A Wishful Port Called Consolidation

The maritime industry has been facing headwinds for almost a decade now: chronic tonnage oversupply, intermittent demand growth, new trading patterns, heightened level of regulations, new technologies and vessel designs, and more recently, the prospect of a global trade war.  It’s not easy being a shipowner, if ever it was.

Besides the obvious “academic” solutions of self-discipline when it comes to newbuilding appetite and accelerated schedule of ship demolitions, little can be done strategically to alleviate the industry’s woes.

Since the early days of the present decade, the concept of consolidation has been mentioned as a solution with the best hope for mitigating the industry’s problems. Conceptually, fewer and bigger owners could better sustain the weak times of the industry by sharing overhead and expenses across larger fleets, by having higher fleet efficiencies, and by affording more competitive access to capital; a market dominated by fewer owners can also employ strategic efficiencies whereby fewer players would be more disciplined at ordering newbuldings and also providing a united front against the demands of charterers.

Notable names of the shipping and the finance worlds have been advocating for industry consolidation for some time now, most conspicuously then-private-equity-shipping-investor and now Commerce Secretary Wilbur Ross. Proponents of consolidation have drawn their conclusions mostly from other industries than shipping, such as the steel industry in the case of Wilbur Ross; and, there is a strong body of academic research and case studies taught at business schools supporting the case of consolidation. On the surface, consolidation has saved the steel industry from chronic losses (although ironically part of the current trade war discussion is driven by the consolidated state of the steel industry having cost thousands of jobs). Likewise, the airline industry, via consolidation (and also chronic waves of bankruptcies), have reached now a point of high utilization and profitability, as any weary traveler can attest to these days.

No doubt there are economic benefits for the players in a market that has undergone consolidation; on the other hand, we think that certain markets and industries are more prone to consolidation than others, for many reasons.

Let’s follow the empirical approach to see what has happened so far in this maritime field:

Wall Street and institutional investors are big proponents for consolidation in the shipping industry. Image credit: Karatzas Images

In the tanker market, after Frontline’s failed effort to acquire DHT, the got critical mass to defend itself by buying the BW VLCC fleet, catalyzing, in turn, Euronav’s acquisition of Gener8 Maritime (itself the product of merger of General Maritime and Navig8 Crude Tankers). There is little merger activity in the rest of the crude tanker market, with the exception of Teekay folding two “daughter” publicly-listed companies into one, and also  acquiring the Principal Maritime crude tanker fleet. In the product tanker market, Scorpio Tankers acquired Navig8 Product Tankers in 2017, while recently BW took a bow with publicly listed Hafnia Tankers. If there is a lesson to be learned from merger activity in the tanker industry is that these are a handful of transactions among already sizeable players who are publicly listed and/or driven by institutional investors or financially-oriented managers behind them. The typical, average tanker owner has been least affected, or bothered, at least so far. However one slices the tanker market, there are almost 15,000 tankers of all sizes with a few thousand shipowner groups worldwide; if all these tankers and owners were to be consolidated into groups of big companies, investment bankers in shipping would be among the richest people on this planet.

In the dry bulk market, Star Bulk, publicly listed and driven by institutional investors, have been growing the size of their fleet by acquiring Augustea, Songa Bulk, and Ocean Bulk in the past. Golden Ocean acquired the Quintana capesize-focused fleet, and potentially the acquisition of the CarVal Investors dry bulk fleet by Good Bulk can be considered a case of consolidation; there are a few more meaningful transactions with privately held companies (most the Angelicoussis and Zodiac groups) acquiring massively, and surgically, shipping assets in the secondary market.  There is no doubt that there has been much more S&P activity in the dry bulk, but nothing to qualify as consolidation. The dry bulk market is often described as the textbook case of perfect competition, and as such, it makes little sense to buy (and retire) dry bulk shipping companies – the companies have little to offer in excess of  the stripped assets. Again, zooming out on the sector, consolidation so far seems to be with mostly sizeable companies, publicly listed, often driven by institutional investors, and almost always payment taking place – at least partially – in shares. There is still a very ‘long tail’ of small shipowners in the sector. And, there are more than 12,000 dry bulk vessels and several thousand shipowners active in the market; once again, investment bankers in shipping should be voted happiest people on earth if consolidation was ever to take hold in this market segment.

