Navios Maritime Holdings: Acquisition By Navios Maritime Partners Likely The Endgame

Summary

• Company's efforts to address its short-term debt issues likely getting support from CEO and Chairman Angeliki Frangou.
• While remaining a standalone entity has become an option, a merger with former subsidiary Navios Maritime Partners looks like the most likely outcome at this point.
• Outlining a hypothetical acquisition scenario. Depending on Ms. Frangou's course of action, dilution for common unitholders of Navios Maritime Partners could be substantial.
• Discussing the overhang from a recent intercompany debt-for-equity exchange transaction. Ongoing stock sales into the open market have caused Navios Maritime Holdings' shares to underperform dry bulk peers by a wide margin since the beginning of the month.
• Timing will be of the essence for a potential rebound trade in the shares with a potential merger with Navios Maritime Partners in which Ms. Frangou holds all the aces likely still months away.

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Four weeks ago, I was surprised to see Navios Maritime Partners (NYSE:NMM) or "Navios Partners" bailing out financially distressed sister company Navios Maritime Acquisition (NNA) or "Navios Acquisition".

While the merger consideration will be all stock, Navios Partners was required to inject $150 million in cash against newly issued shares into Navios Acquisition to help redeem the company's outstanding Ship Mortgage Notes and provide a $45 million interim working capital facility to the ailing tanker company.

Apparently, in preparation for the transaction, Navios Partners raised $176.8 in net proceeds from aggressively selling new units into the open market at a fraction of net asset value between April 9 and August 25.

Personally, I would have expected the funds to be used for addressing the debt issues of former parent and general partner Navios Maritime Holdings (NYSE:NM) or "Navios Holdings" but obviously CEO and Chairwoman Angeliki Frangou isn't willing to give up on key parts of her shipping empire.

With Ms. Frangou not hesitating to save her money-losing tanker subsidiary, it seems pretty clear that she's also working on a solution for Navios Holdings, particularly as the former parent's core dry bulk carrier business is currently enjoying very strong market conditions.

Navios Holdings also owns a 63.8% stake in Navios South American Logistics or "Navios Logistics", a heavily indebted subsidiary which operates port terminals and barges in the Hidrovia Region of South America. The company also engages in cabotage trades along the eastern coast of South America.

The short-term debt issues at Navios Holdings mostly relate to two bonds:

1. $456 million in 7.375% First Priority Ship Mortgage Notes due in January 2022 (the "2022 Notes")
2. $165 million in 11.25% Senior Secured Notes due in August 2022 (the "Senior Secured Notes")

With financial support from Navios Shipmanagement Holdings or "Navios Management", an entity controlled by Ms. Frangou, Navios Holdings recently eliminated the obligation to make a springing maturity offer for the Senior Secured Notes.

As of June 30, the company owed approximately $182 million to Navios Management thus providing Ms. Frangou the chance to grab a large stake in Navios Partners in a potential merger with Navios Holdings.

Please note that both bond issues as well as the $500 million in 10.75% Navios Logistics Senior Notes due 2025 are subject to change of control provisions which would require the company to repurchase both the 2022 Notes as well as the Senior Secured Notes at 101% and the Navios Logistics Senior Notes at 100% of face value.

Navios Holdings also owes an estimated $85 million under its outstanding preferred stock (NM.PG and NM.PH) including unpaid dividends. Prices of the company's preferred shares have soared after the merger announcement of Navios Partners and Navios Acquisition as investors are betting on Angeliki Frangou to bail out Navios Holdings one way or another.

The number of outstanding shares in Navios Holdings recently increased from 15.9 million to 25.2 million after the company agreed to an intercompany debt-for-equity exchange with Grimaud Ventures S.A. or "Grimaud", a subsidiary of Navios Logistics. Subsequently, Grimaud sold the majority of these shares (approximately 6.4 million) into the open market with some of the proceeds used to redeem an additional $20 million under its Senior Secured Notes last week.

I fully expect Grimaud to sell the remaining 2.9 million shares over the next couple of weeks which could result in the outstanding amount under the Senior Secured Notes being reduced to $150 million or even less.

Using the proposal for the Navios Partners' merger with Navios Acquisition as a blueprint and assuming Navios Logistics to remain part of Navios Holdings, here's a hypothetical scenario for a Navios Holdings acquisition by Navios Partners:

1. Exchange rate of 0.25 Navios Partners common units per Navios Holdings common share.
2. Senior Secured Notes having been paid down to $150 million ahead of the merger announcement.
3. Navios Management injecting another $250 million into Navios Holdings to redeem the remaining $150 million in Senior Secured Notes as well as $100 million under the 2022 Notes in exchange for new Navios Holdings shares.
4. New shares issued to Navios Management being converted into Navios Partners common units at the above stated exchange rate.
5. $50 million in existing Navios Holdings debt owed to Navios Management being converted into new common shares and subsequently exchanged into Navios Partners common units at the above stated rate.
6. Remainder of 2022 Notes (approximately $350 million) being refinanced.
7. Navios Logistics Senior Notes to remain outstanding or being refinanced.
8. Navios Holdings Preferred Stock to remain outstanding.

At a Navios Partners unit price of $28.00, Navios Holdings common equity holders would receive a per-share value of $7.00.

