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Pareto Places $60 Million of Fresh Equity for B+H
Using the issuer-friendly Form Reg F, which allows a foreign issuer to sell securities to foreign investors through a very simple process, Pareto Securities raised $60 million of cash for tanker company B+H this week. As we understand it, the deal was scaled back from an initial size of about $120 million and pricing was $18.50, about 5% below the trading price at the time. Although we have not done the math, the valuation is somewhere in the vicinity of net asset value. As we understand it, the newly issued shares will trade over the counter in Norway (until BHO lists there officially), and the U.S. lock-up period is only 40 days for investors. As you can see from the accompanying stock price graph, the shares have experienced notable selling pressure since the deal was announced.
Despite the reduced size and valuation that resulted from recent weakness in both the equity and shipping markets, this is an important deal for B+H for a few reasons. First off, the company now has a meaningful amount of buying power and we would be very surprised if they don’t have some specific ideas about how to use it. We would speculate that if B+H has, or will identify, a deal with some charter coverage (as they recently did with the OBO on charter to Sempra), bank financing could add another $200 million in dry powder. B+H management has proven themselves to be very experienced dealmakers with the patience required to do sensible deals in today’s market. Moreover, the new issue will reduce Michael Hudner’s stake to about 50% of the outstanding shares and thereby increase the free float by about five times.
Pareto Places $60 Million of Fresh Equity for B+HUsing the issuer-friendly Form Reg F, which allows a foreign issuer to sell securities to foreign investors through a very simple process, Pareto Securities raised $60 million of cash for tanker company B+H this week. As we understand it, the deal was scaled back from an initial size of about $120 million and pricing was $18.50, about 5% below the trading price at the time. Although we have not done the math, the valuation is somewhere in the vicinity of net asset value. As we understand it, the newly issued shares will trade over the counter in Norway (until BHO lists there officially), and the U.S. lock-up period is only 40 days for investors. As you can see from the accompanying stock price graph, the shares have experienced notable selling pressure since the deal was announced.
Despite the reduced size and valuation that resulted from recent weakness in both the equity and shipping markets, this is an important deal for B+H for a few reasons. First off, the company now has a meaningful amount of buying power and we would be very surprised if they don’t have some specific ideas about how to use it. We would speculate that if B+H has, or will identify, a deal with some charter coverage (as they recently did with the OBO on charter to Sempra), bank financing could add another $200 million in dry powder. B+H management has proven themselves to be very experienced dealmakers with the patience required to do sensible deals in today’s market. Moreover, the new issue will reduce Michael Hudner’s stake to about 50% of the outstanding shares and thereby increase the free float by about five times.
Understanding the Risks and Returns of Aker American Shipping
Last week, DnB Nor Markets, Enskilda and Fearnley Fonds executed a rather challenging deal very smoothing. The transaction resulted in a $125 million private placement for Aker American Shipping ASA (AKAS). Sources in Oslo tell us the deal was priced at the high point of the range and was 5x oversubscribed. It is important to point out the equity execution development that was seen in Oslo, which demonstrates that Norwegian bankers have developed a clever way to control deal risk in today’s choppy market. As we saw with the recent B+H placement, issuers are now hiring underwriters to sell shares on a private placement basis, with the agreement that these shares will later acquire a public listing.
Profits generated by the AKAS offering will be used to fund the construction and ownership of 10 U.S. flag product tankers, which will be delivered at the Kvaerner Philadelphia Shipyard from 2006 to 2010 and bareboat chartered to OSG. In addition to the offering, Aker will be listed on the Oslo Stock Exchange next week. Our calculations tell us that AKAS sold roughly 45% of its shares in the recent equity offering for $125 million.
There are two aspects of the AKAS deal that got investors excited. First, investors in AKAS will also own the Kvaerner Philadelphia Shipyard, which is positioning itself as the most efficient builder of vessels to replacing the aging U.S. Jones Act Fleet. Second, Norwegian and international investors and OSG are excited about the “simple math” involved in the supply and demand outlook for U.S. flag product tankers.
According to the structure of the deal, AKAS will bareboat the ships to OSG, who will then timecharter them to an OSG subsidiary called OSG PT, which was formed for the purpose of the transaction and will then time charter them to U.S. oil majors. Under the terms of the bareboat, OSG will take the first five vessels for seven years and the next five vessels for five years. Also, OSG negotiated an unlimited number of charter extension options of three or five years plus one year.
While the exact details of the deal have not been revealed, market sources say AKAS is planning to deliver the vessels at an average of $86.4 million. AKAS will initially fund the equity portion of the deal with funds raised through the recent offering and later with free operating cashflow once the vessels have been delivered and can be financed. As for the economic aspect, we understand that OSG will take the vessels from AKAS on bareboat charter rates in the mid $20,000 range.
There are definite risks that this deal carries for everyone involved. For OSG, the risk takes the form of the time charters. From a return on equity standpoint, however, OSG has little to lose. They have no money in the deal, so any money OSG makes will essentially equate to an enormous return on investment. For shareholders in AKAS, the major risk comes earlier than for OSG. It is absolutely critical that the Kvaerner Philadelphia Shipyard deliver these vessels on time and on budget, which shipyards in the U.S. are not known to do. If AKAS cannot produce the ships at or under budget there will be little or no return to the shareholders. While OSG will pay a floor rate that will keep the deal current with its lenders, the upside from this equity will be limited by charter rates and what new business the shipyard is able to generate. For both AKAS and DnB, there is the outstanding value exposure to the shareholders of AKAS. Each vessel will produce $7.3 million EBITDA, ($20,000 bareboat per day for 365 days), meaning that vessels are valued at 11.7x initial EBITDA.