Just like consolidation in shipping, the bigger, the better… or, the sky is the limit! Image credit: Karatzas Images

Onto a shipping sector with a more disciplined structure, the containership liner market, it would appear that consolidation has offered a proven solution to this market over time; from almost thirty liner companies in existence in the early 1990’s, the number now stands at fourteen (14), a clear trend of consolidation over the last two decades. Again, there does  seem to be the same consolidation pattern of this market segment: most of these companies were big companies to begin with, often publicly listed or owned / managed by sophisticated investors in a market segment with relatively high barriers to enter; nothing new here. Looking onto smaller regional market players, the market has been much more fragmented, and allegedly ripe of consolidation. Some of these regional players are publicly listed or some of them run by investors and financiers, but it’s hard to discern a consolidation pattern on the surface. Probably the transactions that stand out in this sector are those of KG owners that are driven by shipping banks to consolidate, most notably MPC Container Ships, the Zeaborn and the Claus-Peter Offen groups that have keep absorbing smaller players such as Cido (containers), E.R. Schiffhart, Rickmers Linie, Ahrenkiel, Conti, etc (some of these transactions involved also MPP vessels).  And, there has been the absorption of many more smaller KG houses and vessels that popped up in the last decade jus because of the exuberance of the KG market in Germany. What all these stories of consolidation have in common, in our opinion, is that most of these target companies had their financial base completely wiped out, the management teams had no ‘skin in the game’ but mostly, German shipping bank have effectively forced ‘shotgun marriages’ (read consolidation) in this market. Otherwise, left to its own devices, it’s questionable how much consolidation would had taken place in this segment.

Despite the obvious benefits in the shipping market by a less fragmented ownership distribution, with fewer and more stable players, it’s still a very long way, in our opinion, for the industry to really get to appreciate consolidation. It’s been vividly implied in the discussion above that each segment in the shipping industry is driven by slightly different factors, but it’s abundantly clear that consolidation so far has been driven by a confluence of financial owners (this includes shipping banks) building up on the critical mass of already sizeable companies and where egos can be forced aside by the prospects of economic benefits and payouts, often in the form of paper (shares).

For the several thousands of shipowners worldwide, especially when they are the founders of shipping companies or have some sort of competitive advantage (captive cargo, access to terminals, etc), consolidation would be a tall order. Consolidation favors bigger players, but still smaller players can be shaping the market for longer than hoped for.

Darwinism in known to work, but it takes a notoriously long time; economies of scale make for more efficient shipping companies, but again, this takes time. In Darwinism, let’s not forget, some species become extinct. Probably for some shipowners, unless extinction becomes their only choice, consolidation will be getting little attention. The financial markets and shipping finance can impose their will on shipping forcefully, but likely consolidation in the shipping industry cannot be material in the near future, at least for commodity shipping.


Article originally appeared in Lloyd’s List on September 7, 2018 under the heading “Consolidation Players Go Hungry“.


© 2013 – present Basil M Karatzas & Karatzas Marine Advisors & Co.  All Rights Reserved.

IMPORTANT DISCLAIMER:  Access to this blog signifies the reader’s irrevocable acceptance of this disclaimer. No part of this blog can be reproduced by any means and under any circumstances, whatsoever, in whole or in part, without proper attribution or the consent of the copyright and trademark holders of this website. Whilst every effort has been made to ensure that information here within has been received from sources believed to be reliable and such information is believed to be accurate at the time of publishing, no warranties or assurances whatsoever are made in reference to accuracy or completeness of said information, and no liability whatsoever will be accepted for taking or failing to take any action upon any information contained in any part of this website.  Thank you for the consideration.

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Topical Insight and Current Developments in the Maritime Industry

Basil M Karatzas and Karatzas Marine Advisors Quoted in the News

We are delighted that Karatzas Marine Advisors & Co. and its founder Basil M. Karatzas have been the trusted and insightful source of market knowledge and intelligence for all things maritime; with prompt and accurate access to market information, a vast network of resources and paramount access to senior executives worldwide, in the shipping and complimentary industries, the company and its founding partner have had a front row seat to today’s developments in the maritime industry.

We always thought that we have had a strong advantage over the competition and nothing gives us higher pleasure than seeing our expertise appreciated beyond a constant deal-flow and boardroom discussions with our clients, and in the pages and the trust of the international business press.

