DryShips Cancels Acquisition of Four Carriers - What Does it Mean for the Stock?

George Economou is keeping his toys but getting paid for them. DryShips (DRYS) this week said it agreed to cancel the acquisition announced in July of four Panamax dry bulk carriers from companies beneficially owned by George Economou, DRYS Chairman and CEO. This because the purchase price of $400 mn would have represented a significant cash outflow from DRYS reserves since no bank finance was obtained for the acquisition.

The DRYS Audit Committee concluded that due to the deterioration in the dry bulk market since the agreements, it would not be in the best interest of DryShips to consummate the transaction. In fact, DRYS is aiming to amend contracts for bulk carrier acquisitions and new building to save capital.

Mr. Economou and his clan get to keep the deposits totalling $55 mn for the 4 ships. Moreover, DryShips paid for an agreement with the Economou family selling companies to give DryShips an exclusive option to eventually buy the 4 Panamax vessels for $160 mn by next Dec. 9. For this it paid each selling company (4 of them!) $26.25 mn.

How comforting that the agreement was negotiated and approved by a committee of the independent board of directors of DRYS!

Also the previously announced sale of the M/V Lacerta, a 1994 built 71,862 dwt Panamax drybulk carrier for a price of about $55.5 mn, will not close due to the Buyer's decision to not perform its obligations under the MoA. DryShips will pursue all legal remedies against the Buyer.

I continue to recommend retaining half your previous holding of DRYS because this amounts to an option on the recovery of the Chinese economy, fed by iron ore pellets, coal, wheat, fertilizer and other dry bulk carrier cargo. Mr. Economou characterized the present collpase of the Baltic Dry Index (of bulk charter rates) as something like "a nuclear explosion."

Mr. Economou, an MIT educated self-made Greek millionaire is a practitioner of what the Attic Greeks called hubris. But he is also a brilliant strategic investor in sea-borne vessels who always seems to be ahead of the rest of the gang in Piraeus.

While obviously he is interested in protecting his own assets, perhaps on the backs of shareholders, he had begun to seriously prepare for the downturn in freight rates, by switching DRYS to long-term from day charters, roughly half completed; and by a strategic investment to acquire a Norwegian company renting out ultra-deep water drilling rigs.

The latter deal (as always with Mr. Economou) included his personal purchase of the Norway stock before the company big, front-running his shareholders for his own pocket. His fleet modernization since DRYS went public in 2005 have frequently involved the company buying ships that his family already owned. Self-dealing is the price you pay for going along with George Economou in the shipping business.

Because DRYS is incorporated in the Marshall Islands, do not expect much in the way of stockholder rights, despite a lot of pretty verbiage the company puts out.

Even after the fall coming with lower Chinese growth figures and Mr. Economou's latest ploy, the stock is up about 200 percent in the last 7 weeks. It fell to under $4 when an analyst who had long recommended DRYS downrated it for fear of financial collapse and a possible failure to meet loan covenants.

Disclosure: Vivian still owns 600 shares after selling half her stake at a much higher price level.

Comments

[Oneslip:]

It does not sound like a shareholder freindly co. Too many conflict of interests for the shareholders as George works hard on lining his pockets rather then the shareholders. As far as China, I feel the expectations are overblown on their future growth at this time. The world is coming to a crawl and China will not be an exception. There will always be a need to get commodities from one country to another but if the shipping rates are in the toilet there go any profit margins.

2008 Dec 12 09:17 AM

[Stephen Ros...:]

when the shipping industry is doing well, George gives himself and his privately owned Cardiff sweet heart deals on the back of Dryships' shareholders. When the industry collapses, he unloads his mistakes onto Dryships. As you alluded to, shareholders have no recourse with a company based in the Marshall Islands. George is the 21st century pirate and I would not suggest doing business with him.

