He’s Back!

With Wednesday’s extraordinarily successful DryShips Inc. floatation, George Economou has stunned the ship finance community and silenced even his harshest critics. The final deal nearly doubled from its original size, going from 7.1 million shares in the initial prospectus to an astonishing 13.0 million shares (before underwriters’ over-allotments).  The $18.00 price per share compared favorably with the red herring price of $17.00 but was significantly higher than the $14.00-$16.00 range initially put out by the company. In total, DryShips raised a gross $234 million (again before the shoe and underwriters’ commissions) against an initial target of $120.7 million (same basis). Market sources tell us the deal was 9x oversubscribed, and as we go to press, the stock is up 10% in heavy trading. This transaction was a huge success for George, Mark Blazer, Anthony Argyropoulos and Cantor Fitzgerald, which is proving to be a formidable force in shipping finance.

Let’s take a quick look at the deal from both sides of the ball. First, when John Sinders of Jefferies told more than 100 shipowners, in attendance at the Marine Money/Jefferies seminar at the Piraeus Yacht Club two weeks ago, that the pool of U.S. investment capital available for shipping equities was unlimited, the owners hooted – but Sinders was absolutely spot on. As we have said in these pages for more than two years, U.S. investors are clamoring to invest in dry cargo shipping deals, and DryShips has been the first to come to market with scale. Although we have not seen the roadshow slides yet, we suspect that the word “China” in six-inch red letters was superimposed on the background of each one. Sometimes as shipping professionals, we tend to over think and complicate things. Conversely, investors in this space look to simplify (perhaps oversimplify) things.

With Wednesday’s extraordinarily successful DryShips Inc. floatation, George Economou has stunned the ship finance community and silenced even his harshest critics. The final deal nearly doubled from its original size, going from 7.1 million shares in the initial prospectus to an astonishing 13.0 million shares (before underwriters’ over-allotments).  The $18.00 price per share compared favorably with the red herring price of $17.00 but was significantly higher than the $14.00-$16.00 range initially put out by the company. In total, DryShips raised a gross $234 million (again before the shoe and underwriters’ commissions) against an initial target of $120.7 million (same basis). Market sources tell us the deal was 9x oversubscribed, and as we go to press, the stock is up 10% in heavy trading. This transaction was a huge success for George, Mark Blazer, Anthony Argyropoulos and Cantor Fitzgerald, which is proving to be a formidable force in shipping finance.

Let’s take a quick look at the deal from both sides of the ball. First, when John Sinders of Jefferies told more than 100 shipowners, in attendance at the Marine Money/Jefferies seminar at the Piraeus Yacht Club two weeks ago, that the pool of U.S. investment capital available for shipping equities was unlimited, the owners hooted – but Sinders was absolutely spot on. As we have said in these pages for more than two years, U.S. investors are clamoring to invest in dry cargo shipping deals, and DryShips has been the first to come to market with scale. Although we have not seen the roadshow slides yet, we suspect that the word “China” in six-inch red letters was superimposed on the background of each one. Sometimes as shipping professionals, we tend to over think and complicate things. Conversely, investors in this space look to simplify (perhaps oversimplify) things.

George Economou’s DryShips Files S-1 ~

A Look Inside

George Economou’s dry bulk shipping IPO, to be called “DryShips”, filed a prospectus today to sell 7.1 million shares at $16-$18 each in an initial public offering with underwriters Cantor Fitzgerald & Co., Hibernia Southcoast Capital, Oppenheimer & Co., Dahlman Rose & Company, and HARRISdirect. A market report from CBS Marketwatch today reported that the price range is actually $14-$16. DryShips plans to pay a 5% dividend and will be listed on the Nasdaq under the ticker symbol “DRYS.”

As is our policy, we will refrain from presenting our valuation of the company intil the transaction is complete, so the following facts have been taken directly from the offering document.

Sources & Uses of IPO Funds

As the accompanying chart illustrates, at the time of the offering DryShips will own five panamax and one capesize vessel. The company also has 11 more dry bulk carriers on subjects for an aggregate cost of $322 million.

The the company states it will use the estimated $111.5 million net proceeds of the offering together with $145 million borrowed under a new $185 million credit facility from Commerzbank and HSH, 1.35 million shares and up to $30 million under another credit facility that it plans to put together to finance the purchase. The company will have $7.0 million in cash immediately prior to the closing of this offering.

According to the document, DryShips will acquire the capesize drybulk carrier Netadola and five panamax drybulk carriers – Paragon, Samsara, Waikiki, Toro, and Iguana – from companies beneficially owned by Mr. Economou’s sister for a total purchase price of $197.8 million with delivery by April 29, 2005. Netadola and the four Panamax drybulk carriers, Paragon, Samsara, Waikiki and Toro, will come in at the same purchase prices as those companies paid when they acquired the vessels from unaffiliated third parties ($164.3 million), and the panamax drybulk carrier Iguana will be acquired at its fair market value ($33.5 million). DryShips will buy the remaining five Identified Vessels directly from unaffiliated third parties at the aggregate purchase price of $119.0 million.

