It’s been a series of deals that put Kjell Inge Rokke and his advisors at DnB NOR squarely in the running for the Marine Money Dealmaker of the Year award.
Back in November, when DnB was hired, Kvaerner’s stock price was at NOK 25 and his shipyard had two orphaned containerships and nothing but dreams about securing contracts to build Jones Act tankers. Today, just five months later, the boxships have been sold to Matson at a profit, the share price is at NOK 100 and the company has just signed contracts with OSG for 10 with an option of two Jones Act tankers – a $1 billion deal that is probably the biggest commercial order for ships ever.
The progress has been really and truly amazing, and all of the people involved with this effort at both Kvaerner and OSG should feel proud for having stuck with it. In an industry in which a lot of people take the money and run, Rokke and his team have proven they will do whatever it takes to make their challenging venture a success – something that we think will benefit not only their respective shareholders, but also the aging U.S. fleet.
Masters of Public Relations
In addition to being able to manage a shipyard on the brink, Kjell Inge Rokke and his team are also masters of public relations. In fact, today’s fete was so high profile that even United States President Bill Clinton showed up to share his best wishes. Whether of not the ships go to OSG, Rokke has telegraphed to every would-be shipyard or shipowner that his yard will be the one to construct the next generation of Jones Act tankers.
The contract signing that took place this morning in Philadelphia outlined OSG’s agreement to take 10, option for two, Jones Act newbuilding tankers on charters of 5-7 years with options, probably for many more years. The rate has not been specified, but average costs of $80 million per ship have been whispered against bareboats of about $60,000 per day.
As many readers know, the subject of building new Jones Act tankers, hotly debated at our October event in New York, has been stuck in a gridlock for years. Shipyards have been complaining that oil majors would not give financible charters to shipowners – and oil companies and shipowners have been complaining that shipyard prices have been uncompetitive with long-haul foreign flag oil. Finally, the gridlock appears to be breaking.
Kvaerner Philadelphia- A Coup for DnB NOR
As we understand the deal, an entity called American Shipbuilding has mandated DnB NOR and Enskilda to raise a round of equity to help fund the first ships, likely alongside construction financing from Cat Financial, which did pre-delivery financing on the Matson newbuildings. The series will then be long-term financed against the leases to OSG. In addition to the vessels, and their residual value after the charters expire, investors in American Shipbuilding will own the shipyard – which will use the $1 billion from this deal as a platform for a healthy long-term operation. And their investment will be in the hands of a management team that is clearly tenacious.
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carisk | Categories:
Freshly Minted,
The Week in Review | April 14th, 2005 |
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It appears as if the equity in Horizon Lines will be turned over yet again – for the third time in as many years. Leading Jones Act container shipping and logistics company Horizon Lines has filed an S-1 with the U.S. SEC in its bid to raise up to $287.5 million through its initial public offering. The company is looking to be listed on the NYSE under the symbol HRZ. Joint bookrunning lead managers on the deal are Goldman, Sachs & Co. and UBS Investment Bank, while co-managers are Bear, Stearns & Co., Deutsche Bank Securities and JP Morgan. The deal comes as private equity firm Castle Harlan, which purchased Horizon Lines in July 2004, seeks to cash out on some of its massive $663.3 million investment while maintaining a controlling stake in the company, which is well-positioned strategically in all three of the non-contiguous U.S. Jones Act markets as well as Guam. Castle Harlan extracted about $80 million of its original investment in the company through the issuance of a zero coupon bond in late 2004, and this deal will likely represent a total return of invested equity.
A Little Something for Everyone
By way of review, the Carlyle Group of Washington, D.C. had bought Horizon from CSX Lines for around $375 million in 2002 before selling the company to Castle Harlan for over $650 million in 2004. While the trade press reported that Carlyle nearly double its money, that statistic refers to the enterprise value of the company and assumes the firm used its own money. In actual fact, assuming Carlyle put up 20% of the equity on the original deal, then the private equity firm would have turned its $75 million initial investment into $350 million, or a return of about 460% on its equity.
On the surface, the deal looked reasonably priced even from Castle Harlan’s perspective at 7.3x. However, significant deductions for drydocking expenditures brought the multiple to 11-13x, placing the purchase at the upper end of the reasonable range, but still not shocking considering how sacrosanct the Jones Act is. But then, using the metrics behind the $140 million price Kvaerner Philadelphia newbuildings fetched from Matson with a 40-year amortization period, Horizon Lines’ vessels can be valued at about $35 million each, reasonably closer to what Castle Harlan paid for them before even considering the steady stream of earnings the vessels bring. Less than a year later, Castle Harlan has already extracted $80 million from Horizon through a bond offering and stands ready to issue almost $290 million worth of shares.
