Saturday, March 28, 2009

Quintana Merger runs amuck for Excel Maritime - a Wall Street parable

Senior debt lenders are now putting maximum pressure on Excel Maritime for new injections of capital for restructuring. In a previous piece "EXM and debt covenants" that I published in September 2008, I had outlined the risks that the Group had undertaken in acquiring Quintana. It seems that these risks have now come to roost. Excel may be taking nearly a $1bn write down on its equity, which would nearly wipe out the shareholders' position!

Quintana was an extremely successful Wall Street 'value' play for its shareholders and management. In business, shareholder value means intrinsic competitive advantage in the market place. On Wall Street, value tends to mean short term gain from building up shareholder expectations and cashing out on shares ASAP at advantageous prices. There is huge space between these two concepts nearly as vast as the oceans. It leads to conflicts all the time between corporate management on the one hand and private equity firms and investment banks on the other hand. It is very common that investment bankers and private equity firms impose conditions on corporations that are not ideal for management in building sustainable competitive advantage for their shareholders.

In the case of Quintana, the price of obtaining private equity PIPE support for their scaling up in the Metrostar deal was the need for low paying long term charter employment to support a large dividend payout. Even on that basis, the PIPE was sold at discount. The financial interests were simply not interested in building a company. They saw the operation as a junk bond transaction or in other words an asset speculation play.

When dry bulk markets soared in 2007 beyond expectations, the only way for QMAR shareholders to benefit was to sell the company and cash out. A charter party default case last fall concerning one of their vessels illustrates their predicament. The subcharter had fixed their unit on a voyage basis at rates in excess of US$ 100,000 per day. The vessel had been let and relet several times with multiple charterers in a chain. Quintana was only receiving US$ 30,000 per day on the vessel as owners. The perils of the vessel provider business model are ending up as a cheap source of capital for commercial operators to make big profits.

They successfully got out in the fall of 2008, which was very fortunate. At the time, there were doubts that their counter party Excel could even execute the deal. The subprime crisis has first broken out and it was beginning to have an impact on the banking industry. Excel had to arrange a massive senior debt facility in excess of US $1 bn to finance this transaction.

In retrospect, I suppose one might ask what was in the minds of the Excel BoD when they approved the M&A deal given the risks involved. The only value in the merger was the QMAR fleet that was locked into low-paying charters. In essence they were paying premium prices for the vessels whilst the underlying intrinsic value of the company was low - an unattractive combination.

Whilst many on Wall Street would likely castigate my constant emphasis on value beyond steel in shipping, I think that this case illustrates the perils in ignoring business fundamentals and seeing every transaction as an asset speculation. For a company, assets are only a means to an end. The bottom line depends on what management does with them to build a business.

Now EXM shareholders are facing an impairment charge and the need to recapitalize that may significantly dilute their interests. Stamatis Molaris, the CEO, recently resigned. The major shareholder, Gabriel Panayotides, may be obliged to sell his controlling share in Torm to cover the losses. Ironically, Torm is a 120 year-old Danish shipping company that has considerable intrinsic value.

Despite this dire situation, EXM shares soared over 10% in Friday trading. It will be interesting to hear the earnings announcements on Monday and see the market reaction.

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