Tuesday, February 20, 2007

AMA Capital in MTM chem fleet buy out

MTM is a privately held business and we have limited information on the fleet buy-out, but let me make the following observations as an outsider:

I certainly have no doubts that the prime motive of AMA is a financial play.

MTM is engaged in the world-wide transportation of bulk liquid chemicals, edible oils, acids, and petroleum products. The MTM fleet is interesting and valuable in the simpler end of the parcel chemical tanker trade. The fleet under management consists of approximately 20 vessels totaling more than 400,000 dead-weight tonnes capacity, with an annual volume carried of about three million tons. The company provides its commercial service through long-term contracts of affreightment (COA's) in combination with spot fixtures in several key parcel tanker trading areas, including trans- Pacific, Middle East Gulf - east and west, US Gulf - east, South East Asia - Europe/Med, and trans-Atlantic. Some of MTM's larger customers have included British Petroleum, Shell, Equate, Cargill, Archer Daniels Midland, Mitsui, Mitsubishi, Wilmar, and Kuok Oil Group.

From the press reports, it seems that the MTM group has a valuable COA book and its fleet is mainly leased from Japanese owners with purchase options. Doug MacShane came from Stolt's chartering department. MTMM started as brokers in 1982. They moved to operations as time-charterers in the mid 1980's.
This kind of business model was based on trading and turnover without a heavy asset base. An asset base is a drag on IRR initially since newly acquired tonnage has a premium in its price as a function of prevailing market conditions at purchase. Later out, however, as the units are amortized and with capital appreciation it can be a source of leverage.

The press reports maintain that AMA got a good deal because the operating leases give them control of a fleet at a cost that is far less than if they actually bought the vessels. Doug MacShane got his timing right for his fleet expansion plans. This was back in 2003-2004, when the current market cycle was just beginning to firm.

Of course, one would expect that Doug MacShane would be seeking top dollar to cash out. We do know what the buy-out terms are in terms of cash payments, etc. We should assume, however, that the ships will have been effectively marked-to-market with this buy out transaction, so more realistic costs will drive their chartering and their operating margins will be tighter.

The normal path of any private equity play is to cash in sooner rather than later. It is very likely that AMA will seek to take it public to capitalize on significant free cash for further investments. There may already be sufficient earnings multiples for an attractive cash out through an IPO, but the premium that they will get depends heavily on an attractive story for further growth and forward earnings.

Their newly appointed CEO Bob Burke is a financial man, investor and outsider to the chemical parcel industry, He is a King's point graduate, but with prior limited practical chartering or ship operational experience. He has reportedly hired Johan Molenaar, an ex Stolt senior chartering manager, to take care of the commercial side of business. His mission will undoubtedly be to try to make the business grow. This may be hard with today's prices for incremental tonnage and the marked up cost structure.

It will be a challenge to keep the company together and leverage the good will for further gain.

As a postscript, AMA succeeded to turn around and resell their investment in MTM to Berlian Laju Tankers by the fall of 2007. Bob Burke did a good job to reorganize the company and it was a very successful transaction for both him and AMA.

Skuld scare story?

Although votes in TradeWinds readers poll on insurance club mergers are still pretty evenly divided a few readers have a rather critical view of Skuld. The Swedish Club appears to have rather more fans that Skuld as TradeWinds latest internet poll draws to a close. TradeWinds will count the votes in its club consolidation poll at noon GMT this Friday so the time to participate is running out.

Diran Majarian of Amalia Tankers writes from Greece to say he would rather see the Swedish Club linking up with Gard than Skuld.
“The Swedish Club has an upper market reputation with good owners, safety consciousness and quality service. The Club has a tightly knit base of owners and functions as a 'club' in a very traditional sense. Skuld has a mixed reputation in Piraeus through its Danish office, taking on smaller owners and assisting them, but being very tough on the terms and not always offering the best service to its members,” writes Majarian.
“The Swedish Club has always enjoyed a good economic situation with their finances and back calls, whilst the Skuld has had its ups and downs,” he adds “The Skuld mission statement some years ago was to be the most desirable P&I Club, but the club has never managed to gain the stature of their other Norwegian counterpart: Gard. In many ways, the Swedish Club would be a lot more compatible with Gard rather Skuld on these above matters. In essence the Swedish Club has been a sort of cameo Gard,” says Majarian.

“Regardless of improved economics of scale, the merger opens these serious service and relationship issues for owners in the Swedish Club, who have had traditionally a much better deal that those in the Skuld. They would lose control and be overwhelmed in a much larger and very different kind of a P&I Club. Whether the new club that arises from merger would retain the positive elements that existed in the Swedish Club is a question of concern. There will be serious rebranding problems in Piraeus,” Majarian predicts.
Carl Gill of British Marine’s claims team also appears to be not a big fan of Skuld.
“I have dealt with both whilst employed by a ship management firm. The Swedish Club have a good reputation on service to assureds and for being reasonable when dealing with third parties - which is the complete opposite of Skuld,” he adds. “Skuld being larger will undoubtedly drag the Swedish Club down to their level,” Gill adds.

