COVID-19 put a temporary kibosh on mergers-and-acquisitions (M&A) activity — and not just for shipping. According to Refinitiv, the value of U.S. M&A deals fell 40% year-on-year in the first half. Now that the initial shock of the outbreak has passed, will shipping companies regain the urge to merge?
There has been a higher-than-usual number of M&A questions on quarterly conference calls in recent days. One likely reason for analysts’ heightened interest: Takeovers are one of the few big catalysts left for these limping stocks.
Shipping executives confirmed on the calls they want to do M&A deals. But consolidation has always been hard due to insider interests. And two barriers loom particularly large in 2020: depressed stock valuations among buyers and a lack of desperation among sellers.
Shares as M&A currency
“Last quarter we told people that it was probably not a good time for consolidation because everybody was uncertain as to the future. I think that has changed,” commented Hamish Norton, president of Star Bulk (NYSE: SBLK), during a quarterly call on Thursday.
“I think people are getting more comfortable with the current situation and the future and with how the world will react to COVID-19,” he opined.
“We’d be very interested in consolidation opportunities that fit with our operations and do not increase our leverage,” said Norton.
However, he said that Star Bulk is only looking to use its own shares, not cash, to pay for acquisitions.
A deal would also have to value Star Bulk’s shares at net asset value (NAV). NAV is the market-adjusted value of the fleet and other assets minus debt and other liabilities.
The discounted-share conundrum
The problem is that Star Bulk’s shares are currently trading at a 35% discount to NAV (according to Jefferies’ estimate). And almost all other listed shipping companies are also trading at a discount to NAV.
As Jefferies analyst Randy Giveans previously told FreightWaves, “It’s often difficult [for the two sides] to come together when companies are trading at large discounts to NAV.”
“None of us, with our stocks being so far below NAV, and with investor concerns related to NAV [discounts], are stretching out to buy,” said Scorpio Tankers (NYSE: STNG) President Robert Bugbee on his company’s call on Thursday.
The one share-for-share deal that was recently proposed — the unsolicited offer by Hafnia Tankers (Oslo: HAFNIA) for Ardmore Tankers (NYSE: ASC) — went nowhere.
“We’d love to have increased scale in capital markets. But there’s no point in doing it if you can only do it dilutively,” commented Ardmore CEO Anthony Gurnee.
Stifel analyst Ben Nolan also brought up the NAV discount conundrum. He said on Friday that crude- and product-tanker owner International Seaways (NYSE: INSW) “is probably the ideal candidate as a consolidator. However, with shares trading at 54% of NAV, paying cash or using shares to buy at fair value is dilutive.”
The high-earnings conundrum
Another big challenge to shipping M&A in 2020, specifically on the tanker side, is that rates have been extremely strong.
“I can’t imagine that there’s a product tanker owner with modern tonnage that hasn’t done great and is continuing to do great,” said Bugbee. “So, no one here is a forced seller in terms of the modern market. They don’t have to renew assets and they don’t have to sell to bolster their balance sheet.”
“Are there deals to be done? I don’t think so, or at least I haven’t heard of any,” said Hugo de Stoop, CEO of crude-tanker owner Euronav (NYSE: EURN).
“The reason is that we are on the back of three super-strong quarters and the quarter we’re in right now will also end up being a very good quarter.
“There is more uncertainty about the future than we’ve seen in the past, but I just think it’s too early for people to throw in the towel or decide to sell their fleet,” he said, noting, “The cash they’ve generated very, very recently and up until today has been phenomenal.”
Decarbonization as future M&A driver
De Stoop does see an M&A driver down the road. “There are a number of challenges for smaller shipowners, mainly related to regulations — primarily regulations around CO2 emissions — and also related to banks and capital access. Banks prefer to lend to public companies with good corporate governance and a lot of transparency than to smaller players.
“I think these smaller players face severe challenges, which I believe can only be addressed by size — by a big company like Euronav or some of the other public companies.
“That gives us real hope that when the market softens and values come off, people will realize that it might be a good opportunity and either become shareholders of bigger entities or simply take cash and reinvest in something else,” said De Stoop.
Like Star Bulk, Euronav is ready and willing to be a buyer. But unlike Star Bulk, Euronav is not taking cash deals off the table.
Euronav will do share-based transactions or pay cash. “We are very, very flexible,” affirmed De Stoop.
Amid the heightened chatter on M&A, there has been a flurry of results filed by dry bulk companies over recent days. All posted sizable losses.
Due to the lag effect — wherein rates for long voyages may be accounted for in the next reporting period — the dry bulk rate uptick at the end of the second quarter (Q2 2020) won’t show up in the numbers until the third.
Star Bulk reported a net loss of $44.1 million for Q2 2020 versus a net loss of $40.2 million in Q2 2019. The adjusted loss per share of 19 cents handily topped the consensus estimate for a loss of 32 cents.
The company’s ships earned $9,402 per day in Q2 2020 versus $10,549 per day in Q2 2019. It has 60% of its available days for Q3 2020 booked at an average of $12,145 per day.
Genco Shipping & Trading
Genco (NYSE: GNK) reported a net loss of $18.2 million for Q2 2020 versus a loss of $34.5 million in Q2 2019. The adjusted loss of 43 cents per share was better than consensus expectations for a loss of 53 cents.
Genco’s bulkers earned $6,693 per day in Q2 2020, down from $7,412 per day in Q2 2019. So far, it has 62% of available third-quarter days for owned ships secured at $11,617 per day.
Eagle Bulk (NASDAQ: EGLE) posted a net loss of $20.5 million for Q2 2020 versus a loss of $6 million in Q2 2019. The loss of 28 cents per share was slightly worse than the consensus estimate of a loss of 26 cents.
The company’s ships earned an average of $8,038 in Q2 2020 compared to $9,731 per day in Q2 2019. Eagle has 66% of its third-quarter days fixed at an average of $9,220 per day.
Safe Bulkers (NYSE: SB) reported a net loss of $13.9 million versus net income of $1.8 million in Q2 2019. The adjusted loss per share of 16 cents was worse than the consensus estimate for loss of 9 cents.
Its fleet earned an average of $8,094 per day in Q2 2020 versus $11,970 per day in the same period last year.
Seanergy (NASDAQ: SHIP) posted a net loss of $11.3 million in Q2 2020 versus a net loss of $6.9 million the year before. The loss per share of 65 cents came in slightly better than the consensus estimate of a loss of 67 cents.
Seanergy’s fleet earned $5,424 per day in Q2 2020 versus $9,104 per day the year before. Seanergy has 88% of available third-quarter days booked at $22,414 per day — a huge improvement over the preceding quarter.
Scorpio Bulkers (NYSE: SALT) reported a net loss of $45.1 million for Q2 2020 compared to a net loss of $35 million in Q2 2019. The adjusted loss of $3.98 per share was better than the consensus for a loss of $4.11 per share.
Using weighted averages of its disclosures for various vessel classes, the company’s fleet earned $5,565 per day in Q2 2020 versus $9,920 per day in Q2 2019. It has 60% of third-quarter available days booked at an estimated average of $8,610 per day. Click for more FreightWaves/American Shipper articles by Greg Miller
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