Recent media quotations for Basil M Karatzas & Karatzas Marine Advisors:

– China, Flush With Cash, Sets Sights on Shipping, The Wall Street Journal, December 23rd, 2017                                                                                                       On Chinese leasing and Chinese financing going aggressively after the international shipping finance market where western banks are retreating                                                                                                                                                                                           – Euronav to Buy Gener8 to Create Oil-Tanker Giant, The Wall Street Journal, December 21st, 2017                                                                                                       Consolidation in the supertanker (VLCC) market at a time of weak freight rates and soft asset prices with a transformative acquisition where a storied company goes from a consolidator to being a target                                                                                                                                                                                                                                           – Is the Dry Bulk Tramp Trade at an Inflection Point? The Maritime Executive, December 1st, 2017                                                                                                        Article penned by Basil M Karatzas for The Maritime Executive on the challenges the dry bulk market is facing and a blind repeat of the past and “buying low, selling high” dry bulkers may be more complicated this time around.                                                                                                                                                                                                         – Dry bulk: Why the Year of the Dog can wag its tail, Lloyd’s List, November 23rd, 2017                                                                                                                                  2017 has turned out to be a decent year for the dry bulk market; although it’s hard to see how it could be worse than 2016 (worst year in living memory), shipowners seem to got their faith back that the industry is not completely dead                                                                                                                                                                                                   – A Specter Is Haunting Europe’s Recovery: Zombie Companies, The Wall Street Journal, November 22nd, 2017                                                                                        Many chronically loss-making companies in Europe are kept alive because of the kindness of the banks. Shipping companies are part of the landscape.                                                                                                                                                                                           – JPMorgan making big profits by flipping cargo vessels, The Globe and Mail, November 19th, 2017                                                                                                        In a weak freight market leading to soft asset prices (“cheap ships”) some financial players see opportunity of buying ships at low prices, and occasionally flipping them soon thereafter for an easy profit

Manhattan from afar. Cruiseship MS ‘Queen Mary 2″ can be seen moored at the Brooklyn Cruise Terminal (right of the picture) in between the Empire State Building and  the 432 Park sky-scraper. Image credit: Karatzas Images.

© 2013 – present Basil M Karatzas & Karatzas Marine Advisors & Co.  All Rights Reserved.

IMPORTANT DISCLAIMER:  Access to this blog signifies the reader’s irrevocable acceptance of this disclaimer. No part of this blog can be reproduced by any means and under any circumstances, whatsoever, in whole or in part, without proper attribution or the consent of the copyright and trademark holders of this website. Whilst every effort has been made to ensure that information here within has been received from sources believed to be reliable and such information is believed to be accurate at the time of publishing, no warranties or assurances whatsoever are made in reference to accuracy or completeness of said information, and no liability whatsoever will be accepted for taking or failing to take any action upon any information contained in any part of this website.  Thank you for the consideration.

Captain’s logbook entry for ‘strategic acquisitions’ and ‘smart money’

With the holidays behind us, shipping slowly returns to daily routine of moving cargoes (we should never forget what shipping is all about) and everyone having a stake in the industry is trying to figure out where the market is heading in terms of freight rates but also in terms of momentum, expectations and consensus thinking.

In terms of freight rates, the market’s proxy index BDI started the year by dropping anchors showing a 30% drop since the last reporting day of 2013 on Christmas Eve; the capesize index caused most of the drop with about a decline of 48% over the same time. The news is not as bad as it looks (really!) and actually it was to be expected, since charterers are ‘looking hope’ (as they say in auto racing) where cargoes have to be one month or more in advance, the run up in the end of the year was partly seasonal; also, heavy rains in both Brazil and northwestern Australia caused Vale to declare force majeure for iron ore exports over the holidays which pushed shipments into 2014; and, new environmental laws coming into effect in Colombia since the beginning of the new year have halted coal exports from the country.   Likewise, the implementation of an export ban of raw commodities from Indonesia has tied up in the country several vessels in laden condition unable to sail.   Tanker rates have also been softening since the end of last year with the exception of Suezmax tankers that have seen their rates jump to more than $70,000 pd due to heavy fog and delays in the Straits of Bosporus.  In our opinion, rates will drop more in the very near future before they start recovering going to the celebrations of the Chinese New Year.

In terms of market activity, the year started impressively with two transactions that were finalized during the holidays.

