Larger U.S.-listed ship owners are poised to grow larger still via so-called ships-for-shares deals, in which the fleet seller takes stock in lieu of cash.
The time is ripe. Shipping stock prices have risen substantially, making shares more palatable as transaction currency, and private equity (PE) vessel owners are increasingly anxious to “harvest” positions as their funds reach maturity dates. Trading ships for public stock gets them one step closer to the exit.
Ships-for-shares deals were getting done even before shipping equities rebounded. What financiers foresee now is an acceleration of that trend.
Ships-for-shares deal drivers
There have been three main drivers for such transactions. First, there have been public-to-private fleet deals between owners and strategic partners on the cargo shipping side, such as the Scorpio Tankers (NYSE: STNG) purchase of 19 product tankers from Trafigura in September and the Frontline (NYSE: FRO) acquisition of 10 crude tankers from Trafigura in August.
The second driver involves public-to-public deals in which the stockholders of the smaller entity trade their shares for those of a larger entity, exemplified by the purchase of Gener8 Maritime by NYSE-listed Euronav (NYSE: EURN) in June 2018.
The third driver – and the one that may be about to shift into a higher gear – involves PE ship owners who have been unable to cash out through initial public offerings (IPOs) and are instead plotting their exits by selling fleets to already public companies.
Such deals include: the spinoff of the tanker fleet of Capital Product Partners (NASDAQ: CPLP) and reverse-merger with Diamond S Shipping (NYSE: DSSI) in March; the reverse merger involving the sale of Poseidon Containers to Global Ship Lease (NYSE: GSL) in November 2018; the acquisition of Navig8 Product Tankers by Scorpio Tankers in May 2017; the purchase of the Quintana fleet by Golden Ocean (NASDAQ: GOGL) in March 2017; and the ongoing string of such deals by the undisputed ships-for-shares “champion,” Star Bulk (NASDAQ: SBLK), which has used its equity to buy the fleets of Delphin Shipping, Augustea Atlantic, York Capital, Songa Bulk, E.R. Capital Holding and Oceanbulk in 2018-19.
Higher stock prices equal better M&A currency
The recent gains for ocean shipping stocks, particularly tanker stocks, make such deals considerably more likely to get done, according to speakers at the shipping finance forum held in New York City on October 15 by investor relations and advisory firm Capital Link.
“I think [ship-for-share deals] will continue and I think it will be a heck of a lot easier now if companies are trading above NAV [net asset value],” asserted Michael Kirk, managing director of RMK Maritime. NAV is the market-adjusted value of ships, cash and other assets, minus debt and other liabilities. Until very recently, almost all shipping shares traded at a discount to NAV.
“This [higher stock valuation] makes ship-for-share deals much easier and we might also get some separation [in share-to-NAV levels] where more public-to-public deals make sense. Everything is easier on the M&A [merger and acquisition] front if you’re trading above NAV,” said Kirk.
According to Doug Mavrinac, global head of maritime investment banking at Jefferies, “I can say first-hand that we are having many conversations with owners on this very topic – ships for shares, cash deals, everything is on the table. We’re talking with owners in every sector, and this began even prior to the run-up in the tanker market.”
Christa Volpicelli, managing director at Citi, said, “If you go back and study the stock-price performance of the companies that have announced these [ships-for-shares] transactions, you will see a very strong pattern of stock outperformance and positive share-price reactions. This is something that investors are embracing. They see the benefit of it.
“And it’s not just about the liquidity of the stock, which I agree is very important,” she added, referring to the fleet sellers’ interest in obtaining an equity position they can eventually exit from.
“What’s also attractive to investors is the idea of being a part of a bigger platform. If you look at where shipping is going in the future, with the environmental standards and new technology, you will have to have more financial resources and the ability to spread your costs more across the overall platform, which is something that larger companies can do much more effectively than smaller companies,” said Volpicelli.
PE ship owners yearning for an exit
PE buyers entered the shipping space en masse after the global financial crisis, believing that they could buy cheap assets, wait for the market to revert to the mean, then do an IPO and exit with an outsized profit.
They failed to realize that it could take much longer for the ocean shipping market to rebound than they had planned for, and that it could be much harder to exit their positions than they anticipated. Furthermore, the funds that PE general partners used to buy the vessels have set lifespans after which money must be returned to the limited partners. This timeline is making PE groups increasingly anxious to do ships-for-shares deals.
According to Art Regan, operating partner at Apollo Management, “Larger public companies that have been able to increase their liquidity will continue to be active [in ships-for-shares deals]. It’s kind of wide open to them, because there are so many PE sponsors holding onto ships and this is a perfect solution for them.
“The PE investors I see that are holding onto ships are kind of worn down,” he continued. “Their options are dropping, so I think we’ll see a lot more of this [ships for shares]. I think those [public companies] with scale and momentum will be very active [with M&A], which is good for the industry.”
According to Yohan Minaya, managing director at Evercore, “Some of the PE investors that came [into the industry] in 2012-13 are still trying to harvest their legacy investments. I think we’re going to see more ships-for-shares transactions, given where [stock] trading liquidity is today, especially in the tanker market. As the shipping market continues to improve, you’ll see more [M&A] activity. The portfolios the PE guys still own will be merged into publicly listed platforms.” More FreightWaves/American Shipper articles by Greg Miller