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  • play_tow play_tow Mar 10, 2005 12:32 PM Flag

    The Screwing of Shareholders

    Issuing stock to fuel expansion makes good "business" sense, but does not make good sense to "shareholders".

    It all comes back to the true valuation of dry bulkers, which is the value of its assets....Book Value. As of end of 2004, EXM traded at 7 x book value......very pricey.

    EXM will have issued 8M new shares, to raise about $200M to fund the acquistion of a rough equivalent of $200M worth of ships. (Other acquistions are being funded from cash flow, and credit facilities)

    So, with the share-offer money, EXM immediately increases its assets by $200M (its actually only 90% of $200M owing to fees). Added to the prior asset base of $30M ending 2004, the total asset base would become $230M (again, Im only isolating the equity-funded purchaes to make a point).

    IF outstanding shares remained 11.6M, then the new Price/Book would be about 1. However, the share dillution means Price/Book would be about 2.

    IF instead debt had been issued for the $200M purchase, Price/Book would be 1.

    On one hand, you might say, it doesnt really matter
    since in both situations, once debt is paid off, you have the same size, and fully owned fleet. HOWEVER, in the share offering case, the fact is that the shareholder stake is effectely halved because of the newly bloated share count.

    How could a management, who genuinly cares about shareholders, redress this? One way is to buy back shares in the future. Another, more immediate and direct way, is to pay a dividend to shareholders. Ths dividend would be at a rate that is on par to the equivalent debt payment which would have been incurred if fleet expansion had been debt-funded.

    Short of these pro-active efforts by management, there is no reason for shareholders to benefit
    from these "growth by acquistion" activities. It depends solely on finding a "greater fool" to buy our shares at values above our own purchase price.

    Cuurent management speaks about value creation, and accretion to earnings. However, 3 yrs from now the asset value of its currently enlarged fleet will have likely declined, but the share count will still be inflated barring new initiatives. And so, shareholder equity would be reduced. Personally, Id like to see a commitment to dividend payout, that is commensurate with some fraction of earnings that exceed what is needed for basic costs, and modest growth opportunities.

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    • That's why you should own FRO. Screw this company...

    • You also need to factor in the ROE of 117% which changes your results dramatically.

    • It will be most interesting to see at what price they set the new IPO. In December, the last time EXM had an equity offering, the IPO was priced at $25. Unfortunately for shareholders, EXM was trading at $35 at the time and the stock cratered as a result.

      This IPO is nearly 3 times as large as December's. One would hope the new shares would be priced at $25 again, but in all likelihood they'll be offered at below market price. At $20? $18? $15? Your guess is as good as mine.

      I was an enthusiastic buyer of EXM two months ago at $22. Sold all my shares yesterday at $23 and will not consider buying again until the dust settles from this latest offering.

      • 1 Reply to AnsonCom
      • This too is my feeling. There was much grumbling about the share price in the original offerring, but I suspect that price was set well before the stock had actually returned to $35. In fact, that price, at the time was above most moving day averages.

        In this case, if I understood their press release (which itself is a bit opaque), the offering will be public, which typically means it would price at the market value on the day of offer. If I have that correctly, then predicting the secondary price is pretty futile, since youve got to predict the daily price of EXM itself.

        At the end of the day, I doubt it matters much to management whether it prices at $18, $20, or even $25. Remember, their shelf doesnt restrict the NUMBER of shares, only that it is bounded by $250M. If they need to sell an extra 1M shares to raise their required capital, so be it.

        None of that is particularly good for shareholders though.

    • You are an amateur- a flat out idiot. I have been listening to you for a while now, trying to sound smart and objective. The truth is the more you post, the more you expose yourself as a simple person, with no knowledge of accounting. The facts are that your statements are absurd. B/V would have been less had they issued debt instead of equity! BV is not synonomous with assets and vessels, it is defined as net equity. By issuing equity, they effectively INCREASE their BV, by issuing debt, BV is unchanged (assets increase as much as liabilties- for now at least)... so please save us all from your brilliant assessments. After the offering BV will increase in spite of the dilution!

      • 2 Replies to tankbanker
      • Let me say that I am not an accountant, just an investor. I appreciate your info, and its worth going through the excersise of how debt and share issuance can effect Book Value.

        Here is how I understand Book Value.....

        Its the per-share value of equity excluding goodwill.

        (Ive ignored the goodwill aspect, having little info on that for EXM)

        What is equity? Its the total assets minus liabilities.

        Assets are cash (and equivalents) plus equipment and inventory (things paid for and owned).

        EXM's principal asset is the market value of its ships.

        Liabilities are obligations to pay, like bank and bond debt, accounts payable.

        EXM's principal liabilities are its bank debt (Im unaware of any EXM corporate bonds).

        Alright. Lets see what happens to Book in the case of 2 options for EXM to raise $100M to purchase ships. Just for sake of example, let's assume that
        EXM had 10M shares outstanding initially, had $50M in assets, and no debt. Then inital Book Value per share is $5 (giving a price-to-book ratio of 4 if EXM trades @20).

        Option 1: Issue 5 million shares @20/share.
        Assets increase by $100M, to a total of $150M.
        Share count increases to 15M. Book Value per share then is $10 (giving a price-to-book ratio
        of 2 if EXM trades @20).

        That part I got right in my original posting.

        Option 2: Issue debt equivalent of $100M to purchase ships. Liabilitities increase by $100M. Assets also increase by $100M. Share count is unchanged. Book value per share remains $5 (giving a price-to-book ratio of 4 if EXM trades @20).

        That part I got wrong in ny original posting. Thanks for correcting me on that tankbanker.

        The interpretation than is that, from the point of view of immediate impact on Book Value, and related Price-to-Book ratio, the equity offer is indeed the superior choice.

        Its worth noting, however, that at the time the acquired vessels have lost all value (except their scrap value), then the equity offer could turn out to be inferior from a Book Value perspective because of the increased share count. it very much depends on what manaagement does with the cash flow from the fleet, which are "free" to the company in the case of equity sale, but is "committed" to debt maintenance in the debt offering.

      • Shorting this fleet of rackety old barges filled to the brim with growing outstanding shares.