The Week in Review – December 6th, 2007

Teekay Tankers (TNK) this week filed the first public forms for its long-awaited IPO. Parent Teekay has already spun off its LNG assets and its offshore assets, and now it is spinning off some of its tanker assets. Unlike Teekay LNG and Teekay Offshore, however, the tanker assets will not go into an MLP protected by long-term charter cover. Nine aframax tankers will instead be placed into Teekay Tankers Ltd., four of these with charters ending between 2008 and 2010 and the remaining five being placed into a Teekay pool where they will operate on a spot charter basis. The company calls this mix of short and medium-termTC contracts and spot trading a strategy for cash flow maximization, a nod to the widespread belief that over the long run the spot market still yields the highest returns.

Citigroup and Morgan Stanley are acting as joint bookrunning managers on the offering; the full complement of underwriters also includes Merrill Lynch, Wachovia, Deutsche Bank, JPMorgan, Dahlman Rose, Scotia Capital, and Johnson Rice. Watson, Farley & Williams and Perkins Coie are providing legal advice to Teekay Tankers while Cravath, Swaine & Moore is advising the underwriters on legal matters. The company is selling to the public 10,000,000 shares with the option for a 1,500,000-share over-allotment. Assuming no over-allotment option and midpoint pricing this would raise $185 million, with net proceeds to the company of $171.4 million. Net proceeds together with a $113 million draw down on the company’s new credit facility and the assumption of $37 million in debt currently associated with two of the tankers will be used to acquire the nine modern, double hull tankers, which are shown in the table that accompanies this article.

Teekay will retain a 60% stake in its tanker spin-off, 10% of which will consist of the same Class A common shares being offered to the public, the other 50% of which will consist of Class B shares that are worth discussing. These Class B shares can be converted one-for-one into Class A shares, but they hold 5 times the voting rights of a Class A share. However the voting power of the Class B share block can never be more than 49.9%.What this means essentially is that Teekay can sell off some of its stake to the public if an opportune time arises without having its control diluted, but it also cannot have overwhelming control. The Class B shares are automatically converted to “normal” Class A shares if Teekay sells them, and if Teekay’s stake falls below 15% the company will also lose the Class B voting privileges.

This is only an excerpt of The Week in Review – December 6th, 2007

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