Wednesday, June 22, 2011

Debate and shaky start for Diana containerships IPO

Diana Containerships recently completed a US$ 107 mio follow-on shares offering in New York last week at a steep discount to the company’s net asset value (NAV) and its previous share price. This new IPO follows the Paragon Boxships offering and has many of the same inherent defects as a pure asset speculation play rather than a coherent entry into the containership business.

Credit Suisse recently downgraded the parent drybulk company, Diana Shipping, to 'underperform' status due its exposure to larger bulk carriers in present lackluster market conditions.  Rates have plummeted from the the beginning of the year and the over supply of tonnage is significant with the order book overhang.

Diana Shipping came into the 2008 meltdown with one of the strongest balance sheets and has been considered a favorite by many analysts. Investor pressure for profit expectations led management to move into containerships given the deep slide in containership values in 2009 and the comeback in container market last year.

Like Paragon, Diana has no history in the containership sector and would be solely a vessel provider to liner companies with little added value, very similar to the German KG market, which is heavily invested in this sector. Indeed their strategy is potentially to pick up container vessel assets from beleaguered German KGs.

Both are late in the game to their established and successful peer, Seaspan. Diana management lacks the charism of Gerry Wang and his almost mythological Chinese business connections. It lacks the investor backing/ Far East connections clout of the Tiger Group, related to Seaspan.

Diana Containership NAV before the offering was estimated between US$ 15-16, but the offering was priced at US$ 7,50 to attract investors. The huge discount made the offering popular with investors; but a disaster for shareholders, who bought into the company at the initial price of $15. More significant is that Diana originally had expected to raise as much as US$ 250 mio in fresh funds in the offering led by FBR Capital Markets of the US. But with interest lacking, its own US$ 50 mio contribution to the spin-off wound up giving it a majority stake in the new venture. The result left Diana without sufficient capital to be a player of any size in boxships.

All this makes you wonder what FBR Capital had in mind to back such a venture. In any case, Jefferies, Cantor Fitzgerald and Wells Fargo are touting this nascent "Seaspan" as a 'buy' ostensibly to feed the retail investor 'ducks' on Wall Street.

Whilst they have a plausible argument on low share valuation and container market expectations, Diana Containerships is one of many vessel providers and new ordering by the likes of Seaspan and other established players may leave this company at the station for an adventure that could potentially turn out more like some of the German KG's.

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