In the dry bulk market, the Scorpio Bulkers (ticker: SALT) has continued their buying spree by announcing the newbuilding orders of twenty-two more vessels (twenty capesize vessels and two kamsarmaxes) for a total consideration of approximately US$ 1.2 billion; all orders have been placed with Chinese yards and a couple of the vessels will start delivering as early as 2015 Q1, but with the majority of the orders delivering in 2016. No breakdown of pricing has been provided but it seems that capesize vessels were ordered at about $55 million per vessel and the kamsarmaxes at about $36 million per vessel. Based on this transaction, SALT’s fleet mounts to 74 vessels in three assets classes (ultramax, kamsarmax and capesize) with about eight million cumulative deadweight. Since the company’s inception less than a year ago, the magnitude of the orderbook is impressive and it’s an all-out ‘bet’ by the management and the equity investors for a sustainable market recovery in the dry bulk sector (in addition to the sustainable market recovery of the tanker market where sister company Scorpio Tankers (ticker: STNG) has also a nineteen-vessel strong existing fleet and 65 still one order and total deadweight of 7 million.)  Equity investors stand to profit handsomely if the market recovers as modeled, but there have been voices of concern that such extensive overall newbuilding activity could delay a market recovery, ameliorate any possibilities for intense, volatile or even sustainable recovery, and also that the vessel management of such a sizeable fleet may not benefit all parties involved equitably.

EURONAV VLCC MT FAMENNE (2001) (Image source: Euronav)

EURONAV VLCC MT FAMENNE (2001) (Image source: Euronav)

In the other headline news of the first week of the year, Maersk Tankers has finally found buyers for their VLCC fleet of fifteen vessels owned by their Maersk Tankers Singapore Pte Ltd subsidiary for a total consideration of US$ 980 million. The AP Møller-Maersk group has been re-aligning their priorities since the new CEO Nils Andersen took over the reins of the group in 2007 (joining from Danish brewery Carlsberg) by divesting businesses and assets that do not strategically fit the group anymore as the emphasis shifts to the containership and ports business; just this week, AP Møller-Maersk agreed to the sale of its stake in supermarket division in Denmark Dansk Supermarked for the amount of US$ 3 billion. Maersk Tankers has been looking into the sale of their VLCC fleet since early 2013, as matter of strategy, and Peter Georgiopoulos and General Maritime with Oaktree as the primary investor have been associated with the potential sale.

Early in 2013, the only way to generate any excitement in the investment community about VLCCs was to put the words ‘VLCC’ and ‘demolition’ in the same sentence; however, the fortunes of the market improved in the second half of 2013 as rates more than tripled from the year average of $16,000 pd by the end of the year, mostly for reasons that we do not exactly deem them to be ‘fundamental’, including the premise that China will be buying excess US shale oil on VLCCs if/when an oil ban export materializes in the US and also the premise that ‘things cannot get any worse in the VLCC market’ and thus a contrarian bet was appropriate. However, the resurrection of the VLCC freight rates caused a few transactions in the secondary market to take place, notably the acquisition of four VLCC tankers by the Navios Group, one vessel by the Capital Group in Greece, and the ordering of seven newbuilding VLCCs from none other than Scorpio Tankers.  These transactions tried to instill some degree of conviction in the market, and mostly managed to establish an updated record of vessel valuations in the VLCC market; sale of modern VLCCs in the secondary market as arm’s-length-transactions has been a dead market in the last four years, so, any valuations were mostly extrapolations and pontifications from broker reports. Pricing of the fleet has been crucial for many reasons as many institutional investors were keen in a ‘contrarian investment’ in the VLCC sector but only at pricing to reflect such probability. On the other hand, despite Maersk’s impeccable name as a vessel manager and operator, buyers were/are extremely selective in terms of vessel specifications and quality when freight rates have been hovering at break-even points; also, it is known that Maersk Tankers owns a few of the most expensive VLCCs in the world at present as they placed their last orders in September 2008 at the very top of the market, and certain market reports had those vessels ordered at US$ 140 million, each, at that time; obviously, exact details cannot be known, but there is a chance that Maersk may negotiated a price discount afterwards given the severity of the financial meltdown post Lehman Brothers and the strength of their signature.

