Cosco Vs. Frontline+DHT

by: Lloyd's List


John Fredrisken makes unsolicited offer for DHT.

Hot debates over DHT's actual NAT.

World’s largest tanker firms vying for investors.

THE US has the world's most active capital markets for shipping. But the last great consolidation of tanker firms did not occur there.

In 2016, Beijing decided to merge Cosco Group and China Shipping Group, two Chinese state-owned shipping firms, to create the world's largest shipping conglomerate in terms of fleet size.

With the birth of China Cosco Shipping, China Shipping Development (OTC:CITAF) (OTC:CITAY), a CSG subsidiary, took over Dalian Ocean Shipping, a Cosco subsidiary, to become Cosco Shipping Energy Transportation ((1138:HKG)).

It was mainly the sheer state will, rather than market forces, that resulted in the world's largest listed tanker firm. Shanghai- and Hong Kong-listed Cosco Shipping Energy owns 158 tankers with almost 20m dwt, including newbuilding ships, according to Clarksons. Its market capitalization has reached approximately $3.6bn as of Wednesday

Now, let's shift our attention back to the New York Stock Exchange. Last Friday, John Fredriksen's Frontline (NYSE:FRO) made an unsolicited offer to acquire the whole of DHT Holdings (NYSE:DHT) in an all-share deal. The ambition is clear: such an offer is aimed to "create the largest public tanker company by fleet size, market cap and trading liquidity", Frontline said in a statement.

The merged entity, if realized, will have a fleet of 40 very large crude carriers, 17 suezmaxes, five aframaxes, 14 long range two and three medium range product carriers on the water when vessels under commercial management are included. Taking into account the orderbooks, its owned fleet's carrying capacity would reach nearly 15m dwt.

The overarching goal of both consolidations is to strengthen the economies of scale. By doing so, the Chinese government hopes to improve operational efficiency of state-owned enterprises; Mr. Fredriksen seeks to position himself better for the next up cycle.

However, they are also very different types of deals.

In China, the actual dealmakers were the State Council's bureaucrats. The discussions took years, but once the details were ironed out the new entity quickly emerged from a series of intra-group transactions. The general investing public had very little say.

Don't get it wrong - all the deals involving Cosco Shipping Energy meet the rather rigorous regulatory requirements of Hong Kong's stock exchange. Detailed public disclosures came out in time. It was just that investors had to rely on their gauge of Beijing's political will to make sound decisions - and not many had good access to it.

In contrast, everything seems to break open on the New York Stock Exchange. The two companies had to announce that Frontline offered 0.725 of one of its shares for each share of DHT. Based on Friday's closing price, the offer valued DHT's share price at $5.09.

The pricing could be too high or too low, based on one's view of DHT's net asset value. Stifel analysts said it "makes sense" with its previous net asset value estimate of DHT at $4.71 per share. Clarkson Platou, which pegged DHT's NAV at $5.40 per share, said a DHT board recommendation for the merger would be "surprising".

On the other hand, Arctic Securities reckoned the tie-up would be good for DHT shareholders while putting the NAV at nearly $4.50 per share (though the brokerage had assessed the valuation at $5.20 right before the offer was announced, then made the revision for unknown reasons).

DHT immediately adopted a poison pill approach, which is aimed at preventing the pursuer from further increasing its share ownership and discouraging a third suitor from acquiring more than 10% of its stock. Its board of four independent directors is still evaluating the takeover proposal. In its earnings call, the company's management assessed its NAV at $5.70 per share, including $0.40 from its time charters.

Wells Fargo ranks DHT near the top of its corporate governance scoreboard. More often than not, investors will have sufficient information to make their own calls on whether the pricing is high enough. Their positions might turn out to be wrong and costly, but at least they are not kept in the dark.

Money has always flowed more easily across national boundaries than human beings. Wall Street dealers can trade shares in Asian markets without much hassle nowadays, and vice versa.

The Chinese tanker giant is Beijing's jewel in the crown of Cosco's shipping empire, with superior access to cargoes shipped by China's state energy firms, some of the world's largest charterers.

If looking into a future where cross-border trading becomes even more prevalent, what would eventually make the proposed merged entity of Frontline and DHT more attractive for investors might not be extra tonnage, but transparency and prudent operation.

(Note: DHT's board has rejected the Frontline bid on February 6. The market is waiting for Frontline's next move, if there is one.)

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.

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