2023-06-23 12:30:56 ET
Summary
- Eagle Bulk Shipping Inc. surprisingly announced it is repurchasing all shares held by Oaktree Capital Management at a large premium to prevailing valuations in the dry bulk shipping space.
- The transaction has likely been negotiated in response to ongoing share accumulation by leading Greece-based containership lessor Danaos Corporation.
- In addition, Eagle Bulk Shipping disclosed the adoption of a new shareholder rights plan, also known as a "poison pill," which would be triggered in case Danaos Corporation accumulates additional shares.
- If Eagle management would have been really interested in creating some immediate value for shareholders, the company could have simply launched a large-scale self-tender offer rather than providing a major payday solely to the benefit of Oaktree Capital Management.
- Given the high purchase price relative to prevailing valuations in the dry bulk space and resulting, vastly increased leverage as well as the adoption of a poison pill, I am downgrading Eagle Bulk Shipping's shares from "Buy" to "Hold."
Note:
I have covered Eagle Bulk Shipping Inc. ( EGLE ) previously, so investors should view this as an update to my earlier articles on the company.
Quite frankly, I wouldn't have expected to update readers on Eagle Bulk Shipping Inc., or just "Eagle," just five days after my most recent discussion of the company.
But after the close of Thursday's session, the company surprisingly announced the repurchase of 3,781,561 shares from affiliates of Oaktree Capital Management ("Oaktree") at a price of $58.00 per share for an aggregate purchase price of $219.3 million in cash.
Eagle Bulk Shipping Inc. (...) today announced that its Board of Directors has approved an agreement with Oaktree Capital Management ("Oaktree") and certain of its affiliates pursuant to which Eagle has repurchased approximately 3.8 million shares of Eagle common stock, representing Oaktree's entire stock ownership of approximately 28% in the Company, for an aggregate purchase price of approximately $219.3 million. The purchase price of $58.00 per share represents a discount of approximately $11.00 per share or approximately 16% to Net Asset Value, as adjusted ("NAV") per share diluted based on March 31, 2023, financials and current fleet valuations. (...)
Eagle's Chairman Paul Leand, Jr. commented, "Today's transaction is in the best interest of our shareholders, both financially and strategically. It ensures that shareholders maintain the opportunity to realize the value of their investment in Eagle Bulk and eliminates any potential disruption resulting from the sale of a very significant interest in the Company."
Eagle's CEO Gary Vogel added, "We believe the transaction will be significantly accretive to NAV per share and EPS in future periods based on historically strong supply-side fundamentals. Looking ahead, we will continue to execute on our growth and renewal strategy, including building upon our 33 previous ship acquisitions, and remain committed to acting opportunistically to create value for all of our shareholders."
Eagle's balance sheet remains strong, with total liquidity of approximately $188 million based on March 31, 2023 financials, as adjusted for this transaction, previously communicated financing, and vessel sale and purchase activity. The Company noted that it remains committed to its balanced capital allocation strategy, including maintaining its current dividend policy of 30% of net income, which we believe will be positively impacted by this transaction, and continued repayment of term debt.
As a result of this transaction, the Company's outstanding common stock will be reduced to approximately 9.3 million shares. The transaction will be financed by cash-on-hand and drawings under the Company's credit facility.
According to the company's press release, the purchase price of $58.00 per share represents a discount of approximately $11.00 per share or approximately 16% to fully diluted net asset value ("NAV"):
Please note that the company's fleet valuation of $1.18 billion exceeds the vessel values provided by MarineTraffic.com by approximately 17%, but the difference might be a result of scrubber fittings not being adequately reflected in MarineTraffic's numbers.
But even when assuming Eagle Bulk Shipping's NAV calculation to accurately reflect prevailing market values, the stated transaction discount of 16% doesn't exactly look like a bargain when compared to current valuations in the dry bulk shipping space.
To be perfectly honest, I am somewhat perplexed by management's decision to increase leverage very substantially in the current business environment only to provide a major payday to its largest shareholder which due to current weakness in dry bulk shipping stocks would have been unlikely to sell its stake anytime soon.
On the flip side, the move might be very well a reaction to the ongoing share accumulation by leading Greece-based containership lessor Danaos Corporation ( DAC ) or "Danaos," which had been rumored for some time already before Danaos officially disclosed a 9.99% stake on June 16. Over the past week, Danaos has increased its stake to 11.33%.
Following the buyback of the Oaktree stake, total outstanding shares will be reduced to approximately 9.28 million thus increasing Danaos' stake to 16.7%.
Given this issue, yesterday's adoption of a so-called "poison pill " is hardly a surprise (emphasis added by author):
Additionally, the Company announced that its Board of Directors has unanimously adopted a limited duration shareholder rights plan. The Rights Plan is effective immediately and has a one year duration expiring on June 22, 2024 unless extended by shareholders. The Rights Plan will reduce the likelihood that any person or group gains control of the Company through open market accumulation, or other abusive tactics potentially disadvantaging the interests of all shareholders, without paying all shareholders an appropriate control premium or providing the Company's Board of Directors sufficient time to make informed decisions in the best interest of all shareholders.
Pursuant to the Rights Plan, the Company will distribute one right for each share of common stock outstanding as of the close of business on July 3, 2023. While the Rights Plan is effective immediately, the rights generally would become exercisable only if a person or group (including a group of persons that are acting in concert with each other) acquires beneficial ownership, as defined in the Rights Plan, of 15% or more of the Company's common stock in a transaction not approved by the Company's Board of Directors . In that situation, each holder of a right (other than the acquiring person or group) will have the right to purchase, upon payment of the then-current exercise price, a number of shares of Company common stock having a market value of twice the exercise price of the right. In addition, at any time after a person or group acquires 15% or more of the Company's common stock, the Company's Board of Directors may exchange one share of the Company's common stock for each outstanding right (other than rights owned by such person or group, which would have become void).
According to the provisions of the shareholder rights plan, Danaos would have to acquire additional shares following the public announcement of the poison pill for the rights to become exercisable.
Adjusted for the buyback and recent upsizing of the company's credit facilities as well as a number of previously announced vessel purchases and sales, post-transaction liquidity is expected to be $187.6 million, down from $255.9 million at the end of Q1:
Total outstanding debt is expected to increase by $200 million with the remainder of the Oaktree stake buyback being financed from cash on hand.
There will be no changes to Eagle's stated dividend policy.
Bottom Line
At least in my opinion, the surprise buyback of the Oaktree stake at less-than-stellar terms appears to be a reaction to the ongoing share accumulation by Danaos that has been rumored for a couple of months already.
After all, nothing would have prevented Danaos management from entering into discussions with Oaktree regarding its stake in Eagle Bulk Shipping thus coming very close to taking control of the company.
With the newly adopted shareholder rights plan effectively precluding Danaos from acquiring additional shares in Eagle Bulk Shipping without triggering the poison pill, I do not expect Danaos to increase its position even further at this point.
If Eagle management would have been really interested in creating some immediate value for shareholders, the company could have simply launched a $200+ million self-tender offer rather than providing a major payday solely to the benefit of Oaktree Capital Management.
Given the high purchase price relative to prevailing valuations in the dry bulk space and resulting, vastly increased leverage as well as the adoption of a poison pill, I am downgrading Eagle Bulk Shipping's shares from " Buy " to " Hold. "
For further details see:
Eagle Bulk Shipping Stock: Downgrading On Expensive Oaktree Stake Buyback