Little Star Bulk Carriers Corp. (SBLK -1.96%) is growing up and becoming the largest publicly traded drybulk shipping company in terms of number of ships and capacity surpassing that of Genco Shipping & Trading. A deal was announced June 16 with a new investor group called Oaktree Capital Management. Pending shareholder approval, Star Bulk Carriers is issuing a boat load of shares to acquire a boat load of ships. The press release is lengthy, with enough information to make your head spin, so here is what I hope is the more easily digestible version.
Source: Star Bulk Carriers
The transaction
Star Bulk Carriers is issuing 54 million shares which will nearly triple the share count. For that, the company and its shareholders will acquire 17 currently operating ships of diverse sizes and market rates. These ships are quite young with an average age of 5.6 years which means they should last at least 15 more years.
Star Bulk Carriers will also acquire contracts for 26 brand new fuel-efficient ships of varying sizes with varying delivery dates scheduled throughout 2014, 2015, and 2016. Spyros Capralos, the current CEO of Star Bulk Carriers, will move into the position of Non-Executive Chairman of the Board. Petros Pappas, who was jointly selected by Oaktree Capital Management and the company, will come on board as the new CEO.
The benefits
Pappas commented that this deal will allow Star Bulk Carriers to grow "quickly and significantly in the highly fragmented dry bulk sector." Both Pappas and Capralos believe this transaction is accretive to earnings, cash flow, and net asset value though the details remain to be seen. This means all three of those metrics will increase on a per-share basis despite the share count nearly tripling.
Once the deliveries are complete, Star Bulk Carriers will likely be the "largest, diversified, ultra-modern U.S. listed dry bulk company." From this initial transaction, Star Bulk Carriers will instantly have a market cap greater than $1 billion based on the current share price. Currently it has a market cap of $350 million at the time of this writing.
The company believes this results in economies of scale and also make Star Bulk Carriers a prominent market player. It plans to use this newfound size and strength to pursue "accretive acquisition transactions."
In other words, it will only pursue transactions for which it sees earnings benefits to be realized immediately for less than the amortized cost of acquisition. Think of it like renting out an "acquired" investment home for more than the cost of your mortgage payment. The increase in earnings per share of the target would be higher than any dilution.
What's next?
The transaction is expected to close within 30 days of June 16. Star Bulk Carriers will hold a special meeting to allow shareholders to vote, and generally votes for this type of thing go smoothly.
While in the release it mentioned optimism about an improving freight rate environment, what was missing was what strategy the new CEO has in mind that Star Bulk Carriers would be pursuing. Long-term fixed rate contracts or contracts based on the daily fluctuations of the spot rates? Or a combination of the two?
Star Bulk Carriers will have almost its entire current fleet see its fixed-rate contracts expire this year. In the most recent earnings conference call, Capralos mentioned a shift in company strategy toward letting the fleet operate based on the spot rates, as it believes those rates will rise faster than the market rates for contracts over the next three years.
However, that was before this new agreement was announced. It will be interesting to watch how it all unfolds in the coming months, quarters, and years. Does bigger equal better and more profitable for shareholders? We will find out.
