As shipping prospects increase, the scope of shipping inventory decreases
A perennial complaint about shipping inventory is that there is way too much of it and that it is way too small. If only there were only a handful of large-cap consolidated shipowners in each category – tankers, dry bulk, containers, gas – not a mishmash of micro-caps.
The good news for “more and less” supporters is that shipping inventory is indeed decreasing. There has been only one maritime IPO in the past six years compared to many write-offs.
The bad news is that the remaining public players are not necessarily bigger on average than before. Mergers between state-owned companies that create larger fleets are overtaken by equity investment agreements that exclude other, larger-capitalized public owners.
Speakers at this week’s annual Capital Link New York Maritime Forum discussed what is behind the privatization wave and the shipping’s IPO prospects.
Mergers and Acquisitions
Consolidation is one way to reduce the number of shipping stocks.
Container and bulk carrier owner Navios Partners (NYSE: NMM) finalized the takeover of related tanker owner Navios Acquisition (NYSE: NNA) on Friday. This followed earlier acquisitions within the group of Navios Containers by Navios Partners in April and Navios Midstream by Navios Acquisition in December 2018. The Navios family circle has now grown from five to two.
In addition, the owner of the tanker International Seaways (NYSE: INSW) finalized the purchase of Diamond S Shipping in July. Recent mergers and acquisitions talks have turned to Euronav (NYSE: EURN), given the purchase of nearly 10% of its shares by shipping mogul John Fredriksen, founder of Frontline (NYSE: FRO) .
Privatization deals are much more frequent than buyouts by public shipping companies.
The first big public start was DryShips, taken privately by founder George Economou in August 2019. These transactions have jumped this year.
Teekay LNG (NYSE: TGP) announced on October 4 that it was acquired by infrastructure fund Stonepeak for $ 6.2 billion (including equity and debt securities). GasLog Ltd. was bought by a BlackRock infrastructure fund in June and delisted. The owner of the mixed fleet Seacor was privately held by American Industrial Partners in April. Container equipment rental company CAI International was acquired by Japan’s Mitsubishi HC Capital last month.
The trend goes beyond listed shipping stocks in the United States. Hoegh LNG Ltd., listed in Oslo, was acquired and private by the Hoegh family and a Morgan Stanley infrastructure fund in June. Oslo-listed Ocean Yield, which has a diverse fleet, is in the process of being acquired by private equity giant KKR.
Other departures from shipping stock
Most of the departures of public shipping during the previous decade were due to business failures. There have been no recent maritime bankruptcies because the balance sheets have been strengthened by previous restructurings, most segments benefit from high interest rates and the owners of the only segment that is not – the tankers – have cash flow from the 2020 rate peaks.
Yet there are other ways to lose shipping names besides mergers and acquisitions, privatizations and bankruptcies.
Golar LNG Partners was sold to New Fortress Energy (NYSE: NFE) in April; while the buyer is publicly traded, the stock is outside the shipping space.
Scorpio Bulkers announced last year that it would sell its entire dry bulk fleet and start installing wind farms, renaming itself Eneti (NYSE: NETI). It sold its last bulk carriers in July.
The listing of line operator Zim (NYSE: ZIM) in January marked the first successful IPO since Gener8 Maritime in June 2015. (Gener8 was acquired by Euronav in 2018.) Zim is now by far the largest US-listed shipping company in terms of valuation, with a market capitalization of $ 5 billion.
There were also other new entrants, despite the drought of the IPO. Several shipowners, mostly small, registered through non-IPO means. Torm (NASDAQ: TRMD) entered the US public market in late 2017, Grindrod (NASDAQ: GRIN) and Navios Containers – which has since been sold – in 2018; and Castor Maritime (NASDAQ: CTRM), Flex LNG (NYSE: FLNG) and Diamond S – which has since been sold – in 2019.
Add it all up and Wall Street’s outflows are higher than the entrants. Adjust that by market cap and the pendulum swings even more towards the exits.
What motivates private outings?
Capital Link panelists pointed out that most recent equity deals involve infrastructure funds purchasing LNG transmission assets – and this is no coincidence, given the high coverage of the long-term charter of LNG transport and the optimism of institutional investors about the demand for natural gas.
According to Oystein Kalleklev, CEO of Flex LNG, “If you look at an LNG ship, it’s $ 200 million infrastructure. It is a much more versatile floating pipeline than a [land-based] pipeline, so of course the infrastructure people can figure that out. LNG also envisions an annual growth of 3-4% for the next 20 years and there aren’t really many segments outside of renewables with this kind of growth.
Meanwhile, most valuations of LNG shipping inventories have been low. Karl Fredrik Staubo, CEO of Golar LNG (NYSE: GLNG), said, “Most infrastructure companies are smart money. LNG yields are significantly better than renewable yields. Smart money is there to step in when the capital market is not there to assess effectively.
The strong focus on LNG shipping means that the current cycle of private equity investment may have largely run its course, as there are only a few public LNG shipping companies left. Oil tankers and dry bulk companies do not have the same long-term charter objective as transporting LNG. And while container ship leasing has long-term coverage, the question is whether private equity believes these charters are as unbreakable as LNG charters.
What Stops IPOs?
Capital Link panelists also commented on the long-standing drought in shipping IPOs.
Chris Weyers, Head of Maritime Investment Banking at Stifel, said: “The lack of IPOs is the result of private companies being unhappy with market valuations. Stock prices have risen a lot during the year, but in most sectors they are still well below the value of the underlying assets. [the fleet].
“When Zim went public there were special circumstances,” Weyers said, referring to historic shareholders who needed an exit. “Until valuations improve in public equity markets, I don’t think we’ll see many IPOs among traditional shipping lines.”
According to Christa Volpicelli, head of maritime investment banking at Citi, “I think the pace of IPOs in shipping is and will be slower than it was if you go back seven or eight years ago. “.
Larry Glassberg, senior managing director of the Maxim Group investment bank, had a different point of view. Maxim works with smaller shipping companies and sees new entrants coming in. “Maxim’s point of view is very different from that of Citi,” he said, noting that Citi focuses on “a multi-billion dollar approach” and Maxim examines “very micro-cap type stories. “.
“We are actively on file with a number of IPOs in this space, so you are going to see transactions in the first quarter. [of 2022] both on the asset side and on the operational side, ”said Glassberg.
This involves more and smaller new entrants into the shipping space as a result of privatization and the exit of larger players.
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