Mogens Jensen writes from Denmark supporting the idea of a merger in principle but says implementation will be the real test. If Skuld and the Swedish Club can make a merger work Jensen says others will follow.

Australian reader, Patrick Bradley, says the clubs have to get bigger to gain the resources to serve markets like his own. “We have got correspondents here but if we want to talk to club managers the nearest are in Hong Kong,” he adds. Bradley also thinks all the clubs are far too focussed on Europe.

TradeWinds' top ten deals

I rate the deals as follows:J - Camillo Eitzen & Co’s EUR 219m ($280m) purchase of the 14 ship fleet of French chemical tanker operator, Fouquet Sacop. I like the Eitzen deal because I have a bias in this sector of the market. Eitzen is a knowledgeable and experienced operator. I know the acquired company to be a quality operation. I - Bergesen Worldwide Gas’ $347m purchase of the 10 vessel LPG carrier fleet of Norwegian fertiliser producer, Yara. C – DP World’s $5.75bn purchase of P&O for its ports portfolio. D - AP Moller – Maersk’s $2.8bn takeover of P&O Nedlloyd. E – Hapag-Lloyd’s $2.3bn acquisition of CP Ships. F - The $600m purchase by Saade family controlled CMA CGM of North South liner trade specialist Delmas. These above deals are similar in that strategic market positioning was a major factor in the acquisition. I do not know enough about the specific aspects of the deals to comment in detail. The Bergeson LPG deal looks a like a very fine piece of business. All the companies acquired are established operations of stategic value. Unfortunately we do not see Greeks going for this upper part of the market.H – The $542m deal by Peter Georgiopoulos’ General Maritime to sell 10 suezmax tankers and nine aframax OBOs to Tanker Pacific. G – The $550m sale and leaseback of 13 tankers by Evangelos Pistiolis led Top Tankers. These deals have to do with cashing in on the current high asset prices. Georgiopoulos made a good move to restructure his fleet and will hopefully focus more on quality before further scaling up. The Pistiolis ranks lower because it is really balance sheet restructuring and they are carrying the lease liabilities. It reflects the congestion in the KG market and competition for deals. B - Tsakos Energy Navigation $530m acquisition of nine ice class tankers from Swiss oil trader Western Petroleum. Tsakos is moving into a new area and it remains to be seen how they will perform. His father's management company faces new challenges in crewing, etc in these specialised trades. A – The recent $735m purchase by Stamatis Molaris led Quintana of 17 ships from that serial dealmaker Theodore Angelopoulos of Metrostar. Whilst the scaling up is understandable, the company is moving very far, very fast with analogous challenges. The CEO has no prior personal involvement in ship management or operations, being a financial man. The company faces substantial challenges in crewing and house technical management to find suitable sea and office staff and get them properly working together so that the ships perform well for Bunge. The deal makes the company a technical vessel provider to one major client, so the in-house commercial and operational base remains small.

Aries IPO/ Jefferies - financial considerations

The roadshow will depend in part on the financial parameters of the deal:

The way the Aries deal is structured of the offered share price of US$ 15.00 there is an immediate dilution of US$ 9.35 to shareholders, whilst Mons and associates make a profit of US$ 4.62 on their shares. Compare this to theTOP Tankers IPO where out of an offered share price of US$ 14.00 there was a much smaller dilution of US$ 2.96 to shareholders, albeit the Pistiolis family make a somewhat larger profit of US$ 6.04 on their shares. TOPT is presently trading around US$ 15.00. So the propective Aries investors willface a substantial dilution of 62%. This is quite a big hit.

The big selling point of the Aries business is the long term charters,especially on the container vessels, which they acquired very recently in2004 backed with employment from CMA. This is most likely an incentive in the Fortis and CSFB participation.

There is considerable debt restructuring in the Aries deal. It isinteresting to note that Aries was paying quite high pricing on their bankdebt: 1.75% over LIBOR, which is usually charged for smaller and higher risk companies.

On the other hand, whilst I have not examined the DCF for Aries, I would note that the fixed rates for the tankers, which is my market, areconsiderably lower than prevailing spot rates. I cannot comment on thecontainers - a business that I do not know very well. I do see, however,that Aries appears to have acquired the container units in 2004 - veryrecently. It is all CMA-related and dependent. CMA is their majorcustomer. It is likely that the financial returns are moderate inconsideration of the premium in asset values and rate discounts for thelong-term employment cover.

Of course, long-term time charters are not 'hell and high water'. If rates plummet, they can be renegotiated and there can be frustration. Furtherthere is the matter of performances.
Whilst there are professional ship managers in the TOPT deal: Unicom and V.Ships, the Aries management is in-house where there can be a unexpected setbacks and performance problems. As you probably know, a very modern Aries tanker was detained in the fall 2004 and they have not had a lot ofinspections. On the container side, I have no idea about their operatinghistory, but it is certainly not an established company in this field.

