A bid by Bermudian-based Frontline Ltd to acquire an independent crude oil tanker company less than half its size, is part of consolidation pressure across the sector.
And while the non-binding proposal has been rejected by the directors of DHT Holdings, which is also domiciled in Bermuda, the challenges squeezing the sector and other shipping segments are unlikely to diminish in the near future.
That is the view of Jens Alers, group director of Bernhard Schulte Shipmanagement (Bermuda), which has offices in Par-la-Ville Road, Hamilton.
“The move towards further consolidation cannot be stopped, regardless of whether by corporate takeover, merger, or by fleet acquisition. This happens not only in down markets,” he said.
Mr Alers was commenting in the wake of a rejected unsolicited proposal by Frontline to acquire DHT. Bernhard Schulte Shipmanagement was not connected with the proposal.
Frontline has one of the world’s largest fleets of very large crude carriers, also known as VLCC, and Suezmax tankers. It has a market capitalisation of $1.15 billion, and a fleet of 22 VLCC, 17 Suezmax tankers, and 20 smaller tankers.
Its target was DHT, which has a market capitalisation of $449.4 million, and a fleet of 19 VLCC and two Aframax tankers.
Frontline proposed to acquire all the outstanding common shares of DHT for a per-share consideration of 0.725 Frontline shares. Together with its affiliates, it has already bought 15.3 million shares of the smaller company, representing 16.4 per cent of its outstanding common stock.
In a statement, Frontline said a business combination between itself and DHT would create the largest public tanker company by fleet size and market capitalisation.
However, DHT’s directors unanimously rejected the proposal. Erik Lind, chairman of DHT, said: “We believe that Frontline’s proposal substantially undervalues our company and represents an opportunistic attempt to acquire DHT at a low point in the cycle.”
“We are confident that DHT will generate significantly more value to shareholders as an independent company than the prospects afforded by this proposal.”
The directors rejected the proposal after giving it a “comprehensive review, conducted in consultation with its financial and legal advisers,” the company said in a statement.
DHT was formed in 2005 and operates through management companies in Oslo, Norway and Singapore.
Given the current market conditions, and Frontline’s history, Mr Alers was not surprised by the larger company’s bid.
He said: “Frontline has been the most aggressive consolidator for many years. No other tanker company has been involved in more takeovers than Frontline.”
This year, the crude oil tanker sector is likely to face further pressures, according to Peter Sand of international shipping association Bimco. He said the sector was already struggling due to a high inflow of newly build tankers, while “bloated oil product stocks” globally limit demand for tanker transportation.
Another operator in the sector, Nordic American Tankers, earlier this week reported a full year profit of $32.9 million. Herbjorn Hansson, chairman of the Bermudian-based company, responding to a question about consolidation during an earnings conference call, said: “Preferably, you should consolidate with somebody who is like yourself. And there’s nobody like ourselves.”
Nordic American has a 30-strong fleet consisting solely of Suezmax tankers, something it repeatedly touts as a key strength that helps reduce operating costs.
The container ship sector is facing similar pressures as those in the oil tanker segment, said Mr Alers.
“The rapid concentration process among container liner shipping companies has created a playing field in which we can see only a dozen, maybe even fewer, global players,” he said.
“Against that stands a still very fragmented field of container ship owners who seek liner companies as their charterers.”
“On the tonnage supply side the concentration process will be driven by much smaller growth rates in containerised world trade, the ever increasing need to reduce slot costs and a significant increase in the number of container vessels being scrapped.”
Meanwhile, Bimco sees slightly better prospects for container shipping this year due to growing demand and “decisive action” by shipowners to sell excessive tonnage for demolition.
One of the sector’s unwelcome headline stories of last year was the bankruptcy of Hanjin Shipping, the world’s seventh largest shipping line.
Bimco said that poor market conditions for Panamax ships had isolated and squeezed them out of the market between feeder ships and ultra large containerships.
It also noted that it is a bad omen for the container shipping market to be starting 2017 with 1.4 million TEU [20-foot equivalent unit] of idle capacity. The association “expects 2017 to be another tough year on pure tonnage providers”.
Regarding the bulk sector, Mr Alers said this was the most fragmented of all the major shipping markets.
“A large number of owners face a demand side with many players” he said, mentioning agriculture giants Cargill, ADM and Bunge.
“Yet, even the sharpest and deepest market downturn in living memory has not led to a marked increase in the rate of consolidation. The same applies to the tonnage supplier side, the shipowners.”
Giving an overall assessment of trends, he added: “The confluence of scarcity of finance available to shipowners, and the need to invest into vessel upgrades to comply with environmental rules and regulations, will accelerate the concentration process in all three main shipping sectors.”
Disclosure: the writer of this article owns shares in Nordic American Tankers.
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Source: Royal Gazette
