Dryships' Questionable Deals Don't Help Investor Confidence

Some might recall that I have written a few posts on DryShips (DRYS) in regards to the completely narrow-minded P/E valuations used for the company in the past (as well as for the entire dry bulk industry).

Well the stock has been creamed, now at $11 vs. a 52 week high of $117, though it has rebounded from a low down near (gasp) $3.

Due to the massive collapse in dry bulk rates, whose volatility was the reason why 1-year forward P/E is almost useless for drybulk valuation, vessel prices for dry bulk ships have collapsed and DRYS has been unable to get financing for some of its planned ship purchases. Thus, just the other day, the company announced that it had canceled the purchase of 4 ships for $400m.

The detail of this news, which just doesn't help market confidence in DRYS management, is the following:

DryShips Inc. said Wednesday it had canceled the purchase of four dry bulk carriers from companies controlled by its own CEO, saying it failed to get bank financing for the $400 million deal. DryShips said Chairman and Chief Executive George Economou's companies would keep $55 million in deposits.

And DryShips said it paid the companies controlled by Economou an additional $105 million for cancellation of the sale and an exclusive option to buy the ships in a block deal for $160 million. The option expires Dec. 31.

Now maybe these transactions have all been properly performed in the best interests of DRYS shareholders, but they appear, at best, to leave room for conflicts of interest. Transactions of this kind surely don't help in the current environment for dry bulk shipping, given that DRYS just lost $160m due to a canceled transaction, and considering its current market cap of just $470m. I realize that taking the ships might have meant operating losses on them since markets were weak, and they would have been paying prices well above market. But perhaps the original purchase decision was at fault, when they were buying ships at extremely high prices historically - and from the company's own CEO. Again, while the checks might be in place, even the appearance of potential conflicts of interest can undermine investor trust.

Comments

[bdp1Consult...:]

I think the post gets to the heart of the "problem". In situations where you have a private company and public company (albeit one where insiders own a lot), there is always a winner and always a loser once the dust settles. However, there are advantages to having private/ public deals...

The just announced four ship deal is intriguing because of the optionality aspect. With some adroit timing, if there is a blip upward the public company might excercise the purchase options on the vessels. So, that's the trade- relatively high amount of deposit and option premium goes from the public company to the private company, but the potential upside (for the listed entity) in the event of a positive market surprise would be quite substantial.

But, yes, any situation where the deals are not 100% arms length will arouse suspicion. But, on the other hand, having a privately controlled entity enables deals to stand still so ship purchases can be married with lengthy charters. In a purely arms length situation, it may be more difficult to put such combinations together. And the lengthy charters (to credit worthy counterparties- that's another post for another blog) are what the investors crave.

Dryships claims it has access to financing; I don't know if that's true, or not. I recently wrote an article for Janes Transp Finance where I surveyed bankers- those who talked to me (including some big guys) said that for existing customers, they could finance if the deal made sense.

2008 Dec 11 02:15 PM

[thefuture007:]

Hi Stalwart...
I noticed this Cancellation and wondered about Why and the Details.Now that you've Explained it ..to see DRYS charged 160Mil Fee for Cancellation shows me there No Board involvement here,Just the owner choosing to make his own Decisions.Thus as you Said " Questionable " behavior to me leads to - "LAWSUIT".I Do not own DRYS.This lack of oversight pertaining to the "TERMS" of that Deal should have been reviewed by the Board of DRYS and knowing How Tumultuous and precarious the Current DRY bulk market,Credit market and " Forward markets are,the Deal to Acquire those ships at this time was at best Questionable, the Pocketing of that FEE due to Cancellation leads me to believe no one would have Made that Decision based on anything close to a Buisness Decision Designed to HELP DRYS in the Current market environment.
I Don't know nor have I seen the Complete terms of the Deal and if I were a shareholder of DRYS and wanted a basis for challenging the Board/Owner in light of this matter now would be the time.As the Earnings will be affected by this Carry forward loss,assuming thats how it's Carried or dealt with.
Happy Trails

2008 Dec 11 02:17 PM

[jimmy46:]

ABOUT 8 MONTHS AGO FORBES MAG HAD AN ARTICLE ABOUT DRYS.

VERY CRITICAL, WITH SOME OF THE SAME CONFLICTS YOU MENTION.

THE RESPONSE OF THE CEO:
IF YOU DON'T LIKE HOW I MANAGE THE COMPANY, SELL THE STOCK.

2008 Dec 11 02:20 PM

[coprophagous:]

While most other companies are canceling orders for no penalty this looks like daylight robbery.
The private companies took a profit from the original sale and also sold some contracts for larger ships to Dryships a couple of months ago.
The market for these has totally collapsed so are we likely to see a repeat deal which would drain most of the remaining cash from dryships?

2008 Dec 11 02:30 PM

[DRY MAKES M...:]

No wonder I am losing money.
The Stalwart says Private Ship CEO George Economou sells Public Ship CEO George Economou four ships at certain terms.
Later, Public Ship CEO George Economou cancels the deal and pays Private Ship CEO George Economou $160 million for his trouble.
As a common stockholder, I feel an overwhelming urge to roll over and smoke a cigarette!

