Will other listed ship owners privatize after DryShips’ exit?
It’s official – DryShips (NASDAQ: DRYS) has agreed to go private, heralding the end of a sometimes-controversial 14-year stretch as one of ocean shipping’s highest-profile listed entities.
The broader industry question in the wake of privatization plans of DryShips and Teekay Offshore (NYSE: TOO) is whether slumping stock prices will prompt more public players to throw in the towel.
DryShips announced on August 19 that it had approved a definitive offer from founder George Economou to buy the remaining shares of DryShips he doesn’t already own for $5.25 per share. An initial offer by Economou of $4 per share was proposed on June 13.
There are currently 86,886,627 outstanding shares of DryShips, with 72,421,515 or 83.35 percent owned by entities controlled by Economou. Economou will now pay $75.9 million for the final 16.65 percent, up 31 percent from the $57.9 million offer made back in June.
The deal was accepted by the board after the unanimous approval of a special committee of independent directors. The special committee received financial advice from investment bank Evercore. Legal firm Seward & Kissel represented DryShips, led by partners Gary Wolfe, Nick Katsanos and Ted Horton and counsel Andrei Sirabionian.
A good deal for shareholders?
The initial offer by Economou was criticized as too low compared to the company’s net asset value (NAV), defined as the market-adjusted value of the fleet plus other assets, minus debt and other liabilities. How does the new, approved offer stack up versus NAV?
U.K.-based VesselsValue provided FreightWaves with valuations of DryShips’ fleet as of June 13, estimating that the company’s ships were worth $827.7 million. Using that figure in lieu of DryShips’ fleet book value, assets totaled $1.084 billion (as of March 31) and liabilities totaled $374 million, implying an adjusted equity value of around $710 million, according to the latest available information.
The original June offer equated to a total equity value of $347.5 million, 51 percent below the adjusted equity value. The August 19 offer comes in at $456.2 million, 36 percent below it.
That said, shipping stocks in general, particularly those with exposure to the dry bulk sector, are widely trading well below NAV. If an overall sector is trading at a discount for an extended period, is it necessarily unfair to non-insider shareholders to sell out at a discount to NAV?
Viewed in comparison to DryShips’ actual stock pricing, the offer is at a premium. The June 13 offer was 27 percent above the closing price on June 12. The new offer is 66 percent above the June 12 closing price and 37 percent above the August 18 closing price.
When asked by FreightWaves for comment on the transaction, J. Mintzmyer, lead researcher at Value Investor’s Edge, replied, “George Economou is taking the company private at a steep discount to fair market value, but the purchase price seems to be in line with peer valuations.”
He continued, “This is indicative of the extreme undervaluation we’re seeing in the sector.”
More privatizations may follow
Mintzmyer warned, “If markets don’t shape up, we might see a few more transactions like this in the near- to mid-future.”
Asked about the possibility of more privatizations given low stock valuations, Stifel analyst Ben Nolan told FreightWaves, “Theoretically, it makes sense to be private if the value of the company is worth less in a public format than it is privately, and it does not seem as though that dynamic [low stock valuations] is likely to change in the foreseeable future.”
Nolan further explained, “If the companies have no prospect of a public valuation in excess of that in the private market, it makes no sense to remain public.”
The DryShips privatization deal will likely mark the second departure from the U.S.-listed shipping ranks this year. In late May, Teekay Offshore received an offer from Canada’s Brookfield Business Partners to purchase all remaining common units in the partnership it did not already own. That offer is currently under consideration.
Throughout 2019, stocks of ocean shipping companies have been whipsawed by the U.S.-China trade war. Investor sentiment on these stocks is clearly linked to the news cycle on that issue, regardless of the extent individual public owners are exposed to that particular trade.
If U.S.-China tensions are not resolved before the next U.S. presidential election in November 2020, shipping stocks could face an ongoing and prolonged sentiment headwind.
Low equity valuations are leading to lack of access in U.S. capital markets. According to data compiled by FreightWaves from public filings, U.S.-listed ship owners have raised only $589 million through August 19, compared to $3.2 billion through that date in 2018.
The shipping sector is also experiencing a sharp drop-off in coverage by leading Wall Street analysts. The past few months have seen high-profile departures of shipping analysts at Morgan Stanley, JP Morgan and Wells Fargo. Recent quarterly calls by listed companies have been noticeably shorter because so few analysts are left to ask questions.
It is possible that some of the smaller ship owners that have extremely low trading liquidity will decide that the costs of being public outweigh the benefits, and privatize.
Jefferies shipping analyst Randy Giveans is skeptical, however. He told FreightWaves, “I doubt that many more public companies would go private, although more should, mainly because ship owners who have gone through the process of going public enjoy being listed and having the optional access to public capital if the situation arises. Additionally, there aren’t many public companies that are majority-owned by an insider/founder.”
Another counter-argument is that despite the privatization offers for DryShips and Teekay Offshore and persistently low stock valuations, the number of U.S.-listed shipping companies is actually increasing.
Ship owners are unable to acceptably price initial public offerings, but they can still go public without raising money through so-called ‘direct listings,’ as has been done this year by Flex LNG (NYSE: FLNG), Diamond S Shipping (NYSE: DSSI) and Castor Maritime (NASDAQ: CTRM), and as is expected to be done shortly by the spin-off by Golar LNG (NYSE: GLNG).
Potential legal challenges
The privatization of DryShips is not technically a done deal until it closes, which is scheduled to occur in the fourth quarter. However, it is hard to foresee any outside forces strong enough to derail it.
The transaction requires a majority of stockholders to approve the deal at a yet-to-be-scheduled special meeting, but Economou owns five-sixths of the shares. The only way the deal could be blocked is if minority shareholders successfully sued to halt it. Legal action is currently underway to block of the Teekay Offshore deal.
DryShips and Economou have repeatedly been targeted by lawsuits and investigations over the past decade – but so far, they have always prevailed in court.
According to the company’s latest quarterly filing and court documents, suits remain active in U.S. district courts in Texas and New York as well as in the Marshall Islands. An investigation also remains ongoing by the U.S. Securities and Exchange Commission into stock offerings done in 2016-17, according to DryShips’ latest quarterly filing.
The unusually high volume of shareholder suits DryShips and Economou have faced throughout the company’s history implies at least one rationale for going private – theoretically, less money will have to be spent on legal representation going forward.