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Why Do One Deal When You Can Do Two – Teekay Teams with Marubeni to Purchase Maersk LNG
Following closely on the heels of last week’s announced transaction with Sevan, a joint venture of Teekay LNG Partners LP and Marubeni Corporation, announced the acquisition of Maersk LNG Carriers. Also thin on detail, the parties disclosed that the joint venture would acquire the ownership interests in eight LNG carriers from A.P. Moller-Maersk A/S for an aggregate purchase price of approximately $1.402 billion, which will be paid in cash with no assumption of debt. The average age of the fleet is 3.25 years making it the second youngest in the industry and the youngest among all independent owners. As far as responsibilities, Teekay LNG will provide the technical management upon turnover.
Of the eight vessels acquired, the joint venture will acquire 100% interests in six vessels and 26% interests in the remaining two (Maersk Qatar and the Maersk Ras Laffan), which are owned by limited partnerships. The limited partners will have the right to put their interests to the buyer. Of the eight vessels, five are currently operating under long-term fixed rate time charters with an average remaining term of 17 years, exclusive of extension options. The remaining three vessels are employed under short-term fixed rate time charters, however one of these includes an option which if exercised would put it in the long-term category. Based upon the current employment, the transaction will be accretive to Teekay LNG’s distributable cash flow. Although dated, the below chart describes the vessels and identifies those likely to be on long-term charter. Although not identified on the chart, known customers include Total, Yemen LNG, Woodside Petroleum, RasGas, Qatar Gas Transportation Company, Repsol YPF and the BG Group.
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.
“DryRigs”
We began the week reading Ole Slorer’s initial research note on DryShips. Morgan Stanley’s shipping analyst upgraded the shares based upon his assessment that:
“A firmer tone in the ultra-deepwater drilling market recently may allow DRYS to scale down its risky and under-capitalized rig expansion…We believe the sale of two rigs would remove the financing overhang from the $1.4bn estimated capex for DRYS’s four unfunded newbuilds that still lack contracts. Assuming DRYS completes its announced $350m ATM offering, such an asset sale could put an end to our concerns of further dilution from further offerings related to the drillships. Despite the potential book loss in excess of $440m and the negative impact on the company’s projected EPS (by 15% in 2011 and 27% in 2012), a sale at around $600m per drillship could allow the stock to appreciate 30-40% in the near term.”
Clean-up Then to Market – DryShips Cuts ATM Deal with Deutsche Bank
Back from the summer break, if in fact they had one, the team at DryShips announced on Tuesday that it was in compliance with all of its loan facilities, had entered into new management agreements with Cardiff and Mr. George Economou’s financial advisory firm, and, finally entered into an equity sales agreement with Deutsche Bank.
While some borrowers choose to have relationships with a few lenders, others prefer a larger number particularly when borrowing on an asset basis. With a multiplicity of lenders, a borrower’s dealings with its bankers are at best difficult, as one has to deal with each one and their different needs separately. Mr. Economou has a large stable of lenders and has devoted substantial time to negotiating waivers with a number of them. However, at long last, Dryships was able to report it was now in full compliance with all of its loan agreements having signed a waiver agreement with DVB with respect to $230 million of loan facilities through December 1, 2010.
At Last!
On Monday, Danaos Corporation announced the restructuring of the company having reached agreement with the banks for the restructuring of its existing debt, the provision of new debt facilities and, lastly, the sale of $200 million of new equity. This gargantuan and time-consuming effort will put the company on sure footing going forward.
First and foremost, under the agreed terms all 14 of the company’s lenders have agreed to provide $426 million of new debt financing to partially fund its existing orderbook. The existing loan facilities of approximately $3 billion have effectively been re-written with amortization and maturities rescheduled, interest margins reduced, and financial covenants, events of default, and guarantee and security packages revised.
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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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Economou Out
Top Ships today announced the expiration of the exclusivity agreement between the company and an affiliate of George Economou. Mr. Economou’s affiliated entity had reduced its offer to acquire the outstanding shares of the company to $3 per share in cash, down from the original $6. After consideration of numerous factors, including the recent volatility in global markets and decline in the company’s share price, the company’s board has determined that this offer is not in the best interest of shareholders.
A True Believer Consolidates and Does Right by His Shareholders
On Monday, George Economou announced a major strategic expansion by DryShips Inc. (“DryShips”) in both its bulk and offshore businesses. First, the company acquired the equity interests, from entities controlled by Cardiff Marine Inc., in nine Capesize bulkcarriers, including five newbuildings for $690 million payable in the form of 19.4 million newly issued shares ($35.50 per share) of Dryships common stock increasing the number of shares to 63 million. In addition, the company will assume $216.3 million of existing debt and $262 in remaining shipyard installments. The latter will be funded by debt facilities in place except for $16 million that will be funded by cash flow. The implied aggregate value of the purchase is estimated at approximately $1.2 billion or approximately $130 million per vessel.
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