Related party transactions have become a dirty term in an age of corporate governance scrutiny, but one such controversial deal within the Scorpio Group seems to have turned out fairly well.
A $100m bet on Scorpio Tankers stock by the former Scorpio Bulkers — now known as Eneti — has yielded a 65% total return after nearly four years, according to an analysis from group investor relations head James Doyle.
The result became official this week when Eneti announced it had sold its entire remaining holding of Scorpio Tankers stock for $83.3m, or $38.65 per share.
The story is a little complicated, but it starts in October 2018.
Scorpio Tankers was in need of liquidity in a trough market for product tankers, so it sold $300m-worth of stock at a deep discount to its net asset value (NAV).
Third-party investors took in $200m of the deal at $1.85 per share. But the controversial piece was the $100m chunk taken at the same price by Scorpio Bulkers, the sister public company.
The Scorpio Group quickly came under criticism from some equity analysts and other finance professionals on charges of “lax governance”.
The critics were just as quickly rebutted by Scorpio president Robert Bugbee, who said the idea had been initiated by Scorpio Bulkers’ top shareholders keen on a play for tanker sector recovery.
‘Silly people’
“It’s very important that they were consulted before the deal happened,” Bugbee jabbed at the time. “They know much more about their own desires than the silly people in the corridors do.”
But by May 2020, it was Scorpio Bulkers that needed some help.
Covid-19 had spread from China and sent a chill through the dry bulk market on demand destruction. Scorpio Bulkers reacted by selling 2.25m Scorpio Tankers shares out of its 4.4m holding, pulling in $43m to boost liquidity.
At that point, the investment did not look great. The sale was for an average price of about $19 per share, just slightly above the $18.50 Scorpio Bulkers paid when giving effect to a 10-for-1 reverse shares split carried out by Scorpio Tankers in January 2019.
A wind shift
The dry bulk market was showing the first signs of an earlier-than-expected recovery by August 2020, but Scorpio Bulkers chose to move in a different direction: towards the offshore wind sector through the piecemeal sale of its entire bulkers fleet. With that came the name change to Eneti.
Amid the big transition, Eneti held onto the Scorpio Tankers shares, which have been appreciating throughout 2020, with the clean product market at long last staging a rates recovery.
Scorpio Tankers’ shares have been shipping’s top performer year to date, nearly tripling from a $13.11 price on 3 January.
Eneti struck gold this time, bringing in a 118% total return on the remaining cache of shares when $2 in dividends over the holding period are counted, Doyle said.
And this time around, the reaction from equity analysts was more positive.
“While related-party transactions are a governance disaster, in this case, the outcome was very favourable for Eneti and fits into Scorpio’s capital return programme,” acknowledged Stifel analyst Ben Nolan.
Eneti probably does not need the cash to carry out financing related to its two WTIV newbuildings at South Korea’s Daewoo Shipbuilding and Marine Engineering but, as Nolan put it, “it doesn’t hurt and could open the door for further incremental growth in offshore wind equipment”.
Meanwhile, Scorpio Tankers was the buyer of 1.3m of the shares held by Eneti for a total $50m, and opted to retire them as its stock is trading below estimates of NAV.
“Reducing share count by 2% while at the same time increasing free float should also be a benefit to STNG shareholders,” Nolan wrote, using Scorpio Tankers’ ticker symbol.
Were the critics “silly” after all? Nolan may have put a bow on the episode with the headline of his client note: “It’s a win-win-win for Eneti, Scorpio and investors.”
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