While perfect arbitrage opportunities are rare, often times there are "arbitrage-like" opportunities that afford investors an opportunity to gain value at a severely reduced risk or discount. Such appears to be the case with Ocean Rig (ORIG) and DryShips (DRYS), since Ocean Rig is majority owned by DryShips.
Both Ocean Rig and DryShips are publicly traded companies so it's easy to look up the value the market assigns to each. Ocean Rig is majority owned by DryShips, so accounting rules state it must report the combined operations together. This means DryShips financials are reported, it reports the Ocean Rig results mixed in with its dry-shipping and tanker business as if all of it were one company. This can be a bit confusing though it's almost irrelevant to this article.
Here's the deal. DryShips owns 78,301,755 shares of Ocean Rig. At the time of this writing, Ocean Rig trades at lucky $17.77 per share. This is a market value of around $1.391 billion. Is it reasonable to use the share price of Ocean Rig to calculate the value of all of the shares? History says yes. DryShips has sold bulk amounts of shares before in private transactions that were within range of the trading price of Ocean Rig. For example from its filing:
On April 17, 2012, DryShips Inc. completed the sale of an aggregate of 11,500,000 common shares of Ocean Rig UDW owned by DryShips Inc. in a public offering amounting to net proceeds to us of $180.5 million. Companies affiliated with our Chairman, President and Chief Executive Officer purchased a total of 2,185,000 common shares of Ocean Rig UDW from DryShips at the public offering price of $16.25 per share.
As of March 22, 2013, we had 403,762,244 common shares outstanding and we owned 78,301,755 shares, or 59.4%, of Ocean Rig UDW's outstanding common shares.
On February 14, 2013, DryShips Inc. completed the sale of an aggregate of 7,500,000 common shares of Ocean Rig UDW owned by DryShips Inc. in a public offering amounting to net proceeds to us of $123.2 million.
Meanwhile, despite DryShips holding $1.391 billion worth of value in Ocean Rig, the market cap of DryShips is only $1.10 billion. This means the market values the dry-shipping and tanker business at a negative nearly $300 million value. This is a value worse than zero! If you believe that its dry-shipping and tanker business has any positive value whatsoever greater than zero, then by selling Ocean Rig and buying DryShips you will own essentially a larger percentage of Ocean Rig dollar-for-dollar while getting the dry-shipping and tanker business for free.
Here's an example. As of June 30, 2013, Blackstone Group L.P. (BX) owned 1,300,576 shares of Ocean Rig or almost 1% of the company for a total value of around $23 million. Blackstone Group could sell its Ocean Rig shares and take the cash. It could then buy DryShips shares at the current price of $2.72, and it would end up owning around 8.5 million shares of DryShips. Blackstone Group would then own 2.1% of DryShips. Since DryShips owns 59.4% of Ocean Rig, Blackstone Group would essentially own 2.1% of 59.4% or 1.25%. Through this exercise Blackstone Group could potentially increase its ownership of Ocean Rig from 1% to 1.25% plus get the shipping business for free. 1/4 of 1% more may not sound like a lot, but it's 25% more ownership to Blackstone. Not a bad deal.
The risk here is if the dry-shipping and tanker business not only proves to be worthless over time, but actually becomes a drag on the rest of the assets, literally having negative worth. If you believe that not to be the case because you believe in a recovery in shipping, then the play is simple: sell Ocean Rig and buy DryShips with the same money.
On that note, maybe DryShips should keep on selling its Ocean Rig shares and using the proceeds to buy back its own DryShips shares. If successful, as long as the market gives some value to the dry-shipping and tanker business, the share price would rise significantly.