John Fredriksen, shipping’s ultimate deal maker, has struck again with a $675m deal to acquire up to 14 suezmax tankers from Trafigura.
The deal will see Frontline acquire an initial 10 scrubber-fitted tankers all built in 2019 at Korean shipyards with an option to buy four more.
The tanker giant will fund the deal with a combination of 16m new shares at an agreed price of $8 each and a cash amount ranging from $538m to $547m.
The deal will see Trafigura own an 8.48% stake in Frontline.
Frontline said the closing of the acquisition is targeted as soon as “practically possible” with 15 November 2019 being the earliest and 15 March 2020 being the latest dates.
To obtain earlier exposure to the vessels, Frontline said it has agreed to time charter all the ten vessels from Trafigura until closing of the acquisition at a rate of $23,000 per day.
It will then charter five of these vessels back to Trafigura on three-year time charters at a daily base rate of $28,400 with a 50% profit share above the base rate.
We see significant upside potential in our equity investment in Frontline
Rasmus Bach Nielsen
Frontline has two separate options to acquire two plus two additional suezmaxes which are all 2019 Chinese built and fitted with exhaust gas cleaning systems.
The options expire on the 12 and 14 September 2019 respectively and are structured in a similar way to that of the ten firm vessels.
Frontline said it is in discussions with leading lending banks who have indicated an interest in providing financing for the acquisition.
John Fredriksen’s Hemen Holding, Frontline’s largest shareholder, has offered a $547m commitment at closing of the acquisition through a three year facility at terms described as “attractive”.
“This transaction is backed by our strong belief in tanker market fundamentals and reflects our ability to act swiftly and decisively with the support of our largest shareholder,” said Frontline chief executive Robert Hvide Macleod.
“We welcome Trafigura as a strategic shareholder and believe the acquisition reflects the value Trafigura ascribes to our equity.
“In addition to Trafigura being a longstanding customer of Frontline, we now have a unique partnership that we believe will lead to further synergies going forward.”
Macleod said the structure of the transaction creates an “immediate impact to our earnings at a time when we expect freight rates to increase significantly”.
Rasmus Bach Nielsen, global head of wet freight at Trafigura, said the deal marked the continuation of an approach that has “long been integral to Trafigura’s strategy, namely, investing in infrastructure assets in support of commodity flows”.
He said collaborating with a “market leader like Frontline” enables it to maintain sufficient access to those assets for its trading business.
Trafigura trades around 5.5m barrels per day of oil and petroleum products globally and says it has “a market-leading position in strategic commodity flows, notably as a leading exporter of crude oil from the US”.
“The significant increase in U.S export volumes, an aging global fleet, particularly of crude vessels, and a historically low orderbook all support our constructive outlook for the sector,” said Nielsen.
“We therefore see significant upside potential in our equity investment in Frontline, a company with vast commercial scale and capabilities with whom we already enjoy a close working relationship.”
Following the acquisition of the 10 suezmax tankers from Trafigura, Frontline’s fleet will consist of 75 vessels, including newbuildings, with an aggregate carrying capacity of 14.2mdwt and an average age of 3.7 years.
Seward & Kissel represented Frontline with respect to US law matters.
Analysts back deal
Clarkson Platou Securities said the deal adds up to between $666m and $675m for the ships.
With early charter costs added in, it estimates the total price at $678m if the vessels are delivered by 15 November.
"All vessels are scrubber equipped and the price of average $68m per vessel looks attractive in our view as it is in line with Clarksons’ resale quote of a vessel without scrubber of $67m," it said.
It added: "The dilution in terms of number of shares is 4% less than if they had issued shares at NAV, hence this immediately lifts the NAV valuation by 4% to $5.63 per share."
But with the value of the scrubber added in, the NAV could increase 7%, analayst Frode Morkedal said.
In terms of the deal financing, he said: "Even if we assume 7% interest and 20 year repayment profile and therefore breakeven of $26,000 per day, we believe the vessels should be immediately accretive to EPS with rates expected to comfortably average above this from 4Q19 onwards."
Arctic Securities said its estimate of the price per ship is between $66.5m and $67.4m per vessel, which is in line with current market values.
"The tanker market has started to recover and we are rapidly approaching the strong season," it added.
"We find both the near- and long-term prospects highly compelling and expect tankers, and particularly modern vessels, to benefit substantially from the upcoming IMO 2020 regulations.
"As such, we see the timing of adding high-end tankers with scrubbers at current prices very compelling just as the market starts to move, as see today’s announcement as an attractive deal ahead of the market recovery."
J Mintzmyer of Value Investor's Edge said the transaction should be "super accretive" because Frontline is "financing with huge leverage (limited equity required), plus the 19% equity contribution is done at over 160% NAV."
"If rates are strong, Frontline is going to make a killing on this acquisition."
He added Trafigura is also listed as the owner of four LR2 product tankers and four VLGCs, and posed the question: "Will Frontline step up to acquire the LR2s as well?"
And he added: "What about Fredriksen-backed Avance Gas? Will they take the VLGCs? It remains unclear at this time, but this is certainly worth watching."
