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.


Teekay’s publicly listed private equity fund

Earlier today, January 21st, 2014, Teekay Tankers Ltd. (Teekay Tankers) (NYSE:TNK) and Teekay Corporation (Teekay) (NYSE:TK) announced the creation of Tanker Investments Ltd. (TIL) with the intent ‘to opportunistically acquire, operate and sell modern secondhand tankers to benefit from an expected recovery in the current cyclical low of the tanker market’.  The new entity will have $250 million initial capitalization of which $25 million will be contributed by each of the ‘parent’ companies for a combined 20% stake in the new entity, while the balance of the equity has been subscribed by institutional investors in the US, the UK and Norway. TIL intends to undertake a public listing of its common stock on the Oslo Stock Exchange in the first quarter of 2014.  Incidentally, it was reported last week that interests affiliated with Teekay had acquired four aframax tankers for a total consideration of $116 million, and in today’s press release, it was divulged that such transaction had been earmarked as the first acquisition of TIL; a speedy second transaction will be the acquisition from Teekay by TIL of four 2009-built Suezmax tankers for $163 million.  Both acquisitions have taken place at competitive asset pricing levels; actually, at more than 10% discount to what it’s considered today to be ‘fair market level’ in a surprisingly strengthening crude tanker market and with almost forgotten $100,000 pd tanker freight rates; WorldScale 300 can be seen on current market reports and not on dated, time-stained market reports.

There are many ways to evaluate the logic and the purpose behind the formation of the new company.  The pricing of the transaction is also indicative of prevailing market conditions and also investor expectations (‘value level’ asset pricing vs ‘market related.) The timing and the expected quick consummation of the transaction are also indicative of the quality of the management of the company (ies).

In previous writings, we have explored the means institutional investors and private equity funds have been looking to invest in shipping, whether by extending credit as second lien loans, mezz financing, leasing or taking old-fashioned equity exposure. Credit investments usually provide downside protection but usually also limit upside potential. At a time when the proxy index for the whole market BDI is at a small fraction of its all glory, and also at a  time when the shipping market seems to be poised for a ‘break out’, most investors logically would prefer an equity investment.

But again, an equity investment in shipping is much harder than it sounds. Of course there are the public capital markets and one can just buy and sell shares in public companies, but again, not many legitimate shipping companies have remained standing in the public markets since the financial crisis that are not penny stocks, have daily trading volume that can attract sizable investments, and most importantly, can provide a clean slate platform in terms of management conflicts and legacy issues.

MT HAMILTON SPIRIT (Image source: Teekay)

MT HAMILTON SPIRIT (Image source: Teekay)

Placing an equity investment in shipping in the private markets can be even more daunting for an institutional investor than buying or selling shares in the capital markets. There are the obvious concerns of a passive investors entering physically an industry that is active worldwide with high regulatory and legal barriers – at least to the uninitiated – and will have to depend heavily on a partner and industry expert to maintain, manage and charter the vessels; really, it can be a mind boggling experience sourcing, evaluating and selecting technical and commercial vessel managers and setting a viable commercial course.  A passive investor would have to go through the option sets of setting up in-house technical management (unlikely) to hiring for a flat fee a professional vessel manager (likely) to engaging a ‘partner’ that could provide shipping expertise and also equity contribution in order o have ‘skin in the game’.  Likewise for commercial management, it may be long-term charters, or pool vessel employment or active vessel trading on the spot market where the partner can also have ‘skin in the game’. But again, each time there is a partner and/or manager arrangement, there are also agency concerns and of course lenghty debates about equitable way of sharing the spoils.  Honestly, the history books are rather thin with successful ‘strategic partnerships’ in shipping that worked wonderfully over the long term.  And, sadly, disputes and conflicts often arise from the get-go.

In our opinion, most of the success story of the Scorpio Group, both in the tanker market with Scorpio Tankers (Nasdaq:STNG) and in the dry bulk market with Scorpio Bulkers (Nasdaq:SALT), is attributed to the fact the management of the firms is offering the investors, both institutional and retail, a simplified way to invest in shipping (‘to play the market’ since often investments these days are quite often referred to as ‘bets’): the management devised a business plan, deplete of legacy issues and with a ‘forward looking’ strategy, minimized operational and execution risk by hiring shipping professionals, and thus the risk of an investment has been peeled off to the ‘market exposure’ risk only. However, in Scorpio’s case, with vessel management remaining privately owned and outside the publicly traded ownership umbrella, agency concerns have been raised in certain corners of the shipping investment universe.

This transaction within the Teekay group of companies takes the peeling off of types of risk one layer further to the core of the onion as now the vessel management of the TIL vessels has remained under the publicly owned umbrella of companies.  Although Teekay Tankers (TNK) is acquiring the tanker commercial and technical operations from TK, including ownership of 3 managed tanker pools, as it was disclosed in the same press release, vessel management fees generated from operating the vessels remain under the publicly owned umbrella of companies and available to the benefit of and open to public shareholders.

MT KYEEMA SPIRIT (Image source: Teekay)

MT KYEEMA SPIRIT (Image source: Teekay)

The present TK transaction obviously is aiming at capitalizing on the increased interest in the crude oil tanker markets; this segment of the market has been in a multi-year polar-level hibernation and was almost taken for dead till July 2013; since then, however, there has been renewed enthusiasm on the back of strengthening freight rates, lack of fresh waves of massive newbuilding orders – as it’s the case with many other market segments – and a likely a case of the ‘tail wagging the dog’ effect. There still many skeptics about the prospects of a robust recovery in the tanker market, and TK’s investors will have to ‘make a bet’ on the direction of the market, but definitely the timing of the enterprise is much more opportune now than it would have been in 2013, or 2012, or 2011, or … The slate is clean as it is the platform of any conflicts, and now the few hesitant private equity funds and hedge funds, and even the small investors, could easily play the market for a recovery in the tanker market segment; a case so clean and clear that one even gets tempted to say that the small investor is getting on even footing with the institutional investor to participate in a market recovery.

© 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.