A perennial complaint about shipping stocks is that there are way too many of them and they’re way too small. If only there were just a handful of large-cap consolidated shipowners in each category — tankers, dry bulk, containers, gas — not a hodgepodge of micro-caps.
The good news for ‘bigger and fewer’ proponents is that the number of shipping stocks is indeed shrinking. There has been only one shipping IPO in the last six years compared to numerous delistings.
The bad news is that the remaining public players are not necessarily bigger on average than before. Mergers between public companies that create larger fleets are being outpaced by take-private deals that cull other larger-cap public owners from the mix.
Speakers at this week’s annual Capital Link New York Maritime Forum addressed what’s driving the take-private wave and prospects for shipping IPOs.
Consolidation is one way to reduce the number of shipping stocks.
Container-ship and bulker owner Navios Partners (NYSE: NMM) completed its takeover of related-party tanker owner Navios Acquisition (NYSE: NNA) on Friday. This followed earlier intra-group takeovers of Navios Containers by Navios Partners in April and Navios Midstream by Navios Acquisition in December 2018. The Navios family circle has now shrunk from five to two.
In addition, tanker owner International Seaways (NYSE: INSW) completed its purchase of Diamond S Shipping in July. Recent M&A chatter has turned to Euronav (NYSE: EURN), given the purchase of almost 10% of its shares by shipping magnate John Fredriksen, founder of Frontline (NYSE: FRO).
Take-private deals are far more prevalent than takeovers by public shipping companies.
The first big public departure was DryShips, taken private by founder George Economou in August 2019. Such transactions surged this year.
Teekay LNG (NYSE: TGP) announced on Oct. 4 that it will be acquired by infrastructure fund Stonepeak for $6.2 billion (including equity and debt obligations). GasLog Ltd. was bought by a BlackRock infrastructure fund in June and delisted. Mixed-fleet owner Seacor was taken private by American Industrial Partners in April. Container-equipment lessor CAI International was bought by Japan’s Mitsubishi HC Capital last month.
The trend goes beyond U.S.-listed shipping stocks. Oslo-listed Hoegh LNG Ltd. was acquired and taken private by the Hoegh family and a Morgan Stanley infrastructure fund in June. Oslo-listed Ocean Yield, which owns a diversified fleet, is in the process of being taken over by private equity giant KKR.
Other shipping stock departures
Most public shipping departures in the previous decade were due to business failures. There have been no recent shipping bankruptcies because balance sheets have been strengthened by prior restructurings, most segments are enjoying strong rates, and owners in the one segment that isn’t — tankers — have cash cushions from 2020 rate spikes.
Still, there are other ways to lose shipping names besides M&A, privatizations and insolvencies.
Golar LNG Partners was sold to New Fortress Energy (NYSE: NFE) in April; while the buyer is publicly listed, the stock is outside of the shipping space.
Scorpio Bulkers announced last year that it would sell its entire dry bulk fleet and go into the wind-farm installation business, renaming itself Eneti (NYSE: NETI). It sold its final bulkers in July.
The listing of liner operator Zim (NYSE: ZIM) in January marked the first successful shipping IPO since Gener8 Maritime in June 2015. (Gener8 was bought by Euronav in 2018.) Zim is now by far the largest U.S.-listed shipping company in terms of valuation, with a market cap of $5 billion.
There have been other new entrants as well, despite the IPO drought. Several shipowners, most of them small, have listed via non-IPO means. Torm (NASDAQ: TRMD) came to the U.S. 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 exits are higher than entrants. Adjust that by market cap and the pendulum swings even more toward exits.
What’s driving take-private exits?
Capital Link panelists highlighted that most of the recent take-private deals involve infrastructure funds buying LNG shipping assets — and that’s not a coincidence, given LNG shipping’s high long-term charter coverage and institutional investor optimism on natural gas demand.
According to Oystein Kalleklev, CEO of Flex LNG, “If you look at an LNG ship, it’s a $200 million piece of infrastructure. It’s a floating pipeline that’s much more versatile than a [land-based] pipeline, so of course, the people in infrastructure can understand it. LNG is also looking at 3-4% annual growth for the next 20 years and there are not really a lot of segments outside of renewables with that kind of growth.”
Meanwhile, most LNG shipping stock valuations have been weak. Karl Fredrik Staubo, CEO of Golar LNG (NYSE: GLNG), commented, “Most infrastructure companies are ‘smart money.’ LNG returns are significantly better than renewable returns. The smart money is there to step in when the capital market is not there to price efficiently.”
The heavy focus on LNG shipping implies that the current take-private cycle may have largely run its course, because there are only a few public LNG shipping companies left. Tanker and dry bulk companies do not have the same long-term charter focus as LNG shipping. And while container-ship leasing does have long-term coverage, the question is whether private equity believes those charters are as unbreakable as LNG charters.
What’s stopping IPOs?
Capital Link panelists also opined on the long-running drought in shipping IPOs.
Chris Weyers, head of maritime investment banking at Stifel, said, “The lack of IPOs is a result of private companies not being happy with the valuations in the market. Share prices have gone up quite a lot over the course of the year, but in most sectors, they’re still well below the value of the underlying assets [the fleet].
“When Zim went public, there were special circumstances,” Weyers said, assumedly referring to the legacy shareholders that needed an exit. “Until valuations get better in the public equity markets, I don’t think we’re going to see a lot of IPOs among traditional shipping companies.”
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.”
Larry Glassberg, senior managing director of investment banking at the Maxim Group, had a different perspective. Maxim works with smaller shipping companies and he does see new entrants coming. “The Maxim point of view is very different from Citi,” he said, noting that Citi is focused on “a multibillion-dollar approach” and Maxim looks at “very micro-cap type of stories.”
“We are actively on file with a number of IPOs within this space, so you are going to see deals in the first quarter [of 2022] on both the asset side and operating side,” said Glassberg.
That implies more smaller newcomers to the shipping space in the wake of larger players being taken private and exiting.
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