DryShips (NASDAQ:DRYS) owns an enormous equity stake in public company Ocean Rig UDW (NASDAQ:ORIG). Despite this, management has decided to forgo cashing in some of the company's Ocean Rig UDW shares, and instead sell its own stock to raise money. This gives you some important clues about management's confidence in the valuation for its own company's stock.
On Oct. 4, DryShips announced it would offer and sell up to $200 million worth of its own common shares. CEO George Economou said, "We believe this is an opportune time to flexibly access the equity capital markets to reduce some or all of our funding needs through 2014 that we currently estimate at $150 million."
DryShips owns approximately 78.3 million shares of Ocean Rig UDW. Economou did not explain why DryShips is selling its own company's shares, rather than those of its holding.
Normally, when a company chooses between which assets to sell, it picks the most overvalued one first. Here, DryShips is selling its own shares, while its Ocean Rig UDW holdings remain plentiful and untouched.
DryShips, as of its last earnings report, has sold 5,891,234 common shares of itself at an average price of $3.51 per share, raising $20.2 million. If DryShips had instead opted to sell 1 million and change number of shares of Ocean Rig UDW, it could have raised the same $20.2 million and still be left with a stake in Ocean Rig UDW worth well over $1 billion.
Per share value
If you multiply the 78.3 million ownership shares of Ocean Rig UDW by a $20 share price, you get $1.566 billion. Divided by DryShips' roughly 400 million shares outstanding, that means the Ocean Rig holdings represent $3.92 of every DryShips share.
So why has DryShips instead decided to sell its own stock at just $3.51 per share? Since its shipping business and its Ocean Rig stake are the company's two major components, DryShips is essentially saying that by itself, shipping is worth negative $0.41 per share.
Foolish final thoughts
If management has more confidence in shares of Ocean Rig UDW than it has in DryShips, why shouldn't we? Dilution should always be the last resort when a management feels confident that shares of its own stock are undervalued. Management's refusal to part with even $20 million of its $1.586 billion stake in Ocean Rig UDW seems to all but shout, "Our stock is overvalued."
DryShips management shouldn't be surprised if investors sell DryShips and buy Ocean Rig UDW. This is especially true since CEO Economou is the head of both companies. Going forward, pay attention to what DryShips does with its Ocean Rig UDW shares. If they company starts to sell them, then it's a bullish sign for DryShips. If the company instead continues to dilute shareholders, then it's a bearish sign.