The BW Group has swooped on the 39.1% stake in Navigator Holdings held by WL Ross & Co in a $197m deal, paying $9 per share and a 9.4% premium to the recent share price.
Andreas Sohmen-Pao-led BW Group, whose businesses include BW LPG, has therefore secured another big acquisition in the gas business after seeing mixed results in the sector in 2019.
This latest move follows the one BW made last year when it executed a $120m takeover of 39-ship Epic Gas while failing to convince New York-listed Dorian LPG that a business combination was warranted.
BW is now acquiring the interests of the company founded by master US investor and current US commerce secretary Wilbur L Ross, who subsequently sold the business to Invesco.
Stifel equity analyst Ben Nolan gave the deal a quick thumbs up. While he noted that the $9 price is only a tiny premium over Monday's $8.94 close — and a discount to the trading level on Tuesday as shares surged 9.6% to $9.80 — he said other factors loomed as positives.
"We expect this transaction is a positive for current NVGS [Navigator] holders for several reasons," Nolan wrote. "It removes the overhang of a large seller of NVGS shares, it sets a potential path for a takeover of [Navigator], and it validates the investment opportunity as BW is the largest LPG shipping company in the world."
Leaders of the companies involved in the transactions also weighed in.
"We would like to thank WL Ross for its many years of investment and support of the company and we are pleased and very much look forward to the new support of BW Group as we focus on executing our strategy to drive meaningful long-term growth," Navigator chairman David Butters said in a statement on Tuesday.
Hal Malone, who heads transportation for WL Ross, said Navigator had been a sector leader since the group's initial investment.
"We think the company's future is bright, and this long-term investment from BW Group will position the company to realise its potential," Malone said.
Sohmen-Pao, who is one of the industry's most ambitious consolidators, also cited Navigator's prominent place in the LPG sector.
"We look forward to being a supportive shareholder as Navigator continues to pursue its strategic goals," he said.
Nolan said the need for WL Ross/Invesco to exit its investment had represented an overhang on the share price.
"While there remains one large holder, there is no ticking clock on the investment for BW as was the case for the Invesco private equity fund," he told clients. "Thus, the ever-present risk of a secondary share offering that kept some investors sidelined should be gone or significantly reduced."
The analyst said it was an open question whether BW Group would choose to remain a passive investor or move to take over the New York-listed owner.
"Given their track record of opportunistic investing, the position in [Navigator] could stay at a minority level, or if the company wants to roll up [Navigator], there is no longer a large shareholder to contend with," Nolan said.
One of the strongest owners
Fearnley Securities estimates a net asset value of $13 per share for Navigator.
"Overall, we consider the transaction a positive for Navigator, first and foremost through getting one of strongest owners in shipping on board, which is likely to place more attention on the equity/bond as well as potentially lowering Navigator's cost cost of capital," the investment bank said.
Fearnley continues to highlight the secured NOK 600m ($69m) bond due in 2023, which has strong asset backing from a share pledge in Navigator's US ethylene terminal and four ethylene carriers.
"Applying conservative assumptions of eight times enterprise value/Ebitda and $20m annual Ebitda leaves $85m of equity interest to the bondholders, which covers the outstanding amount under the bond alone," Fearnley said.
The bank estimates a value of $96m for the collateral vessels and therefore a loan to value between 26% and 36%, depending on valuation assumptions for the equity interest in the terminal.
"In addition to strong asset backing, five to seven years take-or-pay contracts for 94% of the terminal capacity ensures strong earnings visibility," Fearnley said.
"This combination offers a highly attractive risk/reward for a bond that carries a circa 6% coupon," analysts Espen Landmark Fjermestad, Peder Nicolai Jarlsby and Ulrik Mannhart said.
Market failing to ignite
On the market side, the midsize/ethylene segment has failed to ignite in the same way as the VLGC sector, though midsize rates have trended upwards in recent weeks, Fearnley added.
"We continue to see a positive market outlook for ethylene and petchem, though Covid-19 has likely pushed a material recovery somewhat out in time," the analysts said.
Navigator operates a fleet of 38 vessels with an average age of just over nine years, serving customers in the LPG, petrochemicals and ammonia markets.
It had a market capitalisation of $548m today after news of the deal sent shares up.
BW Group's payment of a 9.4% premium is based on the price average of the past 10 trading days.
Oslo-traded BW LPG operates 46 VLGCs and has a market capitalisation around $950m.
