Star Bulk (NASDAQ: SBLK), a serial acquirer of second-hand tonnage, has announced the purchase of the dry bulk fleet of Delphin Shipping, with payment to be made in both stock and cash.
Delphin, which is backed by private equity firm Kelso & Company, will sell Star Bulk its 11 Chinese-built dry bulk vessels for a total consideration of $139.5 million. Ten of the vessels, in the Supramax category, were constructed in 2012-13 and each have a carrying capacity of 56,500 deadweight tons (DWT). One vessel in the Ultramax category was built in 2014 and has a capacity of 63,100 DWT.
Star Bulk will pay for the ships with $80 million in cash plus 4.503 million common shares of Star Bulk. The cash portion will be funded through a sale-and-leaseback financing deal with China Merchants Bank Leasing, with a term of seven years.
This is the latest in a string of multi-ship purchases by Star Bulk since early 2018. Previous sellers have included Augustea Atlantic, York Capital, Songa Bulk, E.R. Capital Holding and Oceanbulk.
These ‘ships for shares’ deals have generally involved sellers with a strong private equity component in their ownership structures. Star Bulk’s purchases are just one aspect of a larger trend colloquially known as ‘IPO via M&A’ – other examples include the sale of the Quintana fleet to Golden Ocean (NASDAQ: GOGL); the sale of the CarVal fleet to Goodbulk; the sale of Navig8 Product Tankers to Scorpio Tankers (NYSE: STNG); and the reverse merger involving the sale of Poseidon Containers to Global Ship Lease (NYSE; GSL).
Private equity invested heavily in the ocean shipping asset market in the 2012-15 period, betting that asset prices would rise and that they would be able to exit their positions through an initial public offering (IPO) of the fleet holding company. The IPO ‘window’ has remained closed however, prompting private equity asset owners to sell their ships to already public owners in return for stock, and in some cases, cash for a portion of the price.
Stifel analyst Ben Nolen described the sale of the Delphin fleet to Star Bulk as “another victory for the poster child of private equity consolidation in the dry bulk space.”
The challenge for publicly listed fleet buyers is that many of their stocks are trading at levels well below net asset value (NAV), or the value of the assets minus liabilities. Shipping stocks have fallen substantially since 2018, lowering the value of their acquisition ‘currency, ’ leading some market watchers to predict that the frequency of ships-for-shares deals will decline in 2019.
“We estimate that Star Bulk shares are trading at just 61 percent of NAV,” said Nolan. “In order to give shares as part of an acquisition, in order to avoid nasty dilution, the company would need to buy at a similar discount to fair value. Therein lies the problem – who would be willing to sell far below market value? The answer – private equity-backed vehicles.”
He noted that private equity investors can retain some of the upside potential of a future rebound in the dry bulk market through the shares they receive as part of such a transaction. Theoretically, they could also do so by simply holding onto their private fleets and not selling, except for the fact that some funds have investment deadlines.
“Those investors may be able to experience some of the [cyclical] upside themselves by simply waiting out the cyclical market. However, with finite fund lives, Star Bulk is able to provide the cash needed to satisfy fund maturities, while still providing some upside optionality,” said Nolan.
The trend of private equity fleet sales to publicly listed buyers is likely to continue, he believes. “We estimate that there are still quite a number of stranded shipping investments either held in private equity or the OTC [Norwegian over the counter] market that could follow a similar path.”