MT MAERSK SANDRA (2011-built VLCC)

MT MAERSK SANDRA (2011-built VLCC)

The fifteen vessels acquired by Euronav have an average age of fours years and an average price of about US$ 65 million, which is considered to be a very strong price based on broker report benchmarked prices (about 12% higher than ‘market consensus’.) Obviously, there is a ‘transaction premium’ since this is a transformative transaction for Euronav with a pre-acquisition fleet of 35 vessels (only 12 of which are VLCCs/ULCCs) and quite a few of the vessels were sisterships and coming from a ‘good stable’. Also, a ‘transaction premium’ had to address the sellers’ relatively high cost basis and any accounting issues. The vessels were MT „MAERSK NAUTILUS”, MT „MAERSK NAVARIN”, MT „MAERSK NEPTUNE”, MT „MAERSK NUCLEUS”, MT „MAERSK NECTAR”, MT „MAERSK NAUTICA”, MT „MAERSK NOBLE” and MT „MAERSK NEWTON” (307,500 DWT, 2006-2009 built at Dalian Shipbuilding), MT „MAERSK ILMA”, MT „MAERSK ISABELLA” and MT „MAERSK INGRID” (318,500 DWT, 2012, Hyundai Heavy Industries), and MT „MAERSK SANDRA”, MT „MAERSK SONIA”, MT „MAERSK SONIA” and MT „MAERSK SIMONE” (323,000 DWT, 2011 & 2012 built at STX Shipbuilding.)

Euronav will finance the acquisition with an immediate capital increase of US$ 50 million and a total capital increase of US$ 350 million (to be authorized by the Board) issuing additional shares at about EUR 6.70/share, US$ 500 million debt facility and US$ 235 mezzanine financing; the following funds BHR Capital LLC, Glendon Capital Management LP, GoldenTree Asset Management LP, Solus Alternative Asset Management LP, and York Capital Management Global have committed to the immediate and future capital increases.

There are couple of observations from the transaction: buyers expect that the VLCC market will eventually improve substantially and that the acquisition will be accretive to the investors; Euronav operates the Tankers International pool that has access to cargoes and COAs; however, the company is still an independent shipowner whose success and financial performance will be highly correlated to future freight rates and market conditions. A bigger fleet post-acquisition offers economies of scale and operating efficiencies, but efficiencies will get so much mileage out of any acquisition; also, Euronav will be hopeful to use this opportunity to have a secondary listing on the exchanges in the US and springboard their access to the deeper draft capital markets. The ‘wisdom’ of this transaction will have to be evaluated in the future and will be highly correlated to market conditions.

The second observation is that both strong contenders for the acquisition, Euronav and General Maritime, were dependent on the participation of institutional investors and private equity funds. It seems that one of these buyers got a better reception this time from the investment community, but again, it has to be noted, none of the institutional investors in the Euronav acquisition have institutional knowledge of the shipping markets.  As a corollary to this observation is the conspicuous absence of certain potential buyers: there were no oil companies or traders or refiners or any type of companies that have great access to cargoes that would like to hedge their freight costs. For example, wouldn’t a Chinese oil company or a Chinese shipowner affiliated with crude oil imports to China be a strategic buyer? Why not? The price of the deal was not right or do they have better plans?  Also, one cannot talk about VLCCs without thinking of present market ‘shipping king’ John Fredriksen and his VLCC companies Frontline and Frontline 2012; with the Norwegian over-the-counter market superhot last year, probably it would have taken a quick stroll for ‘Big John’ to round up a billion clams to get the deal wrapped in very short order. Fredriksen is not shy of acquisitions, whether for assets or companies, and of his existing fleet of about 240 vessels (under different corporate entities and market segments) with about ninety-six (96) vessels on order, lacks any newbuildings in the VLCC market, not even as a specimen (actually sold for demolition recently 1998 & 1999 built VLCCs.) And, as a matter of track record, VLCCs operated under the Fredriksen umbrella (Frontline and Frontline 2012) have been known to constantly outperform the Euronav fleet, on certain quarters by a long league of US$5,000 – US$10,000 pd per vessel.

One can observe that there have been no ‘smart money’ interest for this transaction, at least at the prices that took place.

Quo vadis?

© 2013-2014 Basil M Karatzas & Karatzas Marine Advisors & Co.  All Rights Reserved.

IMPORTANT DISCLAIMER:  Access to this blog signifies the reader’s irrevocable acceptance of this disclaimer. No part of this blog can be reproduced by any means and under any circumstances, whatsoever, in whole or in part, without proper attribution or the consent of the copyright and trademark holders of this website. Whilst every effort has been made to ensure that information herewithin has been received from sources believed to be reliable and such information is believed to be accurate at the time of publishing, no warranties or assurances whatsoever are made in reference to accuracy or completeness of said information, and no liability whatsoever will be accepted for taking or failing to take any action upon any information contained in any part of this website.  Thank you for the consideration.