Consolidation, fashioning a bigger shipping company with more market clout, and also more capital raising abilities is also a rationale here.
At a time when shipping IPO’s have not fared well, Diamond S has backed into a public listing through a technique sometimes described as a “reverse merger”, where a private company acquires a listed entity and, when the financial alchemist’s dust settles, effectively becomes the new owner of the listing. The deal is expected to close in 2019 Q1, all going well.
Three years before Wilbur Ross had joined the Trump administration, his W.L. Ross and Company had attempted an IPO of Diamond S, a privately held owner of tankers which it bought into holding a roughly 30% stake several years earlier- acquiring a large product tanker fleet from Far Eastern owners. Back in the heady days of early 2014- before tankers rates were starting to soar, the time seemed ripe for a private equity “exit”.
But it was not meant to be, the $210m IPO, which would have created liquidity for a private holding, launched in early February of that year, was withdrawn in March as the ask was not being met.
The latest transaction is complicated, but essentially merger partner Capital Product Partners LP (CPLP) will hive off its tanker fleet (4 crude carriers, 21 product tankers) and combine it with the existing Diamond S business (12 crude tankers and 31 product vessels). The new entity, to be dubbed Diamond S Shipping Inc. (DSSI), will be listing its shares on the New York Stock Exchange. Based on estimates of NAV, the fleet should be worth nearly $700m. The average age of the 68 vessels in the new entity will be 7.8 years.
Reverse mergers are not without precedent in the maritime sector dealing with a two-year lull in IPOs . In the offshore service segment, Harvey Gulf International Marine did not gain any traction during the summer with its efforts to back into ownership of Gulfmark International,which was acquired by Tidewater.
However, Nasdaq listed Pyxis Tankers (PXS) successfully morphed into a public company through its acquisition of a remnant from the dotcom era. Unlike the PXS deal,where the listed shell company was a web search engine, the “merger” partner is another shipping entity- actually organized as a Master Limited Partnership. Importantly, CPLP management will remain actively involved in the new entity.
Setting the stage for an exit
For Private Equity holders of Diamond S, including Ross’s business, the stage is set for a long awaited “exit” through the public listing. For long suffering holders of CPLP, which languished with tanker shares generally, and as it confused/ cared away investors as it dabbled in the container space, the deal brings multiple rays of sunshine.
When calculated on a NAV basis, CPLP unit holders will be receiving shares in the new DSSI, with their 33% ownership in DSSI being worth roughly $236m, offering a healthy premium over the recent value of their holdings. The deal will also enable CPLP, which will then be a holder of containerships, to simplify its financial balance sheet.
Indeed, the transaction seems to come down on the side of “pure play” in the ongoing debate regarding investor preferences. A CPLP press release states: “This transaction represents a strategic step for CPLP to unlock unitholder value by combining its tanker business with a highly regarded pure play tanker company.”