The deal, reportedly for a reported price of $662m, comes at a time of a booming tanker market- though spot rates for large vessels are down during August. It provides a perspective on a question swirling among financial dealmakers- how easy will it be for PE investors to readily “exit” transactions?
The case of Principal Maritime, which had been unsuccessfully floated for an Initial Public Offering (IPO) suggests a voyage up a narrow winding channel. Principal, led by veteran shipping man Art Regan, had filed for an IPO in early 2014 (eight months before the tanker market surge of later that year) but was unable to attract investor interest at the right numbers.
One meme at recent ship finance conferences is that companies with “scale” can attract capital more readily than their smaller brethren .This deal may support the “large company” paradigm, but market timing plays an important role here. Some observers also point out that financial investors are still highly suspect of the tanker rally’s staying power (keeping a lid on tanker IPO activity), whereas a shipping buyer would quickly benefit from a spot fleet of vessels on the water, and therefore pay more than a financial buyer.
The deep pocketed Apollo (also linked to deals in the container and cruise sectors) clearly fared better by waiting. Principal, which began acquiring vessels in 2010, benefited from a tanker market slump which enabled vessels to be sourced at cyclically low prices. The proceeds of the putative IPO would have been used for acquiring additional tonnage. Instead, Principal’s sellers will be gaining full prices for the vessels while substantially exiting the business.
Five un-named investors, presumably from the ranks of Principal’s PE owners, will get $60m newly issued TNK shares. The sellers- the Principal Maritime entity - will also receive $50m of TNK stock. While sellers still have some skin in the tanker game, the deal contrasts with an IPO, where PE investors would have likely still held a majority of the equity (amidst uncertain attitudes about shipping IPOs from institutional buyers).
The buyers, building a bigger fleet (which will total 44 vessels- 22 of which will suezmaxes), will also reap the benefit of an important financial metric. Morgan Stanley shipping equities analyst Fotis Giannakoulis calculates that TNK’s newly issued stock will be valued at around 20% above the Net Asset Value (NAV)/ share, which provides what is, in effect, a discount over the total price. When shares are issued above NAV, existing holders should benefit from a bump up in value. Analyst Jon Chappell, from Evercore, also stressing the accretive nature of the transaction (where earnings per share will likely increase), pointed out that his firm’s models were valuing the fleet at around $678m- providing a slight further boost to earnings accretion. Both analysts suggest that TNK will holders will likely not see a sharp increase in dividends (presently $0.03/share quarterly) until it pays down debt; the Principal acquisition is financed partly by $400m of new bank debt.
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