Horizon –a Cash Cow for Goldman Sachs
But when you look at risk adjusted returns, the sure winner is the investment bank that has been involved every step of the way, Goldman Sachs. Horizon has been a true cash-cow for the firm as they bought the company for Carlyle, then sold the company to Castle, then did two bond offerings for the company for Castle and are now bookrunner on the equity offering.
What’s Left?
Like most deals, there are “pros and cons” to the Horizon transaction. The “pros” are that the company has a privileged position in a U.S. Jones Act trade, which limits competition to companies that have U.S. built ships that are owned at least 75% by Americans, fly the U.S. flag and have U.S. crews. Horizon is one of only two providers of its services in the Hawaii and Guam markets and the largest such provider in Guam – two stable and growing, albeit slowly, markets.
And then there are the “cons”, Horizon has been bounced between two private equity firms who have extracted a lot of equity over the last three years and have not replaced any of the company’s 28-year-old vessels. The proceeds of this deal will pay back the founders and reduce debt, which will theoretically create buying power assuming they can arrange like kind debt facilities, but at some point there will be some major capital expenditures to be made even though the company states that each of its ships has a 45-year useful life.
The story is not exciting, but it is solid. So long as the sacrosanct U.S. Jones Act is not altered and the maintenance and replacement of the company’s fleet does not prove to be a problem. And it certainly makes sense for Castle Harlan, who has no particular need to maintain much more than a controlling stake in the company, and who also can hardly hope to follow in the footsteps of Carlyle and watch the company double in value once again over the next two years.
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carisk | Categories:
Equity,
Freshly Minted | March 10th, 2005 |
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DnB Nor, Jefferies Score Huge Success for
Kvaerner Philadelphia
When DnB NOR and Jefferies were mandated to raise $75 million in equity so that Kvaerner could place its two orphaned US flag newbuildings OceanBlue, a Kvaerner sponsored enterprise, to compete with Matson, we held our breath. And then we wrote an article entitled: “Will Hawaii Become the Next Puerto Rico?” referring to the fact that a price war might erupt with the addition of another player in what is already a fragile market. Although we understand that DnB NOR and Jefferies have been having success in placing the equity, we were very pleased to learn recently that Kvaerner has in fact entered into contracts to sell the vessels to Matson, who had bought the first two vessels, for $290 million. The new ships are expected to be delivered to Matson and placed into the company’s Guam service in July 2005 and June 2006. “The contract with Matson confirms that Kvaerner Philadelphia has made a successful transition to become a highly efficient Jones Act shipbuilder,” said Dave Meehan, President at the yard, which we now imagine has set its sights on building 10 highly sought-after US flag product tankers.
When DnB NOR and Jefferies were mandated to raise $75 million in equity so that Kvaerner could place its two orphaned US flag newbuildings OceanBlue, a Kvaerner sponsored enterprise, to compete with Matson, we held our breath. And then we wrote an article entitled: “Will Hawaii Become the Next Puerto Rico?” referring to the fact that a price war might erupt with the addition of another player in what is already a fragile market. Although we understand that DnB NOR and Jefferies have been having success in placing the equity, we were very pleased to learn recently that Kvaerner has in fact entered into contracts to sell the vessels to Matson, who had bought the first two vessels, for $290 million. The new ships are expected to be delivered to Matson and placed into the company’s Guam service in July 2005 and June 2006. “The contract with Matson confirms that Kvaerner Philadelphia has made a successful transition to become a highly efficient Jones Act shipbuilder,” said Dave Meehan, President at the yard, which we now imagine has set its sights on building 10 highly sought-after US flag product tankers.
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carisk | Categories:
Equity,
Freshly Minted | March 3rd, 2005 |
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Is Hawaii the Next Puerto Rico?
As we have seen in the Puerto Rico market since the demise and withdrawal of Navieras, a little bit of extra capacity in a captive market can really pollute rates and destroy capital. Competition in the Hawaii market will be further exacerbated by the coming arrival a new Pasha-owned ro/ro working on the trade lane between Los Angeles and Hawaii. If there is a bright spot here, it is that the Hawaiian economy has been strengthening and might even be able to handle the added capacity.
