Shipping stocks have not been a favourite with investors since September. The global financial turmoil and the crash in economies pulled down trade. This led to poor demand for ships, caused freight rates to collapse dramatically and lowered asset prices.
But Rishi Agarwal, promoter of ABG Shipyard Ltd, India’s biggest shipbuilder outside state control, has given investors in shipping stocks some hope. Agarwal is locked in a high-profile battle with his nearest rival Bharati Shipyard Ltd to acquire Great Offshore Ltd, a Mumbai-based firm that supplies drilling rigs and ships that support oil and gas exploration activities.
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Bharati Shipyard, promoted by P.C. Kapoor and Vijay Kumar, and ABG Shipyard are doggedly pursuing investors by aggressively raising offer prices to buy an additional 20% stake in Great Offshore. Earlier this week, ABG hiked its open offer price to Rs520 a share. This comes in the middle of the open offer made by Bharati Shipyard at Rs405 a share that was flagged off on 25 July and will run till 13 August.
ABG and Bharati are eyeing Great Offshore’s assets and customers to derisk their main business of building ships, as the global shipbuilding industry faces an uncertain future after the current orders are executed. Like its global peers, both ABG and Bharati face a dearth of new orders. At this rate, both won’t have any orders to build ships after 2013.
Unlike typical shipping business, which is highly cyclical, running ships that support oil exploration provide more revenue stability. Buying Great Offshore would help these firms to quickly enter the lucrative offshore oil industry, which otherwise, would have taken them many years if they were to go it alone. The entry rules for new firms venturing into the support vessel supply business are stringent in India and elsewhere. Sixteen of Great Offshore fleet of 41 vessels are capable of servicing the deep-water oil exploration market. Moreover, a large number of ships on its fleet have to be replaced in the next five years, bringing captive business to the shipbuilder who succeeds in acquiring the company.
Bharati’s interest in Great Offshore is much deeper. Fourteen of the ships that Great Offshore owns and operates were built at Bharati’s yard. Besides, the firm is also building one oil drilling rig and a support vessel for Great Offshore, together worth about $220 million (Rs1,049.4 crore).
In May, Great Offshore fell out of the hands of Vijay Kantilal Sheth, its promoter, because of shares he had pledged for loans, making him the first promoter in India’s history to face such a situation. Sheth had pledged shares with lenders to raise funds to buy his holding in Great Offshore during its demerger from Great Eastern Shipping Co. Ltd in 2006.
In October, lenders started putting pressure on Sheth after the stock price of Great Offshore was hit by the global liquidity crunch and the fall in crude oil prices. The lenders threatened to sell the stock pledged with them to recover the loan if Sheth wasn’t able to meet the shortfall in the share price. Sheth then pledged his shares with the promoters of Bharati Shipyard for a Rs240 crore loan in January.
When he failed to repay the loan, the promoters of Bharati invoked the pledge and acquired the 14.89% stake Sheth had pledged. Bharati then announced a public offer at Rs344 a share to the shareholders of Great Offshore in line with India’s takeover laws. ABG entered the takeover battle in late June at a price of Rs375 a share that was bettered by Bharati a few days later at Rs405 a share.
ABG raised the offer first on 30 July to Rs450 a share and again to Rs520 a share on 4 August. All eyes are now on Bharati Shipyard. Will it hike the offer price yet again? Bharati holds a 19.47% stake in Great Offshore and needs only an additional 6.53% to become a 26% stakeholder, which will allow it to block special resolutions on the board of the ship-owning firm. On the other hand, ABG has a 7.87% stake in Great Offshore and is going all out to outbid its rival. Agarwal says he will sweeten the bid till he finds value in buying Great Offshore. Analysts reckon the net asset value of Great Offshore to be about Rs600 a share.
So, there could be more price rises on the way. Investors holding stocks of Great Offshore are having a ball.
P. Manoj is Mint’s resident shipping expert and writes on issues related to shipping and logistics every other Friday. Respond to this column at firstname.lastname@example.org