As the tanker world watched the clock count down towards and then pass the high-noon deadline Frontline imposed on DHT Holdings to respond to its latest takeover request, analysts at Clarksons Platou Securities expect Norwegian billionaire John Fredriksen to be disappointed once again.
While analysts have voiced support for the logic behind the transaction, Frode Morkedal and Herman Hildan of Clarksons Platou Securities expect Frontline to be rejected.
It is offering 0.80 of its own shares for every DHT share – unchanged from its previous proposal which did not include the 11 VLCCs from BW Group.
“In sum we do not expect the board of DHT to recommend the offer,” Morkedal and Hildan said in a report today.
“This is due to the new offer representing a lower offer than what appears to have been discussed on the sidelines by management in the two companies prior to the acquisition of 11 VLCCs from BW.”
Price pinch
Morkedal and Hildan say a deal would create an “undisputed leader in the tanker market”, but the analysts expect it to happen at a higher price as accepting the present offer “implicitly indicate that the acquisition of 11 VLCCs one month ago was value destructive”.
“A significant and well recognized industrial player like the BW Group willing to receive DHT shares at a slight premium to NAV likely makes the board of DHT more confident on the position taken with Frontline until now,” Morkedal and Hildan added.
TradeWinds reported last week, when the takeover reached the New York Supreme Court, that Frontline and DHT came within $30m of striking a deal, before $538m combination between DHT and the BW VLCC fleet was announced.
'Not that far off'
Morkedal and Hildan suggest a transaction could take place in the 0.82-0.911 per share range discussed between respective management teams. This would leave the two sides between $65m and $105m apart in negotiations, a 3% to 5% gap on a potential $2bn deal.
"In light of where we are in the cycle and this marginal amount the spread represents it would be disappointing not to see Frontline taking the undisputed role as the number one tanker company globally," the analysts said in an email to TradeWinds.
"We 100% support the transaction and hope to see the price required to make it happen, which is not that far off."
Premium disadvantage
Ben Nolan of Stifel agreed that DHT management was again likely to decline the takeover attempt.
He highlighted the relative value of Frontline shares, which closed at a 49% premium to its $4.53 per share net asset value yesterday, as an obstacle. “DHT shareholders would have to assume the NAV disparity were to hold over time or seek a higher conversion ratio,” he said.
However, Nolan believes a higher bid is unlikely. “While we would love to see larger tanker companies with even better access to capital ideally resulting in more rational behavior, unless Frontline were to issue equity in the public market, and changes the offer to some combination of equity and cash, we expects the price needed by DHT to be beyond Frontline's willingness to pay as they could acquire vessels in the public market more cheaply,” he said.
Deal 'makes sense'
DNB Markets analysts led by Nicolay Dyvik say BW could end up with a 13% stake in Frontline if the deal goes through.
“Whilst the Frontline shareholders would benefit from a 9% increase in the NAV if the merger goes through, the DHT shareholders (and also Frontline shareholders) would benefit from being a shareholder in the largest public tanker company by size, market cap and liquidity,” they said.
“DHT shareholders would also benefit from lower G&A cost and profit from synergy values in addition to Frontlines superior access to debt and equity capital markets increasing cash flows.”
Today’s countdown is the latest moment of intrigue in a takeover battle that extends back to March last year, when Frontline first made a move for DHT – which Arctic Securities today described as “the prettiest girl in the room”.
Greg Lewis of Credit-Suisse notes that Frontline’s fourth offer since January is the first to petition for a vote of DHT shareholders.
“We thought the deal made sense when first proposed in January and view the tie up of these two industry leaders as a positive for shareholders on both sides of the fence assuming its stock transaction - asset prices are ~35% below mid-cycle levels after all,” he said.
"The enlarged company would have a 7% share of the global VLCC market, the analyst calculates. “This deal makes sense on many levels but would not create pricing power in the tanker market,” he added.
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