Of Dilution & Dividends

As the chart shows, new investors in DryShips will experience substantial dilution upon consummation of the offering. The reason for this is that, at October 31, 2004, as adjusted for subsequent events, DryShips had negative net tangible book value of $(4.7) million, or $(0.31) per share.

DryShips plans to issue a dividend to pre-offering shareholders of $69 million, comprised of $51.0 million of retained earnings as of October 31st and $18.0 million of earnings of the Initial Fleet for the period between November 1, 2004, and the date of this prospectus. The $69.0 million dividend has been accrued and reflected as a payable in the October 31, 2004 financial statements.

According to the prospectus, “After giving effect to the sale of 8,452,942 shares of common stock at a price of $17.00 per share, which is the mid-point of the expected range of $16.00 to $18.00 per share in this offering, and assuming that the underwriters’ over-allotment option is not exercised, the pro forma net tangible book value at October 31, 2004, would have been $130.1 million or $5.45 per share. This represents an immediate appreciation in net tangible book value of $5.76 per share to existing shareholders and an immediate dilution of net tangible book value of $11.55 per share to new investors.”

Strategy

DryShips intends to employ the vessels in the spot charter market, under period time charters and in drybulk carrier pools. The ships will be managed by Cardiff, which is under common control with DryShips. DryShips plans to grow its fleet through the acquisition of 10-20 year old capesize, panamax, handymax and handysize vessels.

George Economou‘s dry bulk shipping IPO, to be called “DryShips”, filed a prospectus today to sell 7.1 million shares at $16-$18 each in an initial public offering with underwriters Cantor Fitzgerald & Co., Hibernia Southcoast Capital, Oppenheimer & Co., Dahlman Rose & Company, and HARRISdirect. A market report from CBS Marketwatch today reported that the price range is actually $14-$16. DryShips plans to pay a 5% dividend and will be listed on the Nasdaq under the ticker symbol “DRYS.”

As is our policy, we will refrain from presenting our valuation of the company intil the transaction is complete, so the following facts have been taken directly from the offering document.

As the accompanying chart illustrates, at the time of the offering DryShips will own five panamax and one capesize vessel. The company also has 11 more dry bulk carriers on subjects for an aggregate cost of $322 million.

The the company states it will use the estimated $111.5 million net proceeds of the offering together with $145 million borrowed under a new $185 million credit facility from Commerzbank and HSH, 1.35 million shares and up to $30 million under another credit facility that it plans to put together to finance the purchase. The company will have $7.0 million in cash immediately prior to the closing of this offering.

According to the document, DryShips will acquire the capesize drybulk carrier Netadola and five panamax drybulk carriers – Paragon, Samsara, Waikiki, Toro, and Iguana – from companies beneficially owned by Mr. Economou‘s sister for a total purchase price of $197.8 million with delivery by April 29, 2005. Netadola and the four Panamax drybulk carriers, Paragon, Samsara, Waikiki and Toro, will come in at the same purchase prices as those companies paid when they acquired the vessels from unaffiliated third parties ($164.3 million), and the panamax drybulk carrier Iguana will be acquired at its fair market value ($33.5 million). DryShips will buy the remaining five Identified Vessels directly from unaffiliated third parties at the aggregate purchase price of $119.0 million.

As the chart shows, new investors in DryShips will experience substantial dilution upon consummation of the offering. The reason for this is that, at October 31, 2004, as adjusted for subsequent events, DryShips had negative net tangible book value of $(4.7) million, or $(0.31) per share.

DryShips plans to issue a dividend to pre-offering shareholders of $69 million, comprised of $51.0 million of retained earnings as of October 31st and $18.0 million of earnings of the Initial Fleet for the period between November 1, 2004, and the date of this prospectus. The $69.0 million dividend has been accrued and reflected as a payable in the October 31, 2004 financial statements.

According to the prospectus, “After giving effect to the sale of 8,452,942 shares of common stock at a price of $17.00 per share, which is the mid-point of the expected range of $16.00 to $18.00 per share in this offering, and assuming that the underwriters’ over-allotment option is not exercised, the pro forma net tangible book value at October 31, 2004, would have been $130.1 million or $5.45 per share. This represents an immediate appreciation in net tangible book value of $5.76 per share to existing shareholders and an immediate dilution of net tangible book value of $11.55 per share to new investors.”

DryShips intends to employ the vessels in the spot charter market, under period time charters and in drybulk carrier pools. The ships will be managed by Cardiff, which is under common control with DryShips. DryShips plans to grow its fleet through the acquisition of 10-20 year old capesize, panamax, handymax and handysize vessels.

When Listing Companies Have Accidents

It has been an unusually active month for incidents involving vessels owned by shipping companies that are public, related to public companies and planning to go public.

