Shares of dry bulk shipper Eagle Bulk Shipping (EGLE +0.00%) are soaring this morning, up 11.6% through 11 a.m. ET, on news of a big merger. Last night, after close of trading on the NYSE, Eagle announced that it will merge its business with rival shipper Star Bulk Carriers (SBLK 3.90%).
Star Bulk stock, by the way, is up only 2.2%.
NYSE: EGLE
Key Data Points
A new giant in shipping
The Baltic Dry Index (which tracks dry bulk shipping rates) hit a recent 18-month high of 3,192 earlier this month before retreating pell-mell to just 2,509 this morning -- a 22% drop over barely one week. This suggests the rally in dry bulk shipping rates could be nearing its end.
You might think this would make shippers nervous about making any big moves. But with fears of rough sailing in the offing, it appears these two shippers have decided, instead, that it's a good idea to get bigger more quickly to better weather the storm. The result will be a "global leader in dry bulk shipping" boasting a fleet of 169 ships, more than $1.4 billion in annual revenue, and a market capitalization of $2.1 billion.
What happens to Eagle Bulk Shipping next?
The companies plan to effect this result through a "merger" that looks more like an acquisition of Eagle Bulk by Star Bulk. The latter will trade 2.6211 of its shares for each Eagle Bulk share currently outstanding (for a purchase price of roughly $52.60, paid in stock). The companies hope to close the merger before the end of H1 2024.
Eighteen months post-acquisition, the companies hope to squeeze $50 million in annual costs out of their operations through "synergies." If they succeed in this -- and if prices for dry bulk shipping hold steady (which, admittedly, they never do) -- the net result of this could be to roughly double Eagle's current annual profit. This would generate a total net profit for the two combined companies of more than $300 million -- giving the combined company a price-to-earnings ratio (P/E) of about 7.
I have to admit -- that sounds pretty cheap. Still, the bigger question on most investors' minds is, what will happen to the companies' dividend payouts post-merger?
Currently, Eagle Bulk pays a healthy 3% dividend yield, while Star Bulk's dividend yield is downright generous at 7.9%. On that score, I have great news: Star Bulk notes that "following close, the combined company expects to maintain Star Bulk's current dividend policy."
No wonder Eagle Bulk investors are happy today!
