Seaspan Corporation (NYSE:ATCO) spent the past couple of years shoring up its financial situation so that it could pounce when acquisition opportunities arose. It did just that this week, closing a deal to buy out a shipbuilding joint venture in a transaction that will significantly increase the size of the company's operated fleet and contract backlog. It's a deal that has been rumored for quite some time and has finally come to fruition.
A walk down memory lane
In March 2011, Seaspan Corporation joined forces with private equity giant Carlyle Group (NASDAQ:CG) and other investors to form Greater China Intermodal Investments (GCI), which the partners anticipated would serve as a vehicle to help finance the construction of new containerships. At the time, the partners pledged to invest up to $900 million -- including $100 million from Seaspan for an 11% stake -- in a company that would have the firepower to buy more than $5 billion in containerships. The venture used that cash infusion to secure deals to build several vessels in the following years, growing its fleet up to its current size of 18 ships.
However, Seaspan, which managed the joint venture, began to consider its long-term role with the partnership in late 2014 when its board authorized a committee to look into its strategic options for this investment, including potentially acquiring the entity. While a recent deep downturn in the shipping market delayed that outcome, the company ultimately found common ground with its partners and agreed to buy out the venture.
How this deal impacts Seaspan
Seaspan will pay $330 million in cash and $50 million in preferred shares to buy out the remaining 89% stake it doesn't own from Carlyle and the other investors. That values the entity at $1.6 billion, including the assumption of $1 billion in debt and $140 million still owed for two vessels currently under construction. Seaspan financed the cash portion of the deal from its balance sheet, which it recently bolstered with a $250 million investment from Fairfax Financial Holdings Limited (OTC:FRFHF). Meanwhile, it also secured a $100 million line of credit to boost liquidity further.
The transaction does several things for Seaspan. First, it simplifies the company's structure by bringing its entire managed fleet in-house, growing it to 112 vessels. That gives it the largest fleet among container leasing companies by a wide margin, with Costamare (NYSE: CMRE) having the second largest at 70 vessels. It also bolsters the company's long-term revenue backlog by $1.3 billion, boosting it to $5.6 billion, which dwarfs Costamare's $1.2 billion backlog. Finally, the deal will significantly increase the company's earnings, adding $185 million to $200 million in EBITDA next year, or nearly 40% more than last year.
The acquisition also helps enhance the company's strategic position by strengthening its relationships with key customers while reducing concentration and increasing its lead as the largest containership leasing company. Overall, Seaspan will control 8% of the market, which is nearly double the share of rivals like Costamare. Furthermore, in a vote of confidence on the deal, Fairfax Holdings agreed to invest another $250 million into Seaspan early next year under the same terms as the previous agreement, increasing its financial visibility and flexibility. That initial investment by Fairfax was "instrumental in facilitating our acquisition of GCI," according to Board Chair David Sokol, suggesting that this next one could help move the needle even more next year.
The turnaround is gaining steam
While the shipbuilding venture by Carlyle Group never reached its lofty goals, the private equity giant and its investors still managed to acquire a strong portfolio of cash flowing container ships. Those vessels and their associated contracts will significantly bolster Seaspan's fleet and financial profile. That will help accelerate the company's turnaround efforts, positioning it to grow earnings and cash flow in the coming years, which should hopefully put an end to its steadily sinking stock price.