2008 Dec 12 09:52 AM

[greentrader:]

It is a sad fact that the only way to punish George is to drive the stock as low as possible since he is a major holder. I wonder how he can muster the nerve to host conference calls with analysts. Would the SEC have any power to investigate these tranactions? At least make life miserable for the Greek gift giver! Greentrader

2008 Dec 12 10:08 AM

[ETF 'STER:]

The problem with punishing George is that if the stock drops too low, he could take it private or, as was done before, bankrupt the company and retain the assets at pennies on the dollar.

It looks like a win-win for George and a lose-lose for shareholders.

2008 Dec 12 12:29 PM

[jimmy46:]

FORBES MAG HAD A STORY ABOUT SIMILAR ACTIONS OF Economou 8 MONTHS AGO.

ASKED FOR COMMENT HE SAID:

IF YOU DON'T LIKE THE WAY I RUN THE COMPANY, SELL THE STOCK

2008 Dec 12 12:48 PM

[Chris B:]

Sorry, but if you buy a company that you know is corrupt and then lose money, you have nobody to blame but yourself.

If this information is the kind of thing that doesn't embarass DRYS to disclose, imagine what is going on behind the scenes. It's not like DRYS is the only option in the shipping industry. Find an ethical company to invest in or don't invest at all. Your money is safer in the mattress than in the hands of a known conman.

2008 Dec 12 02:22 PM

[ticker_trend:]

I dont see a problem with these transactions. DRYS market cap is spot on with what he would have payed for these ships. Had he not payed his other companies the deposits he LEGALLY owed them then the same people would be crying foul. Additionally he still has 1 year to purchase these ships and those retainings would still apply.

2008 Dec 12 05:21 PM

[poor&unempl...:]

Mr. Economou, an MIT educated self-made Greek millionaire is a practitioner of what the Attic Greeks called hubris. But he is also a brilliant strategic investor in sea-borne vessels who always seems to be ahead of the rest of the gang in Piraeus.
----------------------...

Whatever happened to Investigative Journalism. Anyone dealing with shipping finance in New York during late 80's and early 90's may have few stories to tell.

If you can not enforce US laws - beware! It will be easier to find a buyer for your Las Vegas Condo or CMO than selling bulk carrier.

2008 Dec 13 12:17 AM

[long_on_oil:]

I own DRYS and TRMD. If you are looking for a well managed old line great dividend payer, then look at TRMD (Torm). But beware, the government gets about 30% of the great dividend. TRMD is beaten down to a point where it is a real bargain. Remember, do your homework.

2008 Dec 13 08:42 AM

[notsosmart:]

he said it.you dont like it sell the stock. cant be more upfront than that. so if you have confidence that greek shipowners have your best interest at heart stay with them.

2008 Dec 13 02:39 PM

[auto44:]

where is the sec? As Warren Buffet would say, don't buy into a company where the bsses use stockholders for patsy. He also says if your in a poker game for twenty minutes and you don't know who the patsy is, your the patsy.

Merry Christmas, Bob

2008 Dec 13 02:53 PM

[PeteK:]

The so called Analysts are nothing but mostly bias individuals.
They created so much uncertainty sometimes make people
think that they have a mission or something.
DRYS have been good to share-holders. In good times, good
dividends. They work hard, and so far very successful in this
business. Unlike AIG, GM and many others, we can trust the Greek
workers and their loyalty. If you trust those analysts, you are in deep
trouble.

2008 Dec 25 12:20 PM

[Kimnkowtown:]

If George was an IPO, I'd snap him up. Best alternative, DRYS shares and a watchful eye.

2008 Dec 28 04:47 PM

[Michael W.:]

At the depressed level Dry Ships is selling at and the manner in which it trades I suspect that the stock is being accumulated by "smart money". The trading volume is totally amazing (often 30% of total outstanding shares traded daily). I suspect that there will be a tremendous short squeeze with any positive announcement. Get ready for a wild Roller Coaster ride, the Cyclone will seem tame by comparison.

Feb 24 01:38 AM