2008 Dec 11 04:25 PM

[ETF 'STER:]

It is becoming clear that DRYS is what Geo. E. uses as a "piggy-bank" to line his pockets at the expense of shareholders. When was the last time he has made a corporate decision that added value to the shareholders?

I would be very interested if someone could answer that question.

2008 Dec 11 05:05 PM

[Mark Anthony:]

Interesting question regarding the situation where one owns both a public company and a private company and then there is a deal between the two. Will there be a conflict of interest?

Keep in mind that Mr. George Economou is a share holder of DRYS, too, and he owns 35%, 15M shares worth. Anything that hurts shareholders will hurt himself just as well. Is it in his best interest to line the pocket of his private company at the expense of shareholders? I don't think so. His bigger interest is NOT in a $160M cash his private company can gain, but rather his bigger interest is to see his stake in DRYS gain value. It's in his best interest to protect DRYS and see its share value surge back to $120 a share, which would give him a $1.8B stake. DRYS was his private company to start with and he choose to go public for better growth opportunity. There is a tremendous advantage to own a public company than a private one.

So I do not see a need to second guess the deal.

2008 Dec 11 07:16 PM

[Vincent Fer...:]

Mark Anthony, it still benefits him even if he owns a stake in DRYS. If you own 35% of one company and 100% of a private company, then it benefits you to transfer cash from the partly owned to the fully owned. This is a classic and common technique in developing markets. Listed companies get bilked of cash by a shareholder who funnels business and cash flow to their private companies. Thus despite his stake in DRYS it is still to his benefit.

2008 Dec 11 07:40 PM

[will c:]

Mark A, you seriously don't see the conflict of interest? He personally is $160m - 35% * $160m = $104m richer after the transaction, but the company is poorer. The company already has high level debt, with that much cash removed from the balance sheet, and plus the ships are not generating positive cash flow, the company can go under very soon.

Funny thing is the CEO can buy the whole company from bankruptcy with small portion of that $160m that he just earned from the company.

Economou is one of the most crooked CEO, but he learned one thing that as long as you disclose everything you are not committing crime even you are stealing money from the public shareholders.

2008 Dec 12 01:28 AM

[johngonole:]

I think something stinks about these types of deals. Who determines price when you have the same guy on both sides of the transaction. Whom do you think he favors?

Trump did this once when he sold some of his bad assets from his private corp to his public one. Of course the public company went into bankrupcy.

2008 Dec 12 03:20 AM

[long_on_oil:]

Just read the forward looking statements in the annual report and it details that DRYS is fully controlled by Cardiff. All of us stockholders have been burnt for good on this one. Did you notice the volumes traded the past 3 days. Far in excess of the total outstanding shares. I guess it was the short covering. So now that the short covering is over we will probably see George take DRYS private with the money he stole from the company. ...lol Where in the hell is the SEC in all of this?

2008 Dec 12 09:07 AM

[notsosmart:]

he said it.dont invest in my co. so dont.

2008 Dec 12 10:59 AM

[Kunst:]

I just skip right over those all-caps posts. Hope you didn't have anything interesting to say.


On Dec 11 02:20 PM jimmy46 wrote:

> ABOUT 8 MONTHS AGO FORBES MAG HAD AN ARTICLE ABOUT DRYS.
>
> VERY CRITICAL, WITH SOME OF THE SAME CONFLICTS YOU MENTION.
>
> THE RESPONSE OF THE CEO:
> IF YOU DON'T LIKE HOW I MANAGE THE COMPANY, SELL THE STOCK.

2008 Dec 14 02:40 AM

[Mark Anthony:]

User 208657:

George Economou does not get the $104M cash for free. It was payment for a purchase option. DRYS will have the option to pay another $160M to get the four ships, before the end of 2009, hence save $80M from the original $400M price tag). And why would DRYS not proceed with the purchase option? $160M for 4 near new condition cape size ships seems to be rather cheap.

2008 Dec 14 05:06 PM

[will c:]

Mark A, if DRYS ever decided to buy the 4 ships next year, it is actually paying $160 + $105 + $55 = $320 mln for them. That is only 20% discount from the $400 mln. Given the market has tanked and DRYS paid a premium for the ships, the discount is hardly enough to justify putting $105 mln for the option to purchase. After payout this huge amount of cash and failed to sell its ship earlier, DRYS might not survive long enough to exercise the option to purchase even if, big IF, ship price skyrocketed in late 2009.

2008 Dec 16 01:18 AM

[Dave.G:]

DRYS may have the option to buy the 4 ships within the next yer, but who makes that decision? If GE can make more than $160 million by having Cardiff sell the ships on the open market, then why would he sell them to DRYS. He is, after all, the only person who gets to decide whether or not DRYS will exercise its option to buy the 4 ships.

This guy is NOT ethical.

2008 Dec 17 12:19 PM