In sum, we feel this was a well-done deal. While of course there are still risks involved, close management of the construction process and smart commercial management will ensure success for all parties involved. And afterall, doing good shipping deals always require the assumption of risk.
Hudner Mandates Pareto – an Equity Raise or a Reverse Merger?
As readers of these pages know, the second quarter of 2005 was expected to be the most active 3-month period for raising shipping equity in history. The first quarter closed with the pricing of the Diana IPO, and everyone was set for lots of action – and then a funny thing happened: nothing.
March 30th rolled by and as we moved into the fabled 2Q05, no fresh deals came to market. There were a few filings made both confidentially and publicly, one as recently as this week, but no new deals have priced or gone on roadshows. At the same time, Diana stock crumbled below its offering price almost immediately, and Excel and DryShips share prices have deteriorated.
But now something really interesting has happened. News came out that B+H Ocean Carriers has hired Pareto to raise equity through an international offering, which excludes U.S. investors. The deal is not unlike the one that Pareto, which has proven itself to be the most powerful and hardest working firm of its kind in Oslo, did for Stolt Nielsen. It was Pareto, we believe, that orchestrated B+H’s recently purchase of 3 OBOs that are chartered to Sempra, one of which was done through a K/S fund.
Financial Investor – or Strategic?
So what does this mean? B+H is no stranger to Oslo. Although the company is based in Rhode Island, it has strong ties to Norway, with an office there run by Sverre Ditlev-Simonsen and most a large proportion of banking done with Nordea. But what is interesting about this deal is the fact that such an offering, using Reg F, may be a way for foreign private issuers to raise equity capital more quickly. Moreover, there are loads of capital in Europe looking for deals that are not U.S.
Another potential scenario is that B+H has found a strategic partner that wants a listing in the U.S. and seeks to accomplish this by acquiring a substantial, perhaps even a controlling, interest. If rumors of a $100 million offering are accurate, it would mean that Michael Hudner, who controls more than 75% of the company, would dilute his interest to below 50% as B+H currently has a market capitalization of about $95 million. The move has the potential to make a lot of sense for both parties, as B+H, even with more than half its EBITDA contracted for the next 12 months and beyond, has an older fleet that needs to be renewed.
Whether B+H is selling to financial or strategic investors, the increase in liquidity and dry powder for dealmaking can only be a huge positive for the company.
Written by: carisk | Categories: Freshly Minted, The Week in Review | April 28th, 2005 | Add a Comment
Hudner Buys Modern Ships at 4.7x EBITDA
Hudner Buys Modern Ships at 4.7x EBITDA
It is our understanding that B+H house bank Nordea and DVB are providing the debt on the deal, estimated to be about $75 million. According to a company press release, the new ships will more than double the EBITDA from $17.6 million in 2004 to $40 million in 2005. If we assume that the new ships will generate the $23 million of EBITDA difference, then B+H did the deal at 4.7x EBITDA, about where George Economou priced his DryShips deal last week. But not all cash flows are created equally. The major difference, of course, is that the DryShips vessels are trading on the spot market and could generate cashflows substantially higher or substantially lower than what is being forecast, while the B+H ships are on firm charters with possibly investment grade charterers. Moreover, since B+H is buying ships at less than 5x EBITDA on 5-year charterers, they will be close to full payout – a figure that is really remarkable in today’s market for ships this young.
Nordea, DVB Provide Debt – Who Will Provide Equity?
So where will the missing $35 million to fund the acquisition come from? There are a few options – re-leveraging the existing fleet, retained earnings, Hudner (who controls the majority of the stock) or outside investors. In the former case, the B+H ships have very little leverage, about $15 million, and the loan balances are declining rapidly. That said, the B+H fleet will be forced to come off the water in 2007, so they do not have much time to earn their way out of debt. Another option is for the company to attempt to access the public equity market through a PIPE or a secondary offering – and we have no doubt that a few of our investment banking friends have made the journey up to the bucolic and littoral offices of B+H. According to our calculation, B+H has about $15 per share in cash and steel, though the product tankers are coming off the water in 2007 due to regulations.
It is our understanding that B+H house bank Nordea and DVB are providing the debt on the deal, estimated to be about $75 million. According to a company press release, the new ships will more than double the EBITDA from $17.6 million in 2004 to $40 million in 2005. If we assume that the new ships will generate the $23 million of EBITDA difference, then B+H did the deal at 4.7x EBITDA, about where George Economou priced his DryShips deal last week. But not all cash flows are created equally. The major difference, of course, is that the DryShips vessels are trading on the spot market and could generate cashflows substantially higher or substantially lower than what is being forecast, while the B+H ships are on firm charters with possibly investment grade charterers. Moreover, since B+H is buying ships at less than 5x EBITDA on 5-year charterers, they will be close to full payout – a figure that is really remarkable in today’s market for ships this young.
Nordea, DVB Provide Debt – Who Will Provide Equity?
So where will the missing $35 million to fund the acquisition come from? There are a few options – re-leveraging the existing fleet, retained earnings, Hudner (who controls the majority of the stock) or outside investors. In the former case, the B+H ships have very little leverage, about $15 million, and the loan balances are declining rapidly. That said, the B+H fleet will be forced to come off the water in 2007, so they do not have much time to earn their way out of debt. Another option is for the company to attempt to access the public equity market through a PIPE or a secondary offering – and we have no doubt that a few of our investment banking friends have made the journey up to the bucolic and littoral offices of B+H. According to our calculation, B+H has about $15 per share in cash and steel, though the product tankers are coming off the water in 2007 due to regulations.
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