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Accountants Run Wild
In an environment where it’s all about the “trade”, it is not surprising to us that the accountants are starting to leave footprints here as well as everywhere else. With the sub-prime mess omnipresent, everyone is on tenterhooks and everything is suspicious. The first signs of the profession’s interest appears in Golden Ocean Group’s “Preliminary Fourth Quarter and Financial Year 2007 Results” where the company, to be conservative, disclosed that it was in discussions with its auditors regarding the accounting for its newbuilding contracts.
Normally, newbuilding contracts are booked as an asset on the balance sheet as construction in progress and incorporate amounts expended to date (i.e. historic cost). Pretty straightforward until you put in the mix that Golden Ocean, during 2007 and 2008, sold ten of the vessels that it has contracted as newbuildings raising red flags for the accountants. Instead of accounting for them at cost, the accountants are instead suggesting that it may be “…appropriate to account for certain of its newbuilding contracts as financial instruments and, as such, record them at fair value.”
Consolidation: Just the Beginning?
Villy Panayotides, Chairman of Excel Maritime, told the Financial Times this week that further consolidation “is looming” in dry bulk shipping and specifically that publicly listed shipowners were obliged by their fiduciary duties to “at least to consider takeover offers.” Mr. Panayotides called the Excel-Quintana merger “pioneering” in that it is unusual to find such high-quality companies up for sale. He said that Excel’s strategy going forward would be to “be a major consolidator in the shipping market” in the coming years. He cited as proof of the need for consolidation in dry bulk that Greeks control about a quarter of the world’s dry fleet, amounting to about 4,400 ships, which are in turn controlled by about 1,100 different companies.
What is particularly interesting to watch for in that, as a result of the fact that vessel prices are stickier than share prices, in the current market public companies are in a position where their fleets are available at a discount to private fleets. Even if their management teams are aware of this disconnect, they are as Mr. Panayotides noted still obligated to consider takeover offers that come at a premium to their share price, even if it is a discount to the value of their vessels.
Harris Antoniou Steps Up
Harris Antoniou last week became Fortis’ CEO of Energy, Commodities and Transportation and member of the Board of Merchant Banking, succeeding Frans van Lanschot, who has been appointed CEO of Specialised Finance. This represents another step up for Mr. Antoniou, who in 2005 left his managing Fortis’ Greek office to head up first the Global Shipping Group and later the Transportation Group in The Netherlands.
Sparks Fly Between NOL and TUI
The Wall Street Journal this week reported that NOL and Hapag-Lloyd parent TUI have retained JP Morgan and Deutsche Bank, respectively, to advise on a possible tie-up that would create one of the world’s largest container shipping enterprises. Such a venture would inevitably involve Singapore state investment company Temasek, which owns 69% of NOL.
Sources in the maritime industry declined comment on the possibility, but reports suggest that potential scenarios include a share swap or a merger between NOL and Hapag-Lloyd directly, with neither Temasek or TUI directly involved in the deal. Analysts pin NOL’s price tag at about $4 billion, a 20% premium to the company’s current market capitalization. They also note that NOL’s trade at a multiple about 20% lower than TUI’s.
A New Romance or Strategic Diversification
Just in time for St. Valentine’s Day, Pacific Basin Shipping Limited (“Pacific Basin”), one of the world’s leading dry bulk shipping companies operating principally in the Asia Pacific region with a particular focus on handysize bulk carriers, found a new interest. On Wednesday, Pacific Basin announced it had agreed to take over resale contracts for two roll-on roll-off (“Ro-Ro”) vessels to be built at A.P. Moller – Maersk’s Odense shipyard and has contracted for two more similar vessels direct from the yard. According to the announcement, the sellers are substantial owners of similar tonnage and it further indicates that a future cooperation between the two is likely.
Various databases show that Odense shipyard has orders for six Ro-Ro sister vessels all of which were placed by the Epic Shipping UK Limited, which had its roots in the original Pacific Basin. However, according to the company, the orders were placed by Epic Shipping partly for their own account and partly on behalf of another entity, whose main shareholders are shipping investors. The two re-sale contracts were purchased from this entity and there is no connection with Epic whatsoever in this instance. Therein lies the mystery in romance.
Frontline Invests in Navig8, Rumored to Plan Spin Out of ITC
Just a few weeks after announcing a strategic investment from hedge fund Touradji Capital Management, Navig8 has announced a $20 million equity injection from NY-listed Frontline Limited. In exchange for the investment Frontline will receive new share capital giving it a 15.8% stake in Navig8, valuing the new venture begin by FR8’s former management team at about $127 million. Frontline’s investment is intended to be financial, but also gives the massive VLCC and suezmax tanker company a foothold in the chemical and petroleum product market. Navig8 controls a fleet of approximately 1.4 million dwt including its newbuilding program and actively trades a timecharter fleet, owns and invests in tonnage, commercially and technically manages vessels for third parties and trades in the freight derivatives market.
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Heading into the Lion’s Den
Just in time for our Hamburg conference later this month, we learned of MPC Capital AG’s (“MPC”) takeover offer for HCI Capital AG (“HCI”) that was announced on Tuesday. Already a shareholder, HCI had recently increased its stake to 35.1% with the all share purchase of a 20% shareholding from Corsair Capital on the basis of a stock price of EUR 44.20 (ratio 1.0:0.3217). To accomplish that transaction, MPC will increase its share capital out of authorized capital.
On the other hand, the Peter Dohle Group declined MPC’s tender for its 10.69% holding, stating it wished to remain a shareholder of HCI for the long-term. Nevertheless, as a strong partner and product supplier in the shipping segment, the Group fully supports both HCI and MPC.
The Securities Censors See Sense
You can’t save people from themselves, especially if you want a free and liquid market. As New York’s financial predominance wanes and new inquiries into investor abuses focus on institutional debt instruments rather than public securities, the US Securities & Exchange Commission is gradually reexamining some of its more draconian policies.
Of special interest is a step madeWednesday that Bloomberg reports will exempt foreign companies from registering their shares with the SEC as long as financial statements are available in English on their websites. SEC Chairman Christopher Cox said that the new policy would “make it much easier for US investors to gain access to a foreign private issuers’ disclosures.” While the SEC does provide very important protections to US investors, to the extent that foreign companies must go to great lengths to ensure their disclosures cannot be seen by any US citizen without SEC approval these “protections” begin to mount into a very serious censorship for those monitoring international markets, like shipping. In increasingly globalized financial markets, this leads to a very disadvantageous parochialism for American financiers, and we are glad to see the SEC coming to this recognition.
The Week in Review
While shipping stocks are no longer booming, the underlying shipping markets remain healthy. Jonathan Chappell and his team at JP Morgan are looking for near-record tanker rates at the end of 2007 to drive up 1Q08 EPS for tanker stocks and also believe that the tanker spot markets will hold up better than expected going forward. On the dry side, Urs Dür at Lazard sent out a note this week to correct common investor misunderstandings regarding the BDI, noting that it is not correlated to near-term world trade. He also expects Chinese iron ore price negotiations to be completed by March 2008, which combined with low inventories in China should lead to near-term improvements for dry bulk freight rates. Omar Nokta and his team at Dahlman Rose note that the tanker market could see some support as AG March cargoes come into the market this week while also observing that the dry bulk market has gained some positive momentum, though this has yet to be reflected in stock prices.
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