Why fleet growth is not a guaranteed recipe for success  – Warungku Terkini

Pierre Aury dissects the merger between Star Bulk and Eagle Bulk.

December 11 last year saw Star Bulk Carriers Corp and Eagle Bulk Shipping announce that: “the companies have entered into a definitive agreement to combine in an all-stock merger on a Net Asset Value to Net Asset Value (“NAV”) basis with a pro forma market capitalization of approximately $2.1 billion.”

The merger was completed on the April 29. Post-merger Star Bulk Carriers Corp has a fleet of 169 owned vessels, up from 117 pre-merger.

The rationale is described in the press release as revolving around five points:

• Leading, Diversified Fleet of Scrubber-Fitted Vessels with Greater Scale
• Best-in-Class Technology-Driven Operations and Management
• Strong Financial Profile and Capital Return Framework
• Significant Cost and Revenue Synergies
• More Attractive Investment Proposition

Let us review these points.

The first point of the list is that this merger will deliver a “Leading, Diversified Fleet of Scrubber-Fitted Vessels with Greater Scale”. The point being? The “leading” claim which is just a vague, feel good platitude. The fleet post-merger is indeed more diversified than each fleet was before but what is the benefit? This doesn’t create any portfolio effect, nor does it bring in any extra revenues. Finally with more and more countries banning discharge of washwater in their territorial waters, having a bigger fleet of scrubber-fitted vessels might just mean a bigger problem going forward.

The second point – “Best-in-Class Technology-Driven Operations and Management” – we simply don’t get. First, the best-in-class thing is a notion that is difficult to substantiate anyway. Second, teaming up two one legged men doesn’t make them run faster. In other words both companies must have been best in class pre-merger so that the resulting company is best in class so in our opinion the merger cannot be credited with that best in class claim whatever that means.

As far as the third point – “Strong Financial Profile and Capital Return Framework” – is concerned it is indeed looking good with a 37% net leverage and a liquidity of around $420m. This, however, must be put in perspective as on a fleet of 169 vessels the liquidity will evaporate in two years if the fleet is trading at only $3,500 per day below breakeven which has happened not so long ago and will no doubt happen again. $420m must also be put in perspective with the fact that only a few years back both companies had cumulated deficits of about $1bn each. And as of the end of 2023 Eagle Bulk was still carrying $156.7m as a cumulated deficit on its balance sheet while for Star Bulk Carriers the number was $633.2m.

The fourth point – “Significant Cost and Revenue Synergies” – has actually some merit. There will be only one listing to maintain, one set of directors to remunerate and only one CEO and executive team to pay going forward so that’s a few millions saved, but to be honest in the grand scheme of things that is more being penny-wise than pound-wise. That is unless of course the board decides to double non-executive and executive directors pay because the company is now double the size it was. We can’t however find any synergies on the revenue front.

The fifth point – “More Attractive Investment Proposition”- has some merit as well. Indeed investors will love the increased liquidity of a single stock although of course increased liquidity gives no guaranty of profit.

As a conclusion we will contend that in a cyclical market growing for the sake of growing achieves only one sure thing: bigger losses at the bottom of the next cycle.