SPEAKERS at Marine Money Week have been bemoaning the lack of consolidation among US-listed shipping companies for over a decade. They were at it yet again at this year’s event, blaming perennially discounted share pricing on management’s perennially self-serving behaviour.

“For 10 to 15 years, we have been saying we need bigger companies. We haven’t done it. It has been a failure,” lamented Craig Fuehrer, managing director of Deutsche Bank Securities.

“Frontline and Euronav had the chance to build the biggest, most liquid tanker company in the world and they couldn’t get it together because of personalities,” he said.

“‘Personalities’ is a polite way of saying ‘self-interest of the management team’,” added Bob Burke, chief executive of Ridgebury Tankers.

According to Fuehrer: “CEO also stands for ‘career ending opportunity’ and a lot of people can’t deal with that fact. A lot of companies don’t want to engage because they know it means they will need to play more golf. It’s a problem with this sector. You just don’t have enough liquid companies.”

The goal, he said, is for listed shipping companies to grow big enough to be included in index funds. “It’s about getting more eyeballs on the sector and getting more flow in these names. It’s a shame we don’t help ourselves.”

Instead of shipping companies consolidating and scaling up to attract index funds, the main trend in recent years has been privatisations, with infrastructure funds picking off larger-market-cap public entities with high contract coverage because of low public valuations and leaving fewer and generally smaller players in the listed space.

Star Bulk merger a rare positive sign

That said, there has been some progress on the consolidation front over the past year. Frontline did acquire 24 of Euronav’s youngest very large crude carriers in October and Star Bulk did merge with Eagle Bulk in April.

But the Eagle Bulk deal is not enough, acknowledged Star Bulk president Hamish Norton, who said his company is still too small to attract the attention of index funds.

“Every dry bulk company is too small for today’s investing market because we don’t get the index fund money,” Norton explained. “We’re not in any of the US indices — and we need that stock-picker money.

“A stock-picker is maybe going to research a thousand companies for a big fund and invest in one-fifth of the companies. If their average investment is $500m, you can’t expect to get out anytime soon [in a company the size of Star Bulk].

“We would have to be twice as big to attract the equity investors we want. If we were twice as big, we would have a hugely increased audience of investors.”

The lack of trading liquidity in shipping stocks due to their relatively small scale “is a huge problem”, said Fuehrer. “Look how long it took for Oaktree to get out of Torm.”

Eagle Bulk was an unusual case of a listed shipowner with equity largely owned by financial players; a chief executive, Gary Vogel, who was open to taking an exit package; and a stock that was trading below net asset value (NAV), creating board incentive to sell.

“At Eagle, we looked at the future and said: We either have to grow the company or our shareholders are better off in someone else’s hands, so we picked up the phone and called Star Bulk,” said Paul Leand, managing director of AMA Capital Partners and former chairman of Eagle Bulk.

“That’s what you have to do. If you’re not a company where that’s an option, that’s a problem, and that’s why you’re trading at a discount.”

If you’re not for sale, what are you worth?

According to Leand: “At AMA, we have looked at this over the years many times, and if you look at publicly-traded companies that are controlled by strategics [career shipowners] versus publicly traded companies that are widely held or controlled by financials, there is a definite difference in how those companies are valued in the market.”

Companies controlled by financials are valued higher, he said.

“It doesn’t matter if you’re a good strategic or a bad strategic. The simple reality is that strategics are in the shipping business to be in the shipping business, whereas financial investors are in the shipping business to make money. The one exception is John Fredriksen’s companies. That is because John is essentially a financial investor.

“Its pretty simple,” continued Leand. “You have to align yourself with the common shareholders and make sure the actions you are taking are not about creating a job for life. Because if a company is not really for sale, then what’s it really worth?”

According to Norton, “Something that’s very important that very few boards pay attention to is that it makes it much easier for the CEO to decide a merger is in the interest of the shareholders if the CEO is going to do very well as a result.

“Sometimes, boards are pennywise and pound foolish by not providing enough incentive to top management to do a transaction that may result in the top management going golfing. The shareholders would actually be much better off if top management got a much bigger exit package.”

Family ownership continues to stifle consolidation

There are further complications with the US-listed shipping companies controlled by families with a multi-generational shipping presence. Not only are they averse to selling because they want to remain in the business indefinitely, they also use the public entity to generate fees for their private companies.

“In our industry, there are a lot of cases where the public company owns the assets and the private companies get the fees, so there are conflicts of interest,” said Burke.

According to shipping investor Ned Sherwood: “I think there’s a valid reason why most shipping companies are trading below NAV, which is not because of the current market environment, but more because of questionable procedures, such as having private shipmanagement companies allied with public entities that do not really disclose the true remuneration between the two entities.

“You have a lot of freewheeling entrepreneurs and family companies in this industry that don’t necessarily seem to care about the NAV of the publicly-traded entity. They seem to care more about how much cash they can get, one way or another.

“Until there are more mergers and the companies get bigger and governance gets better, there will be a lot of questions about whether these people are on your side,” warned Sherwood.