Thursday, October 8, 2009

BLT-Eitzen Merger: too big to fail or too unmanageable to succeed?

The ailing Camillo Eitzen Group recently astounded the market with a merger announcement with the Indonesian-based Berlian Laju Group (BLT) by share exchange to comprise the world’s largest and most modern chemical tanker fleet. Yet neither company is financially strong and both companies suffer from over leverage and aggressive expansion at top of the market prices during the boom times. Fitch promptly revised the rating of the acquiring company BLT as "B" with rating watch negative (RNW) while its US$ 400 million bond issue is "CCC", also with RWN.

Will this merger make a stronger company with a better balance sheet and a good synergy with a shared vision and complimentary product lines that leverage existing infrastructure or vertical integration?

Certainly the joint announcement presents a rosy picture for investors. Total revenues of the combined company for the past 12 months (presumably 30.6.2008 - 30.6.2009) amount to approximately US$ 2.3 billion with an EBITDA of US$ 499 million. Including newbuildings the group will own and/or operate 157 chemical tankers, 14 oil tankers, 42 gas tankers, 50‐60 bulk carriers and 1 FPSO, in addition to services offered through Eitzen Maritime Services (“EMS”). Given that BLT and Eitzen have market shares of 5,3% and 8,2% respectively; the new company would have a 13,5% share roughly the size of Stolt Nielsen!

BLT says that it plans to submit a voluntary exchange offer for all outstanding shares in CECO (Camillo Eitzen Group). CECO shareholders will be offered mandatory exchangeable bonds (MEB) equivalent to NOK 25 per CECO share which will be converted into shares. BLT said the offer represents a premium of 270% on the CECO share price of NOK 6.75 ($1.17) at the close of business on Friday. The deal is subject to a number of conditions including the successful private placement in BLT of a minimum of US$ 200 million in new equity. The offer is expected to be completed by the end of November.

Eitzen has a strained balance sheet. The group has grown rapidly in the chemical tanker sector during the boom years by both vessel acquisitions and mergers. There have been been some integration problems. Their 30-35% contract cover for their fleet is much lower than established chemical operator like Stolt and Odfjell (approx 60-70%) and their dependence on the product markets is relatively high. They were poorly positioned to face the market downturn from the financial crisis. The drop in cargo volume and exposure on the spot market led to a significant drop in their free cash flow whilst they were over leveraged from their aggressive expansion.

Last week CECO and Eitzen Chemical reached agreements with banks to restructure loans of over US$ 800 million. Further they are on the verge of a US$ 100 million equity issue. The merger announcement saw its market value rise 22.17% to NOK 2.81 per share, or NOK 479.86 mio. Eitzen share value had fallen fallen 65.88% from a high of NOK 48.90 each this year following its high-profile financial difficulties.

BLT has also been expanding rapidly in the chemical tanker sector. The group started in the Indonesian cabotage trades first in oil tankers and later products and chemicals with Pertamina employment.. In 2007 it began its global expansion with a US$ 850 million acquisition of US-based chemical-tanker specialist Chembulk. This gave the company access to the US markets, although in 2008 a full 75% of its revenues still came from the Middle East and Asian markets.

American Marine Managers had bought Chembulk earlier in the year as MTM from its founder and main shareholder Doug MacShane and then marked it up and sold it for a premium to BLT at the peak of the market. To finance the $850 million deal, BLT turned mainly to bank debt. The company still has US$ 400 million senior unsecured notes due in 2014 and a US$ 125 million five-year convertible bond due in 2012, issued by BLT Finance BV, a wholly owned subsidiary of BLT. This sent the company's gearing into orbit and it had to resort to drastic measures including sale-and-leaseback deals to bring down its debt load.

BLT appears to have a better contract book than Eitzen, but it is reportedly only 50% so they have considerable spot market exposure and it has been hitting their bottom line. BLT's most recent audited accounts for the first six month period 2009 indicate a fall in gross profits of 32%. BLT closed 30th June 2009 with a US$ 5,98 million net loss as opposed to a net profit of US$ 109 million for the first six months in 2008.

Given the above, it is surprising that BLT has the financial capacity to undertake this merger. The recent Fitch cautionary note on high risks is not unexpected. Of course, the operation is a share exchange and dependent on BTL raising US$ 200 million in new equity with a CCC bond rating subject to downgrade. BLT is merging with a troubled company that needs to be turned around and has severe financial problems. Camillo Eitzen booked a US$ 215 million loss last year as revenue declined 14 percent to US$ 1.32 billion. No one knows whether this deal is a bargain or simply a Trojan Horse. There is a serious risk that this merger - if it goes badly - could cause BLT, which is already in a weak financial position, severe problems.

Statistics indicate that only approximately 50% of all mergers succeed. Both these companies are already pieces of other companies due their recent expansion. Integration and the timing of the market upturn will make or break this deal. Eitzen clearly was not a total success in its merger and expansion deals or it would not be facing its present woes. Putting Eitzen in order is a tall order for anybody.

BLT's main move was its Chembulk acquisition but we do not really know how successful they have been in integrating the Westport-based operation. Off-hand, Indonesians running a US-based outfit with American managers seems a challenge where formible foreign firms like Daimler have met their match and failed in the US. The value of the Chembulk contract book with end-users depends on end-user client satisfaction, which could be potentially eroded by the new ownership or sudden defections by the American management.  It seems that BLT may have let Chembulk run independently and its home office works more like an Asian operation than to try to integrate it.

Axel C. Eitzen will remain actively involved in the further development of the combined group, and will be its second largest shareholder. How will these two groups be integrated successfully to add value to shareholders? How will Eitzen get along with the Indonesians?

* Will the new executive team speak with one voice?
* Will employees of either the buyer or the seller bad-mouth the deal?
* Will the reputation of either company alienate customers?

The merger announcement boilerplate reads:

"The combined entity will create a truly global network capable of serving an international customer base across key markets. In addition to the complementary businesses of the companies, both share a set of common values, and a belief in the value of strong corporate cultures..."

How much of this is really true remains to be seen since there is nothing about this that is prima-facie obvious. It also remains to be seen when chemical market will start to improve. This year 2009 has been miserable.  Both companies are making losses and face challenges with senior lenders.

The only savings grace has been a rise in chemical feedstock imports to China due the cheap prices but this only filled vessels in one direction.  Whilst operators like Stolt with a large contract book benefitted, this offered little comfort to those with spot exposure faced a difficult return voyage with very low rates. Even Stolt and Odfjell have been redelivering chartered vessels, reducing capacity and cutting costs.  Chemicals are tied to consumer economies and the market is not likely to pick up until a return of positive growth in the US and EU. Many commentators, including DnB-NOR bank, are projecting a slow, sluggish recovery for 2010.

If this prevails, it may prove a very trying time for this merger together with the immense challenge of integration and value creation for shareholders.

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