With Navios Management injecting cash against new shares and converting parts of its existing loans valued at the merger consideration, Navios Holdings would issue approximately 42.9 million new common shares to Navios Management thus bringing the total number of outstanding shares to 68.1 million.

The conversion into Navios Partners' common equity would result in Navios Management being allocated 10.7 million common units.

Adding the Navios Partners units to be received from the upcoming merger with Navios Acquisition and considering her existing holdings in Navios Partners and the general partner units as well as the units to be received for her existing stake in Navios Holdings, Angeliki Frangou would directly or indirectly control approximately 13.7 million Navios Partners units or slightly above 30% under this scenario.

Source: Company's SEC-Filings, Author's Calculations

With Navios Partners currently trading at an estimated 70% discount to net asset value ("NAV"), Angeliki Frangou would obviously make a great deal under the above discussed scenario. Even if Navios Management should not have the required $250 million in cash available, lining up some sort of bridge financing shouldn't be an issue for Ms. Frangou.

That said, Navios Holdings might not necessarily end up being acquired by Navios Partners. Should current market conditions take hold, the company might be able to repay the remaining Senior Secured Notes and come up with the $100 million likely required to refinance the remainder of the 2022 Notes with a mix of internally generated cash flows, the above discussed sale of the remaining shares held by Grimaud and some additional vessel sales to Navios Partners.

A sale of the majority stake in Navios Logistics to Ms. Frangou appears like another viable path for Navios Holdings to deal with its short-term debt issues and remain a standalone entity. In addition, a sale would also remove the $500 million Navios Logistics high-yield bond from the balance sheet.

But at least in my opinion, the endgame for Navios Holdings will likely be an acquisition by Navios Partners as the move would provide a chance to refinance Navios Holdings' debt at materially improved terms and potentially enable Ms. Frangou to increase management fees for the Navios Holdings vessels to the higher level currently paid by Navios Partners.

But what would be a fair price for Navios Holdings?

Fellow contributor Nick First estimated a NAV of $15 per share in his article "Navios Holdings Buyout Could Unlock Massive Value" published on June 4 which he based on numbers provided by Clarksons Plateau Securities in April.

Since then, dry bulk charter rates and asset values have increased even further but investors need to keep in mind the above discussed 9.3 million shares recently issued to Grimaud Ventures valued at $6.72 per share of which at least 6.4 million have subsequently been sold into the market at a considerably lower average price.

Much will depend on the value ultimately assigned to the majority stake in Navios Logistics in a potential merger with Navios Partners but even if we assume a current NAV of $12 per share for Navios Holdings this doesn't mean that investors would receive consideration anywhere close to that number in a potential merger with Navios Partners trading at a massive discount to NAV itself.

That said, according to comments made by fellow contributor Joeri van der Sman, Navios Partners appears to have paid a price pretty close to NAV for Navios Acquisition but looking at the current Navios Holdings share price, I certainly do not expect Navios Partners to offer a 200% premium in a potential merger proposal.

On the flip side, the stock price of Navios Holdings is currently depressed by the ongoing liquidation of the Grimaud stake and might very well rebound once the sale has been completed.

With the overhang likely gone soon and current market conditions still strong despite some well-founded concerns regarding Chinese iron ore demand, I could imagine Navios Holdings shares rebounding to the $6 level achieved in the week following the Navios Acquisition merger announcement.

Of course, this would also require some constructive action in shares of potential merger partner Navios Partners given the assumption of an all-stock deal.

Lastly, there's still a chance that Angeliki Frangou won't support Navios Holdings in the company's efforts to restructure its short-term debt obligations and instead focus on the integration of the Navios Acquisition tanker fleet but at least in my opinion, the proposed merger of Navios Acquisition and Navios Partners provides a decent blueprint for a similar bail-out of Navios Holdings in the not too distant future.

Bottom Line:

With a bankruptcy filing of Navios Holdings increasingly unlikely, ongoing strong dry bulk charter market conditions and the current overhang from the Grimaud stake liquidation likely gone soon, shares of Navios Holdings might offer some decent rebound potential but this will at least to some extent depend on the overall direction of dry bulk charter rates and the unit price performance of potential acquirer Navios Partners.

Since the beginning of September, Navios Holdings' shares are down 35% while Navios Partners' common units have lost only 11% with the underperformance mostly attributable to the ongoing stock sales by Grimaud.

Timing will be of the essence for investors to squeeze out some gains from this rebound trade idea while a potential merger with Navios Partners might still be a couple of months away.

In sum, Angeliki Frangou appears to hold all the aces here. If desired, she could grab a material stake in Navios Maritime Partners at a fraction of net asset value by facilitating a potential purchase of Navios Holdings in a way similar to the proposed merger with Navios Acquisition.

Market participants appear to be wary of further actions by Angeliki Frangou to the detriment of Navios Partners common equityholders as the units continue to trade at an estimated 70%+ discount to net asset value.

Should the Navios Holdings situation be addressed in a way that would align Ms. Frangou more with Navios Partners common equityholders without massive additional dilution, the company's valuation might finally catch up to leading industry peers from the likes of Star Bulk Carriers (SBLK), Genco Shipping & Trading (GNK), Golden Ocean Group (GOGL) and Eagle Bulk Shipping (EGLE).

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, but may initiate a beneficial Long position through a purchase of the stock, or the purchase of call options or similar derivatives in NM over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.