Shipping M&A: Learning points from recent transactions
Historically, traditional shipping M&A activity has not been as common, mainly because shipping market investors enjoyed adequate access to funding while the ship owners themselves instinctively preferred more straightforward “asset transactions”.
In the recent years, we observed an increase in the shipping related M&A deals which are many times similar to those found in other industries, especially where financial investors own a significant stake in the equity of the shipping companies. M&A transactions are more complex and take longer to achieve, which impacts the management of shipping companies and their finance departments, who face the challenge of performing (or being subject to) a thorough due diligence, a process which becomes critical for a successful M&A transaction and is pivotal to safeguarding shareholder value.
Recent trends in Shipping M&A
2018 has been the 3rd consecutive year without any traditional shipping IPOs. In fact, “Navios Maritime Containers” and “Goodbulk” both postponed their planned IPOs in 2018 and Navios Maritime Containers took an alternate route to direct list into the US. So far, FY19 is not showing any uptick in IPO activity and unless global trade volumes pick up (something questionable for as long as the threat of trade wars and protectionism prevails) and existing listed companies improve their financial performance drastically, then the IPO activity may remain flat for the remaining half of FY 19.
According to PwC’s research, the key reasons for the absence of Shipping IPOs are summarised below:
- The larger shipping groups have found differentiated access to capital, for example through Chinese leasing funds or the Norwegian bond market;
- Given the challenging market conditions and uncertainty, there has been low investor appetite for Shipping IPOs at terms and prices that make economic sense for shareholders and investors alike;
- Investors have been discouraged by recent shipping defaults and as a result, questions have been raised over corporate governance in shipping companies; and
- The fact that the typical shipping company is still largely family owned and managed as such, thus, their owners are not interested in giving away control (just yet!).
On the flipside, 2018 has seen an active shipping M&A market with almost 30 transactions worth an estimated USD 15.0 billion. These transactions have taken many different forms, most notable of which are mergers, JVs and acquisitions using a combination of shares and cash to the Sellers.
After carefully examining the largest actual transactions that took place in 2018, we summarise below the key reasons identified for engaging into a shipping M&A transaction:
- An opportunistic move from larger companies with adequate access to capital; these companies are seeking to benefit from acquiring under-valued vessels, increasing their scale and realising back-office synergies;
- It serves as an alternative to IPO for private company shareholders looking to position themselves in listed shipping companies with high trading liquidity; in essence, they are swapping their non-listed shares with listed stock through a merger or vessel-for-share transaction;
- It allows the merging of fleets with complementary attributes – for example vessel sizes and age profiles – and the combination of vessels operating in the spot market with vessels on long term time-charters;
- Last but not least, it is driven by private equity funds exiting positions as they reach the end of their investment horizon.
We expect that in the medium term, Shipping M&A activity will continue at the same pace, driven mainly by the repositioning of financial investors seeking to place themselves in more liquid stock and the need to form larger, more scalable entities which will allow easier access to debt and equity markets. On the flipside, listing on the US markets as a means of exit will continue to be challenging for private shipping groups.
The typical M&A process and key challenges for finance teams
There are four (4) stages to a typical M&A process, regardless of whether this is a share acquisition or a merger. In brief, these stages are: (1) Identifying deals, (2) Deal evaluation, (3) Deal execution and (4) Capturing value.
The finance team is expected to be heavily involved during the Deal Evaluation and the Deal execution stages, however, depending on each organisation, involvement will be required in the pre and post execution stage as well.
Drawing on recent experience, the key challenges for the finance team involved in M&A transactions are summarised as follows:
- M&A transactions can take a long time to negotiate and close; be patient and re-arrange team priorities constantly;
- The process involves a significant level of due diligence not only on financial information but on all key aspects of the business; finance teams must be in a position to support and defend their numbers at all times;
- Information shared between the parties and their advisers must be balanced and safeguard its confidential nature;
- The role of the finance team is pivotal in project managing the whole process; ensure there is constant communication internally and with the various advisers and key considerations are shared across the team;
- In mergers, agree early on common valuation method (e.g. NAV-to-NAV basis in case of merger) and align the accounting policies, assumptions and methodologies used by both parties to ensure comparability of the underlying Balance Sheets which shall be merged;
- Pricing negotiations do not stop until the merger documents are signed; to stack up to scrutiny by the other side, negotiations must be based on factual findings;
- In the case of transactions involving listed entities (or at least one of them is listed), assessment of potential implications to Financial Reporting early on is recommended; and
- Map early on the various consents that will be required to complete the Transaction and plan accordingly (for example this involves Lenders, Charterers, shareholders, Regulators etc.).
The due diligence adjustments will be part of the M&A transaction negotiations and are crucial for deriving company valuation. Therefore, it is crucial that appropriate due diligence is carried out at all times.
Concluding, the key messages coming out our study on recent M&A activity and our active involvement in separate occasions of merger cases in H2 2018 are summarised below:
- In the medium term, and for as long as the global markets remain volatile, it will continue to be difficult for shipping companies to tap into the US markets via an IPO. To be successful they will have to demonstrate a differentiated offering and enter the market at a lower price point compared to existing listed Shipping companies;
- We expect Shipping M&A activity to continue at least at the same pace as 2018, as financial investors of private companies will continue seeking to position themselves in more liquid and marketable listed shares or to exit investments reaching maturity;
- M&A transactions are more complex, take longer to conclude and divert management’s attention from day-to-day operations. Good project management, preparation and a robust plan to capture value soon after the acquisition or merger crystallises are crucial elements to the overall success of the transaction and harvesting the anticipated value for shareholders.
- Last but not least, remember that conducting thorough due diligence safeguards shareholder value, provide robust arguments during value negotiations and ultimately supports company management make better informed decisions.
Source: Article By Mr. Ioannis Vovos, Arranged on Behalf of Hellenic Shipping News Worldwide (www.hellenicshippingnews.com)