According to a recent study by E&Y, there have been 1,000 Initial Public Offerings (IPOs) globally in the first three quarters of 2018, a drop of 18% over the same period of the prior year; however, 9% more capital was raised ($145.1 billion) over the same period of the prior year, implying that current investor appetite is for larger companies. Interestingly and despite the down trend globally, during the same period, the number of IPO transactions in the Americas was up by 27% at 195 offerings with $50.1 billion in proceeds (up 41% from same period in prior year); 157 of these IPOs took place in the US capital markets (up 31% over prior year) with effectively a commanding market share of the capital raised in the Americas ($43.8 billion, up 58% over prior year).
Unfortunately, none of these IPOs were in the shipping industry; as a matter of fact, there have been a couple of instances whereby shipping companies of high expectations saw their IPO offerings withdrawn as they faced limited investor interest; most notably, in the US, Goodbulk Ltd had their $140 million offering withdrawn in early summer 2018, and a few months later, Navios Maritime Containers LP (an MLP structure) received minimal investor interest for their $100 mil IPO.
In the last five years, there have been no IPOs with mainstream shipping companies in the US capital markets, whether their investment thesis was for yield, for a market recovery, for an asset play, for a proxy to the Chinese economy, for commodities pricing, for market consolidation, etc There have been several efforts, for sure, but never institutional investors offered “fair pricing” or valuations for shipping companies that exceeded by much the “steel value” of the fleet of those shipping companies. And, quite frankly, publicly listed companies not only have failed to command a valuation premium for their “franchise” value or the quality of their corporate management or for “alpha”, but they habitually have been valued at a discount to their Net Asset Value (NAV). Historically, the discount to NAV can range from minimal to more than 40% under extenuating circumstances. In other words, there is money to be made in them darned ships, by buying cheaply the shares of the shipping companies on Wall Street, take over the ships, turn around and sell them in the open market, and pocket the difference between the discount to share price and the market value of the ships.
Of course, there are practical considerations with liquidating companies, and harvesting asset pricing arbitrage is more complicated than it sounds, but, the main theme is that publicly listed companies, overall, get little respect from investors as they are valued even below their “hardware”.
However, publicly listed shipping companies, despite their weak valuations for now as listed companies, enjoy strategic advantages that are not available to the privately held companies. There are benefits to be a publicly listed company, and hereby we briefly outline three of these advantages:
While IPOs are hard to consummate these days, there have been secondary offerings and follow-ons, when already publicly listed shipping companies exploit short term market opportunities to raise additional equity from the public markets; in the last couple of years, Ardmore Shipping (ASC) and Scorpio Tankers (STNG) in the product tanker market raised additional capital, Seanergy Maritime (SHIP) and Scorpio Bulkers (SALT), etc were among the companies that found their public listing to be a blessing in this respect, raising more capital when market permit. It’s much easier for a publicly listed company to raise additional capital than a private company to raise capital for the first time via an IPO, and thus publicly listed companies enjoy a great benefit.
Besides secondary offerings to raise more capital, publicly listed companies enjoy the benefit of their shares as a currency, and they can successfully consummate transactions such as buying shipping assets or acquiring other companies by paying in shares (or “paper”) instead of hard cash. Paying in shares has strong advantages, primary among those advantages being liquidity; the seller can hold on to the shares offered for payment for future appreciation, but also, they can sell – often within certain parameters – the shares in the open market for hard cash at will; of course, selling in exchange for hard cash is the optimal scenario for most sellers, but there are occasions when selling in exchange for shares may be the next best thing given the option set available.
As a quick reminder, following the shipping market collapse in 2008, many private equity funds invested in shipping at then “distressed levels” and had in mind an IPO as their “exit strategy”. To begin with, some of these private equity funds selected shipowners with already public structures when started investing in shipping, already angling for a smooth exit strategy; Star Bulk (SBLK) and Tankers Investment Limited (TIL) were among the companies that specifically edged out other shipowners to walk to the altar with private equity funds based on their public structure advantage, as the liquidity of their shares offered an advantage from the very beginning.
Since then, however, the liquidity of the public shares has kept being a distinct advantage.
As the private equity funds that had invested in shipping were approaching their investment horizon and the IPO-promised exit strategy was not working due to several factors – including weak market conditions, many of these private equity funds and institutional investors have now been aiming at publicly listed companies and opting for a merger or a reverse merger whereby the private company and the public entity can comingle on a corporate level.
Just last week, Diamond S Shipping, a US-based private tanker shipowner and backed by interests of the US Secretary of Commerce Mr Wilbur Ross, opted to merge with the tanker spin-off from publicly listed Capital Product Tankers (CPLP) in a $1.6 billion transaction. WL Ross & Co invested in products and crude tankers right after the shipping market started collapsing, and ever since, an IPO exit had been on the management’s crosshairs; having failed twice to obtain “fair” pricing as an IPO, a merger seems to have done the trick now.
In the last year, Global Ship Lease used their public structure to acquire Poseidon Container Holdings and their sixteen (16) containerships, a private-equity sponsored shipping company that had hit a roadblock on their way to an IPO exit; Star Bulk used shares to acquire eight vessels from E.R. Capital Holdings, sixteen (16) drybulk ships from Augustea and York Capital Management, and fifteen (15) drybulk ships from Songa Bulk; DHT’s acquisition of eleven (11) VLCC from BW for $540 mil in shares, Good Bulk’s acquisition of thirteen (13) capesize vessels from Carval Investors, and two years earlier, Golden Ocean acquiring Quintana Shipping, etc. All these have been transactions where the road to an IPO did not directly work and private companies – again, often sponsored by private equity funds – opted to settle for shares (stock-for-stock) in publicly listed vehicles.
In a previous article last year, we had considered that issuing shares by publicly listed companies was a way for shipping companies to solve, at least partially, the shipping finance conundrum, as investors (and lenders) seemed to have kept skeptical with the prospects of the shipping industry, in general. Whether acquisitions and merger transactions with publicly shipping companies are presented as market consolidation or as growth, one will have to be considerate of the “value” of shipping companies and that they may deserve better valuations (than their discounted NAV), given the depth and versatility of their financial repertoire.