FRO - Euronav Saga Ends With Fireworks For Frontline

2023-11-03 08:13:58 ET

Summary

• A 2-year dispute between two tanker families over the future of Euronav ended with the breakup of Euronav.
• Frontline, a leading tanker company, has acquired 24 of 41 VLCC vessels from Euronav for a very reasonable price.
• Frontline has geared up for the future, betting on strong sector fundamentals and market uptake.

Introduction Frontline

Frontline (FRO) is a world-leading shipping company that owns and operates a large fleet of crude oil and refined products tankers. The company is listed on both the New York and Oslo Stock Exchanges under the symbol "FRO". Frontline is headquartered in Hamilton, Bermuda, and is controlled by Norwegian shipping magnate John Fredriksen.

Frontline's fleet consists of 65 tankers, including 22 Very Large Crude Carriers (VLCCs), 25 Suezmax tankers, and 18 Aframax/LR2 tankers. The company's tankers transport crude oil and refined products all over the world, and Frontline is one of the largest tanker operators in the industry.

Frontline is a well-established company with a long history of success. The company was founded in 1989, and it has grown to become one of the world's leading shipping companies. Frontline is known for its modern fleet, its experienced management team, and its strong financial position.

Euronav Saga

Euronav (EURN) is a Belgian shipping company that owns and operates a fleet of crude oil tankers. It is the second-largest independent tanker company in the world, behind Frontline, with a fleet of over 60 tankers. In 2020 the founding family, Saverys, sold off all their remaining shares in Euronav after gradually decreasing its stake. At the same time, another reference shareholder (family Cigrang) sold off their 5% stake, leaving Euronav without any reference shareholders. As a result, Euronav became very vulnerable to potential acquirers.

In October 2021 John Fredriksen and Frontline made a fast entrance into capital, buying a 9.8% stake. Since that moment Frontline rapidly accumulated shares of Euronav until in April 2022, Frontline and Euronav announced a merger . To gain management's support Frederiksen promised Euronav's former CEO, Hugo Stoop, he would lead the fusion group. Euronav shareholders were offered to trade in their shares for Frontline shares in a share swap deal at a relatively small premium.

While activists were sharpening their blades against the merger, something happened that no one would dare to expect: the founding family, Saverys, returned to the capital of its left-behind daughter. While doing so, they also publicly opposed the merger proposal. At the same time, Saverys proposed a merger with CMB.tech (owned by family Saverys) to shareholders. Committed to the merger deal with Frontline, Euronav's management opposed a merger with CMB.tech in a letter to shareholders .

The public conflict over Euronav's future between the tanker families started a buying frenzy where both Frontline and Saverys bought as many shares as they could have their hands on. This ended when both parties held above 25% of Euronav's shares. With that, both parties acquired a blocking minority blocking each other's plans. It seemed Saverys and Frontline were locked in a stalemate with both parties opposed. The Savery family did not keep quiet. They openly opposed the merger proposition with Frontline in an open letter stating 'No merger without us'. That was the death sentence for the merger. In January 2023 Frontline unilaterally terminated the merger deal. Euronav reacted to this by initiating a claim on Frontline for not respecting the agreement.

In March 2023, Euronav held a special general meeting to vote on a new board of directors. Frontline and CMB each nominated their own candidates for the board, and the meeting was highly charged. In the end, Frontline's candidates were elected to the board, and Frontline effectively took control of Euronav. As a result of the ongoing tensions Euronav's CEO, Hugo Stoop had to resign after losing the support of both parties.

Now after 2 years, it seems the saga will finally end . Frontline and Euronav will part ways. Frontline will abandon the capital of Euronav and sell its stake to CMB. In return, Frontline will acquire a large part of Euronav's fleet and will strengthen its position as the largest independent tanker in the world.

