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Name Change Needed – DRYS Goes Wet
It should come as no surprise that George Economou’s DryShips was in the news. First, there was the announcement that the private placement of shares in Ocean Rig UDW was successfully closed with total gross proceeds of $500 million raised. Not only was it a success from the perspective of the capital raise, the company achieved a superior market valuation, both in terms of the rigs themselves as well as in relation to its peers, according to Scott Burk of Oppenheimer. But perhaps more importantly, the company now has a balance sheet which is self-sustaining.
This news was immediately followed by the company’s announcement that the Board of Directors had approved a share purchase program for up to $25 million of common stock of Ocean Rig for the first quarter of 2011. The maximum share purchase price is capped at $17.50, the offering price of the shares.
But why stop there? In furtherance of its diversification strategy, the company announced that it had entered into agreements with Samsung to purchase twelve high specification newbuilding tankers at a cost of $770 million. The order consists of six Aframax tankers, of which four will deliver in 2011 and two in 2012, and six Suezmax tankers, of which one will deliver in 2011, two in 2012 and three in 2013. Given the delivery dates involved, the majority of these were clearly re-sales, which is further affirmed by the favorable payment terms of approximately 70% of the contract price per vessel due at delivery. On the other hand, as Erik Nikolai Stavseth of Arctic Securities points out Samsung is involved in the construction of its drillships and the tanker order must be viewed in the context of the total relationship with the shipyard. The company has paid in $120 million from its cash as the down payment on the tankers and intends to finance the balance from cash on hand and bank debt. Ultimately, the intention is to position the company for a spin-off or IPO.
The deal has engendered much discussion among the analysts, particularly with respect to the price paid and the original contracting party. DryShips tried to head off discussion of the former by describing the vessels as having high specification and over $3 million in extras per vessel. Nevertheless, Pareto, Oppenheimer and Morgan Stanley suggest that the company paid a premium of $11 million, $38 million and $50 million respectively for the entire package based upon their analyses. The bigger question arose when the observant analysts noted that Mr. Economou’s private company, Cardiff Marine, had a similar order in place, raising the question as to whether the vessels were in fact purchased from Cardiff or were purchased directly from Samsung. Management made it clear that the transaction was done directly with the shipyard.
While speculation on such a move initially centered on containers, DryShips’ need to resolve Ocean Rig’s financing and the speedy recovery in the container space foreclosed that opportunity. While near-term prospects for tankers do not look bright, most analysts believe, as does Mr. Economou, in an improving medium and long-term outlook. In the interim, DryShips is a diversified holding company with interests in dry bulk, crude oil tankers and offshore drilling.
Complications Unwound. How DRYS Got There.
Last week, DryShips announced that it had agreed to acquire, from George Economou and other third party interests, the remaining 25% minority interest in Primelead Shareholders, Inc., the holding company and operating platform for DryShips ultra deepwater drilling rig assets including two owned and operational ultra deepwater semisubmersibles and 4 newbuilding drillship contracts as well as the commercial operating company, Ocean Rig ASA.
The transaction was structured to minimize the cash outlay and leverage with the price being dilution. Consideration for the transaction included $50 million in cash and the issuance of $280 million in face value of mandatorily convertible preferred stock, based upon a price per share of $5.36, the weighted average seven day trailing price. At the offering price, this equates to 52.2 million shares. The shares are manditorily convertible in four equal installments at $6.83 per share (a 27.5% premium) upon delivery of each of the four newbuilding drillships.
Even the Analysts Wonder
We arrived at work last Friday morning to the rather surprising news that DryShips, clearly seeing the opportunity, had once again gone out into the equity market. The company announced its second ATM Equity Offering through Merrill Lynch for up to $475 million of the company’s common shares. Back in January, DryShips had entered into an earlier agreement to sell up to $500 million, which it completed last month selling a total of approximately 95.7 million shares, generating net proceeds of ~$487.5 million after commissions. An ATM equity offering allows the company to issue common shares at any time and at the company’s discretion.
What Do DryShips And The U.S. Government Have In Common?
The answer is they both seem to be issuing lots of paper. Last week, DryShips announced two transactions designed to reduce their future financial commitments. In the first instance, it transferred its interest in three Capesize newbuildings to an unaffiliated entity generating savings of $364 million in exchange for total consideration of $116.4 million. The latter consists of $36.4 million in previously paid deposits, $30 million paid to the purchaser and two additional tranches of $25 million payable to the purchaser within 30 and 60 days respectively. The last two tranches are payable either in cash or, at the option of the company, by issuing 2.6 million shares of common stock for each tranche.
Not surprisingly, the company also unwound the previously announced acquisition of 9 Capesize bulkcarriers from affiliates of Cardiff Marine, George Economou and third parties for $1.17 billion, which was to be paid for with 19.4 million shares of the company’s common shares and the assumption of $478.3 million in debt and future commitments. The consideration to cancel this transaction will consist of the issuance of 6.5 million shares to the unaffiliated entities, subject to a six-month lock-up. The affiliated entities will receive 3.5 million warrants that give the holders the right to purchase one share of DryShips stock. The warrants will be priced at $0.01 and will have strike prices, depending on the relevant tranches of between $20 and $30 per share. Vesting will be over 18 months with an expiry of 5 years.
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DryShips Launches Bid for Ocean Rig, Plans Ultra Deepwater Spin-off
When DryShips first purchased a 40.4% stake in Ocean Rig from Cardiff Marine in December 2007 for $405 million, shareholders were perturbed and correspondingly punished the share price. Why had a dry bulk play entered the rig market, they wondered? And why did DryShips purchase interests from George Economou’s private company Cardiff Marine just weeks after Cardiff had purchased the interests itself – for a higher price? To Mr. Economou it was a shrewd business move and a good opportunity to diversify, but to shareholders it was perplexing and made the future more uncertain – and therefore more risky.
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