Using Equity to Finance a Debt Deal
The debt financing of these vessels will be another interesting facet of the OceanBlue deal. We highly doubt that Caterpillar will be involved in ships that will compete against those in which they have already taken a considerable amount of risk. Moreover, with the vessels essentially operating in a “start up” business and with book values that make them totally uncompetitive in the international market should the startup not work, we think bank debt will be low. Therefore we would expect to see this deal financing with at least 50% equity and quite possibly more. This would give the lenders the ability to get out whole should they need to remarket the vessels on the international market.
Ocean Blue and the Need to Beef Up
One challenge associated with raising equity for OceanBlue will be the fact that the exit strategy is unclear unless DnB and Jefferies are able to make investors comfortable with the idea that OceanBlue will be able to beef up its business through newbuildings or acquisitions and then go public at a multiple of its book value. But where will they look to expand? With the supply demand balance of Jones Act markets extraordinarily tight, it will be both difficult and expensive to find good assets. If they are able to sell this story, though, then the IPO of Horizon Lines will come at a very good time by creating a comparable valuation that will get potential OceanBlue investors excited. The challenge therefore, is that OceanBlue is really a debt deal that needs equity – but at the end of the day, we have little doubt that the new Kvaerner ships will end up being consolidated into Matson or Horizon. There have been rumors that Alexander and Baldwin has been thinking of selling off Matson Navigation, though Horizon is the more logical choice in light of the age of their fleet and the fact that they are raising fresh equity. After all, Horizon Lines will need the ships at some point, and the economics of these ships is actually pretty reasonable. Moreover, Kvaerner might well shut down after the obligation to deliver these final vessels is fulfilled, which would make it very difficult for Horizon to find large ships at a comparable price.
As we have seen in the Puerto Rico market since the demise and withdrawal of Navieras, a little bit of extra capacity in a captive market can really pollute rates and destroy capital. Competition in the Hawaii market will be further exacerbated by the coming arrival a new Pasha-owned ro/ro working on the trade lane between Los Angeles and Hawaii. If there is a bright spot here, it is that the Hawaiian economy has been strengthening and might even be able to handle the added capacity.
Using Equity to Finance a Debt Deal
The debt financing of these vessels will be another interesting facet of the OceanBlue deal. We highly doubt that Caterpillar will be involved in ships that will compete against those in which they have already taken a considerable amount of risk. Moreover, with the vessels essentially operating in a “start up” business and with book values that make them totally uncompetitive in the international market should the startup not work, we think bank debt will be low. Therefore we would expect to see this deal financing with at least 50% equity and quite possibly more. This would give the lenders the ability to get out whole should they need to remarket the vessels on the international market.
Ocean Blue and the Need to Beef Up
One challenge associated with raising equity for OceanBlue will be the fact that the exit strategy is unclear unless DnB and Jefferies are able to make investors comfortable with the idea that OceanBlue will be able to beef up its business through newbuildings or acquisitions and then go public at a multiple of its book value. But where will they look to expand? With the supply demand balance of Jones Act markets extraordinarily tight, it will be both difficult and expensive to find good assets. If they are able to sell this story, though, then the IPO of Horizon Lines will come at a very good time by creating a comparable valuation that will get potential OceanBlue investors excited. The challenge therefore, is that OceanBlue is really a debt deal that needs equity – but at the end of the day, we have little doubt that the new Kvaerner ships will end up being consolidated into Matson or Horizon. There have been rumors that Alexander and Baldwin has been thinking of selling off Matson Navigation, though Horizon is the more logical choice in light of the age of their fleet and the fact that they are raising fresh equity. After all, Horizon Lines will need the ships at some point, and the economics of these ships is actually pretty reasonable. Moreover, Kvaerner might well shut down after the obligation to deliver these final vessels is fulfilled, which would make it very difficult for Horizon to find large ships at a comparable price.
Written by:
carisk | Categories:
Equity,
Freshly Minted | February 10th, 2005 |
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Horizon & Ocean Blue –
Battle of the Equity Prospectuses
Concurrent with the preparations for Horizon’s public equity offer, a new competitor is in the marketplace with a private equity transaction that will compete against Horizon in the Puerto Rico market. Since the autumn of 2004, Kjell Inge Rokke’s Philadelphia Kvaerner shipyard decided to become a principal in the US flag market through the startup of “OceanBlue,” a liner service that will compete with Matson Navigation and Horizon Lines in the Hawaii market. The company has engaged DnB Nor and Jefferies to raise about half of the $288 million delivered cost (and working capital) – a price many believe will make them the lowest cost per slot in the market.
