Shipping stalwarts came together to discuss M&A at the Baltic-sponsored Marine Money Week in New York.
The shipping sector is finally beginning to witness a consistent flow of mergers and acquisitions (M&A) transactions, whether they be public company mergers, fleet acquisitions or similar transactions. Nick Katsanos, Seward & Kissel Partner, made the observation while moderating a panel covering past and future M&A developments at Marine Money Week 2018 in New York.
Commenting on the drivers for the phenomenon, Star Bulk president Hamish Norton said there are many.
“One of the things driving it is that there was a lot of institutional investor capital invested into the shipping industry in 2012, 2013, and 2014, as people thought that shipping was coming out of its slump. A lot of that capital is due back to its owners at this point and they’re looking for liquidity, and so that creates an opportunity to provide them with liquidity in consolidating transaction. I think that’s driving some of it.”
Ove Meyer, Zeaborn managing partner, noted the ‘special situation’ in Germany where many ships were financed by the failed KG system. Now that German banks are cleaning out their books they are taking action on assets with lower values. “They’re now dissolving the problems with the ships, opening doors for consolidation on the ship management side,” he said.
Tom Higbie, Solus Alternative Asset Management managing director, believed that the other large factor is banks being much more selective than previously.
If you’re a larger company, you’re able to borrow more attractively
“If you’re a larger company, you’re able to borrow more attractively,” he explained. “If you’ve got $1bn of debt then paying at 100 basis points less makes a big difference.”
M&A in focus
Debt providers are said to be reacting positively to increased M&A transactions. Trygve P Munthe, DHT Holdings chief executive, said his business has completed two significant acquisitions over the past three years and both “have been very well-received by our existing lenders”.
“I think it comes down to a company with a sound strategy that resonates well with the lending community going out and acquiring another quality company that has been very well-received by the lending community,” he noted.
Mr Norton gave the example of Star Bulk’s Augustea acquisition, whereby Star Bulk had to gain consent from all of its lenders and all of those for Augustea. “In both cases, that was pretty straightforward because lenders want to drive consolidation. Size is helpful in driving lender interest,” he explained.
In response to a question asking what types of companies in shipping should be considering either selling or potentially merging with another company, Mr Higbie said: “My experience is nobody sells until they have to, and that usually means that they have a maturity that they can’t refinance, that they have confident breaches that the banks are not interested in waiving or that there’s some other factor forcing them. In my experience, I’ve never really seen anyone in this business sell because they want to.”
But that wasn’t the opinion of the whole panel. Opposing that viewpoint, Mr Munthe gave the example of DHT Holdings buying Samco Shipholding: “It was a classic: this was a privately-held company with a generation change and the kids wanted to do other things than run shipping companies, so that company was put up for sale,” he noted. “Last year, when we acquired all BW Group’s very large crude carriers, I think a key parameter was that they had, over time, seen that we were able to run our ships and we’d been able to get more out of the same spot market than they had. I think it was very much a seasoned traditional shipowning family just seeing that their position wasn’t ideal from a size perspective. Furthermore, here was a potential partner that was actually running a sharper operation in terms of cost and revenue generation. It was certainly not that they had to sell.”
Certainly, size is a factor as not all smaller companies have the robustness to survive the current markets.
Mr Meyer commented: “We have digitalisation in the industry, we have significant investments to cope with regulations, and we have ships or shipowners as investors on a limited timeframe buying and selling ships and wanting full transparency. For a lot of the smaller shipping companies, all that is simply not possible. If you have a small shipping company which is managing about eight or 10 ships and they have to a $2m or $3m investment in systems, in accounting, personnel etc they simply have no chance to survive.
“We still have all these zombies out which are controlled by someone else because the ships have no money. They are in bad shape, they’ve got to be sold, and it’s just a matter of time until these companies have no substance to survive on any more.”
This, he concluded, will definitely lead to more M&A activity or at the very least a handover of assets and companies to other units.
The next Shipping Economics & Investment course from the Baltic Exchange will be held on January 14 and 15 next year in London. More information can be found here.