.
All three sources said the approach had been rejected by Hapag's major shareholders - CSAV of Chile, Germany's Kuehne family and HGV, which manages the investments for the German city-state of Hamburg.
"The group of key shareholders holding the Hapag majority do not want a deal right now," a second source said.
CSAV owns 25.8 percent of Hapag-Lloyd, while Kuehne owns 25 percent and Hamburg 13.9 percent.
"There’s a fear there that Hapag would eventually be left as a unit of the French peer. (Hamburg) wants to make sure the headquarters remains in Hamburg and that Hapag-Lloyd remains a German company," the source added.
The third source said: "The sense is that there was nothing in it for Hapag's principal shareholders."
Kuehne declined to comment, while a spokesman for Hamburg's finance ministry did not respond to multiple requests for comment. CSAV did not immediately respond to a request for comment.
Both CMA CGM and Hapag have made acquisitions, but a merger could help them compete better on key global trade routes. While Hapag is strong on routes between Europe and the Americas and in the Middle East, CMA CGM has scale in Asia.
A wave of consolidation in recent years has shrunk the number of global container lines. Deals have included Maersk's takeover of Germany's Hamburg Sud, but the market has continued to struggle.
Maersk paid 3.7 billion euros (3.27 billion pounds) to acquire Hamburg Sud from owner the Oetker Group. Finance sources said, in that deal, there had been exploratory discussions for some time before anything concrete emerged.
CMA and Hapag, with net debt of $7.2 billion (5.40 billion pounds) and $6.7 billion respectively at the end of the first quarter - greater than their combined equity - might be hamstrung to do a cash deal.
CMA CGM is privately-owned by the Saade family. It reported a $701 million net profit for 2017, confirming its turnaround after a $452 million loss in the previous year.
CMA's founder Jacques Saade died last month and his son Rodolphe took over as chief executive last year.
Finance sources said CMA CGM has been looking for ways to bolster its market presence and also cut costs further. This follows its acquisition of Singapore-based line APL in 2016.
Hapag completed its takeover of Gulf counterpart UASC in March 2017, to become the world's no.5 container line. Finance sources said the group has faced difficulties with the integration of UASC, which had also added to costs.
Hapag Chief Executive Rolf Habben Jansen said in May that he did not expect any large mergers in the sector in 2018, adding that Hapag was currently "not very active" in scouting the market for takeover targets.
(Additional reporting by Vera Eckert in Frankfurt and Gus Trompiz in Paris; Editing by Adrian Croft)