Now that Greek container ship owner Danaos is essentially blocked from further accumulation of Eagle Bulk Shipping stock, one investor is publicly suggesting the company reverse course.
Investor/commentator J Mintzmyer of Value Investor’s Edge is calling on Danaos principal John Coustas to consider options more friendly to all his shareholders, including potentially offering the Eagle Bulk shares to Danaos holders through a special dividend.
Mintzmyer made his appeal on Monday in an open letter to Danaos management.
While he said Danaos’ move to buy what is today a 16% stake in Eagle Bulk for a current value of some $75m, done at roughly a 35% discount to Eagle Bulk’s net asset value (NAV), is an “excellent investment”, he complained on other grounds.
“This transaction was arguably not in the best interests of all DAC shareholders,” Mintzmyer wrote, using Danaos’ ticker symbol on the New York Stock Exchange.
The investor argues that Danaos’ best option is to buy back its own shares, because they are even more undervalued than those of Eagle Bulk: they trade at 55% of what he calls “reasonable value” compared to 65% to 70% for Eagle Bulk.
But with Danaos now all but denied any chance to own more than its current 16% in the Stamford, Connecticut-based dry owner through a “poison pill” introduced into its bylaws, another option would be to share the Eagle Bulk wealth with Danaos common holders.
Each holder of one Danaos share would receive 0.078 Eagle shares, worth about $3.60, and could decide whether to keep it or sell it.
“The problem here is that investors in Danaos did not sign up to participate in some sort of ‘maritime hedge fund’,” Mintzmyer argues.
“Investors in DAC are either attracted by the long-term container ship business and platform, or they have bought shares because they saw $120 of value trading at $55 to $60 per share.”
The suggestion would allow Coustas to retain his personal holding in Eagle Bulk, as he owned about 44.5% of Danaos stock at the most recent filing in March.
From the Eagle Bulk side
The pressure exerted on Danaos comes as analysts and investors are also digesting the recent flurry of activity from the Eagle Bulk side.
Just before adopting the anti-takeover language last week, Eagle Bulk splashed out $219m to buy out the shareholding of its largest investor, private equity’s Oaktree Capital Management. This also helped stymie Danaos as it removed the huge block of shares — 28% of its stock — from the market.
Analyst reviews of the Eagle Bulk strategy have thus far been mostly positive, although there are some concerns Oaktree received a sweetheart deal.
“Pros appear to outweigh cons,” said analyst Poe Fratt of Alliance Global Partners.
Eagle Bulk paid Oaktree a premium of almost 20% from its last trade at $59 per share, but the transaction also came below the owner’s estimated NAV in the high-$60s.
“While we acknowledge the near-term challenges, especially macro headwinds, and the potential for a backlash against the large buyback at a significant premium, we remain confident that the management team can enhance shareholder value through a consistent commercial strategy,” Fratt said in maintaining a “buy” rating at a $75 price target.
Stifel analyst Ben Nolan also was positive on the deal, writing: “We view this as a positive as the purchase price was below NAV, and should be easily funded given the current balance sheet strength, and long-term accretion to shares.”
Both researchers noted that Eagle Bulk’s trading has been hampered, even in peak markets, but the “overhang” created by anticipation Oaktree would sell its shares, and this negative has now been removed.
Mintzmyer was strongest in a critique of the deal, telling TradeWinds: “There is a rising sentiment from retail investors that this deal screwed them by favouring a major shareholder. I believe EGLE could significantly improve optics by putting forth a public tender offer at $58.”
Eagle Bulk shares were trading down more than 4% on Monday, worse than its dry peers, leading some financial observers to speculate there might already be some Danaos selling.
Danaos was trading flat at just above $61.
