A Dry Bulk Fire Sale

If you follow our coverage of Chinese bigwigs like PetroChina (NYSE: PTR) and Aluminum Corp of China Ltd. (NYSE: ACH), you may know that there's often an even bigger bigwig behind the scenes -- that is, a fully state-owned parent company.

Often, these parent companies sell assets to their publicly traded subsidiaries at sweetheart rates. It's basically a wash for the parent, when shares of the subsidiary soar on the announcement of such a deal. A recent occurrence in the dry bulk shipping sector is perhaps the most egregious to date.

China COSCO Holdings, one of the world's largest container shipping companies, has decided to bulk up by buying the dry bulk assets of its parent. These are the vessels that transport hot commodities like iron ore, coal, and grains. In total, China COSCO is picking up a fleet of 423 ships with 33.2 million deadweight tons (dwt) of capacity. In contrast, DryShips (Nasdaq: DRYS), the largest dry bulk shipper listed on a U.S. exchange, is about one-tenth the size.

Let's attempt to place a valuation on this target, which is the largest dry bulk fleet in the world.

A slew of dry bulk shippers are valued at around $900/dwt, including announced fleet additions. From DryShips to Excel Maritime (NYSE: EXM) to Diana Shipping (NYSE: DSX), you see the same multiple over and over. Too simplistic, you say? You think anyone dares to run a discounted cash flow valuation on these hyper-volatile shippers? I don't -- the inputs are too unreliable. It's much easier to think in terms of replacement cost, which is closely related to tonnage and fleet age.

Using this rule of thumb, I would guess that China COSCO paid more than $30 billion. But that estimate doesn't take into account COSCO's fleet age or composition. About 200 of these ships are old, small Handymax and Handysize vessels -- not big, bulky babies.

Consider a recent transaction by Eagle Bulk Shipping (Nasdaq: EGLE). That firm paid about $740/dwt for Supramax newbuilds. Let's value COSCO's target fleet at one-third that rate. This gives us $8.2 billion, which mirrors Goldman Sachs' (NYSE: GS) estimate. Think that's what China COSCO paid?

Try $4.6 billion. Yes, China COSCO is paying its sugar daddy all of $139/dwt for this gigantic fleet. In money-making terms, that's five and a half times six-month trailing net profit. Nice deal, if you can get it.

Related Foolishness:

• Skeptics abound, but DryShips hasn't run aground.
• No sugar daddy? This may be your best shot at a cheap dry bulk acquisition.
• Frontline is a lowly crude oil transporter, but its rates have been pretty great.