The OceanBlue situation must be a real disappointment for Castle Harlan, who probably purchased Horizon Lines under the assumption that competition and the supply of tonnage would remain tight. It will also be interesting to see how each of the companies describes the fundamentals for the market, the competition and the economics.
Nothing New Under the Sun
The genesis of the rather unusual situation is the fact that in exchange for about $400 million in state and Federal subsidies, Rokke’s Kvaerner’s Philadelphia shipyard agreed to build a minimum of four vessels. The first two ships, which were 2600 TEU containerships, went to Matson in 2002-2003 in deals construction financed by Caterpillar Finance, but no one has committed to buying the next two vessels and they are getting closer to being delivered.
Although this scenario may seem novel to many of us, the situation is very similar to one we saw in the early 1970s. During those years, Sun Oil’s Sun Shipyard built trailer ships, and when they were able to find a buyer, the yard put them in the Alaska Trade and operated the ships themselves – and later sold the business to the Saltchuk partners in Seattle who have been running the liner service under the brand “Tote.”
Like the Sun ships, the $120 million Kvaerner vessels are not competitive in the international market, so they need to be employed in the Jones Act. The only two Jones Act markets that can ostensibly support the economic requirements of ships with such specifications are Hawaii and Alaska – Rokke has chosen the former by planning a route from Oakland to Los Angeles to Honolulu and hired Brad Mulholland, the deposed king of Matson, to run the business along with John Graykowski, the former head of the Philadelphia Shipyard and the maritime commissioner under President Clinton.
In a very basic sense, we at Marine Money like the concept of shipyards owning vessels; such a structure would finally align the interests of shipyards with the market they pollute with overcapacity, but that really is beside the point. The majority of people we have spoken with think that the announcement from Rokke is simply a powerful marketing approach engineered to remind the management of Horizon and Matson that if they do not work with the new ships, they will be working against the new ships.
Concurrent with the preparations for Horizon’s public equity offer, a new competitor is in the marketplace with a private equity transaction that will compete against Horizon in the Puerto Rico market. Since the autumn of 2004, Kjell Inge Rokke’s Philadelphia Kvaerner shipyard decided to become a principal in the US flag market through the startup of “OceanBlue,” a liner service that will compete with Matson Navigation and Horizon Lines in the Hawaii market. The company has engaged DnB Nor and Jefferies to raise about half of the $288 million delivered cost (and working capital) – a price many believe will make them the lowest cost per slot in the market.
The OceanBlue situation must be a real disappointment for Castle Harlan, who probably purchased Horizon Lines under the assumption that competition and the supply of tonnage would remain tight. It will also be interesting to see how each of the companies describes the fundamentals for the market, the competition and the economics.
Nothing New Under the Sun
The genesis of the rather unusual situation is the fact that in exchange for about $400 million in state and Federal subsidies, Rokke’s Kvaerner’s Philadelphia shipyard agreed to build a minimum of four vessels. The first two ships, which were 2600 TEU containerships, went to Matson in 2002-2003 in deals construction financed by Caterpillar Finance, but no one has committed to buying the next two vessels and they are getting closer to being delivered.
Although this scenario may seem novel to many of us, the situation is very similar to one we saw in the early 1970s. During those years, Sun Oil’s Sun Shipyard built trailer ships, and when they were able to find a buyer, the yard put them in the Alaska Trade and operated the ships themselves – and later sold the business to the Saltchuk partners in Seattle who have been running the liner service under the brand “Tote.”
Like the Sun ships, the $120 million Kvaerner vessels are not competitive in the international market, so they need to be employed in the Jones Act. The only two Jones Act markets that can ostensibly support the economic requirements of ships with such specifications are Hawaii and Alaska – Rokke has chosen the former by planning a route from Oakland to Los Angeles to Honolulu and hired Brad Mulholland, the deposed king of Matson, to run the business along with John Graykowski, the former head of the Philadelphia Shipyard and the maritime commissioner under President Clinton.
In a very basic sense, we at Marine Money like the concept of shipyards owning vessels; such a structure would finally align the interests of shipyards with the market they pollute with overcapacity, but that really is beside the point. The majority of people we have spoken with think that the announcement from Rokke is simply a powerful marketing approach engineered to remind the management of Horizon and Matson that if they do not work with the new ships, they will be working against the new ships.
Written by:
carisk | Categories:
Equity,
Freshly Minted | February 10th, 2005 |
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