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Scorpio Slowly Begins Separating Its Conjoined Twins

FreightWaves

Separating conjoined twins is a delicate operation that is fraught with risk but promises great rewards. The Scorpio family of companies is not yet ready for the full procedure on its conjoined sisters, but it's taking the first step toward the operating table.

If you owned the stock of Scorpio Bulkers (NYSE: SALT) as of Oct. 9, 2018, you were suddenly told you had adopted ownership in related-party Scorpio Tankers (NYSE: STNG). On that evening, Scorpio Bulkers bought an 11% stake in Scorpio Tankers for $100 million in cash.

You may have wanted to invest in the transport of coal and grain, but whether you liked it or not, you were now invested in the carriage of diesel and gasoline as well. As is common with public shipping companies, the original segment mix can evolve and diversify.

You may have been initially upset about the Scorpio family change, but it turned out to be a very good move: During the first nine months of this year, Scorpio Bulkers received a non-cash gain of $68.6 million and a cash dividend of $1.6 million from its stake in Scorpio Tankers.

On Oct. 23, the Scorpio family began separating its siblings through a special dividend for Scorpio Bulkers shareholders, causing that stock price to jump 14% in the first hour of trading.

The dry bulk company also reported quarterly results, which were a sideshow to the main event. Scorpio Bulkers reported a net loss of $1.9 million for the third quarter of 2019 versus a net loss of $354,000 in the third quarter of 2018. The adjusted net loss in the most recent period was $2.1 million or $0.03 per share, better than the analyst consensus forecast for a loss of $0.05 per share.

Special Dividend Announcement

As of market close on Oct. 22, Scorpio Bulkers' stake in Scorpio Tankers was worth $182 million, representing a one-year appreciation of 82%.

Separating the two companies in one fell swoop might be unwise for both parties. It's unclear how much of Scorpio Bulkers' share strength is related to support from the product-tanker side, so divesting the whole tanker position could create downward pressure on the dry bulk stock. Meanwhile, handing over a large chunk of Scorpio Tankers to individual investors who didn't decide to buy those shares in the first place could theoretically create selling pressure for that equity.

A gradual separation is likely a safer course — and such a process is now underway. The Scorpio Bulkers board has declared a one-time special stock dividend totaling 1 million shares of Scorpio Tankers worth $33.7 million, equating to just under one-fifth of the company's total holdings in its sister.

Scorpio Bulkers' ownership in Scorpio Tankers will decline to 7.5%, and Scorpio Bulkers shareholders will receive 0.0138 shares of Scorpio Tankers' equity per share of Scorpio Bulkers.

Amit Mehrotra, transportation analyst at Deutsche Bank, applauded Scorpio Bulkers for beginning the process of "crystallizing what has been a very strong investment."

Scorpio Executives Explain Their Move

On a conference call with analysts on Oct. 23, Scorpio Bulkers CEO Emanuele Lauro explained, "We felt this was the appropriate moment to share a significant part of the value creation of our opportunistic investment in Scorpio Tankers with our shareholders. We thought carefully about how to do this, and we will continue to look for ways to share [tanker] returns with our investors going forward."

Scorpio Bulkers President Robert Bugbee noted that shares in Scorpio Tankers had appreciated 20% over the past three months.

"Our confidence in the product-tanker market has only increased since our last conference call, and it looks like we're setting up for a very strong recovery this winter," Bugbee said. "There's no reason Scorpio Tankers' stock couldn't be up 50% by our next [Scorpio Bulkers] call. That's why we're maintaining the lion's share – the great majority – of our position in Scorpio Tankers.

"At the same time, we thought it was the right thing to do, especially with Scorpio Bulkers' shares trading below NAV [net asset value], to share the [Scorpio Tankers] gain with the shareholders who placed their trust in the original decision that the company made. They deserve a reward."

Asked whether the separation process would continue, with the timing and magnitude of distributions flexible and contingent upon Scorpio Tankers' share performance, Bugbee replied, "Yeah, we have to keep everybody guessing."

He said, "There are a lot of different positions we can take on this. But I think the clear evidence, the clear change, is that we've now moved that balance sheet [the Scorpio Tankers stake] from a holding position to one where we're now wanting to share the gains in that position with shareholders – and we ourselves are substantial shareholders."

Bugbee also explained why giving Scorpio Tankers stock to Scorpio Bulkers shareholders should not lead to sales of unwanted Scorpio Tankers shares and thus downward pressure on that stock.

He estimated there is a 55-70% overlap between the shareholders of the two companies. "The beauty of this is that Scorpio Bulkers shareholders love Scorpio Tankers' stock," he maintained. "People are absolutely thrilled to receive this stock. Some of them think it's better than cash." More FreightWaves/American Shipper articles by Greg Miller

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