Frontline goes home with the crown jewels

As part of the deal, Frontline will acquire 24 of 41 VLCC vessels from Euronav. Of which all of them are ECO vessels and 9 are scrubber fitted. The average age of the fleet is 5.3 years, which can be considered modern young ships. Post acquisition Frontline will effectively own the largest fleet of crude carriers increasing their fleet from 65 to 89 vessels while doubling their deadweight capacity. To acquire Euronav's fleet Frontline will pay up to 2.350 B.$ as part of the deal. Which results in just below 100 M. $ per VLCC. Considering a newbuild ECO VLCC vessel costs 115 M.$ at this time (source Fearnley tanker seminar) , the price seems fair. The big advantage of buying into a modern secondhand fleet is that the ships are already constructed. All acquired vessels are in the water and operational, generating cash from day one. Construction typically takes around 18 to 24 months from order to delivery for a VLCC vessel.

Financing the deal

As part of the deal , Frontline will sell its stake in Euronav to CMB receiving 252 M. $ for it. The remaining $ 2,100 M. is financed with debt. An existing revolving credit facility was drawn for an amount of $ 275M. $1,410 M. was loaned from banks through a 5-year senior secured term loan facility. Lastly, up to $ 540 M. was offered through a shareholder loan as subordinated unsecured debt.

According to Frontline's Q2 statement , the company had around $ 2 Bn. of net financial debt ($ 2.3 Bn. of gross financial debt minus $300 M. of cash) prior to the acquisition. On the asset side, the book value of the vessels is valued at $ 3.6 Bn. This seems below market value considering Frontline's fleet of 65 vessels. Post-acquisition the debt will amount to around $ 4.1 Bn. versus a book value of vessels of approximately $ 6 Bn. Therefore, the company appears to be fully loaded toward a favourable tanker market. Because of the deal, the breakeven prices and consequently the risk profile of the group increase. But so does the potential for cash generation.

Shipping fundamentals

John Fredriksen is notorious for timing the tanker market, knowing exactly when to buy and when to sell. With this deal, Fredriksen seems to live up to his reputation. In the Frontline merger presentation it states the following:

• Lowest VLCC order book since the 1980s, combined with aging fleet and upcoming regulations leave room for highly attractive supply-side dynamics.
• Chinese imports moving to all-time high - Russian sanctions continue to yield inefficient trading patterns.
• Strong rates and attractive supply outlook, setting the VLCC market up for several years with strong earnings potential.

The timing of the deal seems to come right before an uptake of the market. The amount of VLCC vessels with an age above 20 years results in 108 vessels or around 12% of the global fleet. In the next 3 year, another additional 73 vessels (8%) reach their end of life. This while currently only 13 vessels (1.5% of global fleet) are ordered.

Additionally, there is a large part of more recent vessels that are non-ECO vessels and will struggle to comply with the new EEXI and CII regulatory framework. EEXI (Energy Efficiency Existing Ship Index) and CII (Carbon Intensity Indicator) are two new regulations from the International Maritime Organization ((IMO)) that are designed to reduce greenhouse gas emissions from ships.

This is while the demand for oil is still increasing. To cope with additional demand an equivalent of 92 new VLCC-equivalents are needed by 2025, while only 17 VLCC equivalents (new VLCC's, Suezmax & Airmax) are being delivered during this period. Additionally, it is expected that around 54 VLCC equivalents will no longer comply with customer standards because of their age, bringing the deficit to 129 VLCC equivalents. Considering the considerable deficit, Frontline expects that current age limitations will be questioned.

Another supporting factor is the increasing distance oil is transported for trading.

The coming years will be characterized by a change in the regulatory framework and a low order book. These conditions are similar to the period between 2004-2008, when there was a large supply constraint caused by a regulatory shift towards double hulls. As they say, history does not repeat itself, but it often rhymes.

Valuation

Considering the positive fundamentals, tanker companies are now logically trading above book value. Price/book ratios in the sector are now the highest in the last 5 years.

The historically high multiples confirm that Frontline deserves applause for the deal. They acquired hot assets at book value that would otherwise not be available in an illiquid market. As a reward, they now obtained the highest valuation ratio amongst peers in the sector since announcing the deal. Frontline is a pure player with high-quality management and fleet, while geared up toward an uptake in the tanker market. If you believe in the strong fundamentals of the sector, then Frontline is certainly a good buy.

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