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.

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