10. Scenario analyses
10.4 Potential buyers
115 synergies are 14%, based on EY’s survey report, the total cost for REM would amount to MNOK 643,202.
If Solstad were to only realize MNOK 190 through a successful merger with REM, the merger would not prove favorable from a financial perspective. We believe, however, that this scenario might be too pessimistic, and that small synergies related to crew expenses and/or a reduction in WACC would be probable following a successful merger. In that case, a reduction in WACC from 10,94% to 10,64% would lead to a potential synergy effect of MNOK 732. Further, a reduction of 1% in crew expenses could potentially realize synergies of more than MNOK 642, ceteris paribus.
Based on the discussions and calculations in this chapter, we believe that a successful merger with REM would prove valuable for Solstad and its shareholders. REM and other OSV players are currently priced at a severe discount, and a prime target for a potential acquisition. Furthermore, considering the oversupply of vessels in the market, it would not only prove beneficial but necessary in order for the market to rebalance. Yet, Solstad is not in a position today to be able to acquire a company without significant financial backing from an external investor or other financial intermediaries.
116 survival. In the following paragraphs we have a selection of companies that may be potential buyers of Solstad.
DESSC
Deep Sea Supply is an interesting buyer for several reasons. Firstly, it has expressed the same wish as Solstad in considering “industry consolidation, mergers and acquisitions”.181 Although DESSC is a considerably smaller company both in terms of fleet-size and market cap, it has currently the most stable financial structure of the peer group outlined earlier in the thesis. More importantly is the company owned by shipping magnate John Frederiksen which indicate that Deep Sea Supply would be able to buy Solstad with the financial backing of Mr. Frederiksen. In 2016 he had an estimated net worth of $9,1 Billion.182 The owners of a potential merged DESSC and Solstad would also be able to provide many years of business experience outside the offshore supply industry. In addition to Mr. Frederiksen’s ownership in OSVs, he owns highly successful companies in drilling, fish farming and oil tanker shipping. Among many of his companies, he is the chairman and CEO of the world’s largest oil tanker shipping company Frontline Ltd. With rumored cash reserves exceeding 5 billion USD, the shipping giant is well-positioned to buy cheap in a bleeding industry.183 The wide, maritime network DESSC is involved in (through its owners) would be very helpful when integrating Solstad and expanding the business. Apart from the strong, financial backing DESSC can show for, they are also Cyprus based. Flagging out Solstad’s vessels to Cyprus may be a strong cost-savings incentive and cut down on operational costs. One of the arguments against an acquisition is that DESSC would increase their debt-ratios and get a relatively older fleet on their hands.
Maersk Supply Service
The Danish supply service company is part of the gigantic Maersk Group conglomerate that operates in a wide range of maritime industries from container shipping, oil and gas drilling to port and inland infrastructure. Although the conglomerate suffered badly as a result of the oil-crash in 2014, the Group still posted profits of USD 925m in 2015.184 During the market decline throughout 2015 Maersk Supply Service (MSS) still managed to post USD 117m in profits. Further, MSS has stated that their primary focus is creating innovate and cost-effective solutions for the deepwater segment. 6 of their OSVs are Subsea, while another 4 is on order.185 Merging Solstad’s strong CSV
181 http://www.deepseasupply.no/106/strategy
182 http://www.forbes.com/profile/john-fredriksen/
183 http://www.forbes.com/profile/john-fredriksen/
184 Maersk Group, “Annual Report”, 2015
185 Maersk Supply Service, “Fleet List”, September 2015
117 fleet with Maersk’s highly advanced and innovate deepwater operations should help the company in increasing cost-saving by integrating and streamlining a larger part of the oil supply-chain from drilling to supply service. Contract coverage for Maersk Supply for 2016 was 42% and 16% for 2017. Solstad being an industry specialist and its client-relations portfolio may help contribute positively to MSS future contract coverage. In its first quarterly report of 2016 the company stated that they were looking into ways of taking advantage of the depressed market conditions which may offer acquisition opportunities at heavily discounted prices.186 Q1 2016 Group highlights a strong, financial fundament with a liquidity reserve of USD 11,9bn.187
GulfMark Offshore
Another interesting Solstad buyout candidate is GulfMark. The company is the largest operator of PSVs in the North Sea. It currently has 32 vessels deployed in the region. Contrary to the two aforementioned companies, GulfMark, and American offshore supplier, has a U.S. flagged fleet which means a strong foothold in the Gulf of Mexico. U.S. GoM is a protected market and domestic law requires all vessels operating in the area to be owned and managed by a United States citizen.188 Despite the fact that most of its fleet is composed of PSVs, we believe that GulfMark can use its long-standing business relationships in south-east Asia and GoM advantages to gain significant market shares in the regions.189 Moreover, investing in CSVs which has proven to be a profitable segment even during a distressed market can help GulfMark decrease their dependency on the PSV segment and financial exposure.
Bourbon
The French oil service company Bourbon operates in 45 countries with more than 510 vessels providing different segments in the offshore oil and gas industry. Boasting an impressive deepwater AHTS-fleet of over 30 vessels with an average age of 6,4 years and a total AHTS-fleet composed of more than 100 vessels gives just an idea of the scale in which Bourbon operates.190 In addition to its worldwide coverage of the OSV-industry, the Group fully owns the integrated offshore supply ship company Bourbon Offshore Norway with affiliates in key markets. The Bourbon Group has a very diversified client portfolio from National and International Oil Companies such as Petrobras and Statoil to supermajors such as BP, Shell and Exxon.191 98% of vessels operate outside Europe, with noticeable growth in West Africa and South East Asia. We believe that the stable revenue growth expected by Bourbon of 1,1%, cost of net debt down 15%, and its improved operational
186 Maersk Supply Service, “Quarterly Report Q1”, 2016
187 Maersk Supply Service, “Interim Report Q1”, 2016: 3
188 GulfMark Offshore, “Annual Report”, 2014
189 https://www.gulfmark.com/company-overview.html
190 Bourbon Offshore, “Annual Presentation”, 2015
191 Bourbon Offshore, “Annual Presentation”, 2015: 11
118 profitability in 2015 enables them to have the financial strength, international maritime network and industry know-how to effectively integrate Solstad’s fleet into their own. 192