Another point to note is that Aries appear to be members of the AmericanClub, which is one of the weakest of the major Pandi Clubs and usuallyreserved for those owners, who cannot find coverage elsewhere very often due to poor claims records. The case of Polembros is illustrative.
NB Subsequent to this article, Aries has had two severe setbacks in their product tankers due bad technical management. The UK Port Authorities found a hidden crack on the deck of their vessel 'Citius' sealed with metal lock. This resulted in the immobilization of the vessel and extensive repairs on site with prolongned off-hire. Aries troubles were further compounded with a second a costly incident on another tanker. As a result, the company results have fallen into the red and they have recently taken on a new technical manager under pressure from investors.

Dubai Port Hysteria

The DP Ports issue has attracted a great deal of public attention in the US. It was inevitable that it would lead to a public debate in the US Congress, since executive authority is not absolute in the US and subject to Congressional review. DP Port World has handled the issue gracefully in a pro-active way that makes commercial sense.Terrorism per se is not really an issue in this matter, albeit many Arab countries are badly in need of a better public image in the US and EU given the highly unfavourable light that 'terrorism' and 'Islamic fundamentalism' has put them especially since 9/11 tragedy as well as the Madrid and London bombings to the average voter in these countries. The substantive issue here is a private company controlled by a foreign government. Indeed in the Middle East, governments generally control a large part of economic life. This goes against the economic trends in the US and EU in favour of privatisation and anti-trust.

The issue is where to draw the line on foreign governments controlling strategic areas of the US economy. It is an open question that is worthy of discussion, but it does not have simple or easy answers. It not limited solely to countries in the PG as it is also a lingering issue in the EU in many sectors of the economy.

'Prestige' Tragedy

Although I am a member of the Piraeus Shipping Community, I only have hearsay knowledge of this unfortunate accident. Rumours have been rampant with fingers pointing both to the Spanish Authorities and to the Owners/ Managers.Well, it is anymore a liability for a company to operate over-age tonnage and it is a practice that should be avoided if possible. Regardless of due diligence and good standards, the potential fallout in case of an accident is a very high risk that outweighs the possible rewards of continuing to trade out such vessels. Further as a Manager you must face an uphill struggle with classification societies, insurers, major oil companies, etc, that makes very problematical the operation of the vessel.On the other hand, it is well known that tanker industry operating standards have improved enormously over the last twenty years and Owners/ Managers have not been recognised nor rewarded sufficiently for their high standards. Normally, the ship standards are much higher than the shore standards. It is not at all unusual to see an immaculate vessel with a highly trained crew in safety gear attempting to dock at a dilapidated terminal that does not observe any serious safety standards except lip service. Mind you I am not arguing that all ships are immaculate and all terminals are dilapidated, but certainly politically and institutionally much less noise will be made about any deficiencies at the shore facilities rather than on the vessel. The vessel does not vote nor is it a source of local employment, the shore facility is much more important to the local community. All this reminds us of a rather famous Ibsen play...I think the most troubling pattern in recent accidents in Europe is the denial of refuge to vessels in distress and the callousness of shore authorities primarily towards the lives of the seafarers and secondarily towards the property of vessel and cargo owners. Plausible arguments can be made that knee-jerk reactions ordering ships in distress to go to deep sea rather than to be allowed refuge actually increase the likelihood of marine casualties and ecological disasters.As we see currently, there is such an hysterical shore reaction that tankers with no problems at all are being ordered to sail huge distances from the shore. Vessels and their crews are becoming untouchables.Personally I do not see any light in these matters unless there is an effort to upgrade shore standards and educate shore authorities to shipping matters. We suffer presently a generation gap, where shipping standards have improved enormously, but there has not been a similar movement on shore. This is presently impacting very negatively the shipping industry.

Ice smart owners?

Traditional family Greek shipping is based on relatives and close friends rather than professionals and corporate management with business plans, human resources and merit systems. Of course this is not that family shipping does not work well and is very profitable. Generally Greeks are not investors in human resources. This includes crewing where often they prefer low cost rather than quality. Training beyond statutory obligations has come late in Greece. There is insufficient concept of continuing education. Port captains, especially of the older generation, often have limited education and mainly practical experience. Companies are often groping for standards on these matters. Of course, there are exceptions, but as a rule Greek management spends little money on people and human resources management is not widely applied. Proof on a national level is the millions of Euro transfer money the Greek government has put into asphalt and concrete public works, whilst leaving the public educational system in a poor state spending less than any other EU 15 country in this area and tolerating very low standards. So Greek Owners may be investing a lot in expensive hardware. It remains to be seen whether they will spend on the people and training.
I wish my fellow Greek compatriots the best in these ice trades. Generally we could achieve much more meaninful economic development in Greece by investing seriously in people. This includes the maritime sector for better trained crews, etc. Scandinavian Owners are generally well ahead of us on these matters both in the office and at sea. This is a fact with the much higher labour productivity due a first class educational system. I also experienced this in France when I was working in Monte Carlo. I suppose that I am especially sensitive to this due my experience in parcel chemicals trades and the transport of hazardous cargo where high operating standards are a critical part of the business.
With the Euro currency, administrative expenses have reached very high levels in Greece so labor productivity is going to be a major issue in the future.