First came the Athos I, a panamax tanker that on November 26th, the Friday after Thanksgiving, struck a submerged object punching two holes in the cargo and ballast tank ultimately releasing a still unknown quantity of crude oil as it was being maneuvered to a dock at the Citgo terminal on the Delaware River in Philadelphia. The incident has already exceeded the $45 million of $1200 per grt liability limit under OPA and many claims have not yet been filed. The ship’s manager was Tsakos Shipping and Trading, a private company controlled by the Tsakos family but completely separate from NYSE-listed TEN.

Next, on December 2nd, a 1998-built panamax bulker named Selendang Ayu lost power while in transit from Tacoma to China with a cargo of soybeans and ended up breaking up on the rocks on the west coast of Unalaska Island. The Coast Guard rescue effort resulted in the loss of six seafarers’ lives. The bow has now sunk while the stern remains aground and salvors are still working to remove diesel and bunkers from the stern. There are confirmed reports that about 40,000 gallons of oil have been lost, though the vessel had about 424,000 gallons on board.

The Selendang Ayu is part of the 14-vessel bulker fleet owned by Global Maritime Ventures (GMV), a joint venture between the Malaysian Government and the Tsao family’s IMC, which has a minority interest and serves as the vessel’s commercial manager. GMV, like Malaysian Bulk Carriers, is a joint venture created through Malaysian Development Bank, Bank Industri & Teknologi Malaysia, and the private sector in an effort to boost the country’s international maritime industry. MBC, which was a joint venture between the Kuok family and the Malaysian Government, went public in 2004.

IMC is planning a massive $400 million equity offering on the Singapore Stock Exchange during the first half of 2005 through lead underwriter Goldman Sachs and BNP Paribas. IMC was previously listed in Hong Kong (primary) and Singapore (secondary) but took the company private in 2002 when investor interest in bulk shipping companies was anemic.

Finally, this week, the 1992 built, 96,000dwt doubled hulled aframax Tsunami, owned by George Economou, collided with a terminal pier on the Mississippi River. The incident has resulted in the spillage of a minor amount of caustic soda but fortunately the three-foot puncture in the vessel did not pierce the inner hull containing the nearly 90,000 tons of cargo and bunkers on board. The Tsunami is not part of the fleet of ships that is being offered to the public beginning next week in an IPO lead underwritten by investment bank Cantor Fitzgerald, but Economou’s connection to the ship is well known.

It has been an unusually active month for incidents involving vessels owned by shipping companies that are public, related to public companies and planning to go public.

First came the Athos I, a panamax tanker that on November 26th, the Friday after Thanksgiving, struck a submerged object punching two holes in the cargo and ballast tank ultimately releasing a still unknown quantity of crude oil as it was being maneuvered to a dock at the Citgo terminal on the Delaware River in Philadelphia. The incident has already exceeded the $45 million of $1200 per grt liability limit under OPA and many claims have not yet been filed. The ship’s manager was Tsakos Shipping and Trading, a private company controlled by the Tsakos family but completely separate from NYSE-listed TEN.

Next, on December 2nd, a 1998-built panamax bulker named Selendang Ayu lost power while in transit from Tacoma to China with a cargo of soybeans and ended up breaking up on the rocks on the west coast of Unalaska Island. The Coast Guard rescue effort resulted in the loss of six seafarers’ lives. The bow has now sunk while the stern remains aground and salvors are still working to remove diesel and bunkers from the stern. There are confirmed reports that about 40,000 gallons of oil have been lost, though the vessel had about 424,000 gallons on board.

The Selendang Ayu is part of the 14-vessel bulker fleet owned by Global Maritime Ventures (GMV), a joint venture between the Malaysian Government and the Tsao family’s IMC, which has a minority interest and serves as the vessel’s commercial manager. GMV, like Malaysian Bulk Carriers, is a joint venture created through Malaysian Development Bank, Bank Industri & Teknologi Malaysia, and the private sector in an effort to boost the country’s international maritime industry. MBC, which was a joint venture between the Kuok family and the Malaysian Government, went public in 2004.

IMC is planning a massive $400 million equity offering on the Singapore Stock Exchange during the first half of 2005 through lead underwriter Goldman Sachs and BNP Paribas. IMC was previously listed in Hong Kong (primary) and Singapore (secondary) but took the company private in 2002 when investor interest in bulk shipping companies was anemic.

Finally, this week, the 1992 built, 96,000dwt doubled hulled aframax Tsunami, owned by George Economou, collided with a terminal pier on the Mississippi River. The incident has resulted in the spillage of a minor amount of caustic soda but fortunately the three-foot puncture in the vessel did not pierce the inner hull containing the nearly 90,000 tons of cargo and bunkers on board. The Tsunami is not part of the fleet of ships that is being offered to the public beginning next week in an IPO lead underwritten by investment bank Cantor Fitzgerald, but Economou’s connection to the ship is well known.