Rollups vs. Mergers: Options in an Ailing Bulk Market
Some experts have been cautioning that the present depressed state of the dry cargo markets is unlikely to turn around for at least two years. Such is certainly going to be a subject of debate at shipowning families in Europe and the Far East. These families will be pondering how fleets of new or fairly new bulk vessels, costing between $30 and $40 million, are facing historically low market rates of less than $5,000 per day, which fail to cover operating costs, much less provide a return on capital.
Some bulk shipowners have done very well in recent years; some have endeavored to spread the financial risk of shipping investment by “going public”; others have diversified into real property and the ownership of different types of vessels, such as tankers. But all have surely sailed into troubled waters. Tradition and continuity for the next generations hang in the balance. How can business and asset values best be preserved during a period of negative equity?
Not every ailment has a cure, but for continued participation in shipping, certain measures may be appropriate to consider whether or not the depression in the business proves to be shorter or longer than anticipated by the experts.
Beyond layups, for some shipping companies, the appropriate measures may lie in the introduction of rollups, i.e., consolidations of existing fleets into corporate structures which are intended to strengthen the ways the shipping enterprises are organized, managed, and geared to ride out the storm.
Although sharing common elements, rollups are not mergers. Rather, they are intended to combine multiple relatively small companies into something larger and more efficient to be able to enjoy economies of scale; to rationalize competition in a crowded or fragmented market; and to combine entities with complementary capabilities into more efficient service businesses. Shipowners with small fleets of bulk carriers, particularly in the current depressed market, need to answer certain fundamental questions, to wit:
Does it make sense for us to operate our fleet of 10-15 ships virtually identical to those of our neighbors having offices down the street?
We have had generations of loyal employees who have worked for us for years, but so has the XYZ company across the street which has a similar structure. Does it make sense for both companies, because of those circumstances and attendant loyalties, to essentially duplicate the same structures and teams of employees?
We enjoy relationships with some of the same banks and with some of the same charterers; we operate nearly identical ships; XYZ company operates a business paralleling our own, but do either of us enjoy any benefit or protection from such duplication? Is there a more efficient way for both companies to operate in a challenging market?
At the end of the day, many of these issues, flowing from parallelism, family tradition, and the desire to perpetuate traditional shipowning structures, will turn upon the costs of preserving traditional owned shipping companies versus the effective costs (including prospective loss of family control and privacy) of participating in shipowning in a different way.
It is not necessary to reinvent the wheel. Rollups have taken place in many industries – energy, waste management, pharmaceuticals, publishing, etc., but interestingly less in shipping – and there are really no compelling reasons why they should not work effectively with bulk shipping, so long as owners keep open minds.
The opinions expressed herein are the author's and not necessarily those of The Maritime Executive.