I have covered Star Bulk Carriers Corp. (NASDAQ:SBLK) and Eagle Bulk Shipping Inc. (NYSE:EGLE) previously, so investors should view this as an update to my earlier articles on these companies.
Back in June, Eagle Bulk Shipping Inc. or “Eagle” announced the repurchase of close to 3.8 million shares from Oaktree Capital Management (“Oaktree”) at a price of $58.00 per share and adopted a so-called “poison pill” which effectively prevented investors to acquire more than 15% of the company’s common stock.
The move has been widely-viewed as an attempt to preclude leading containership lessor Danaos Corporation (DAC) or “Danaos” and, to a lesser extent, fellow dry bulk shipper Castor Maritime (CTRM) from taking control of Eagle after both companies purchased significant stakes in the open market earlier this year.
Given this issue, I was somewhat surprised to see Eagle Bulk Shipping’s board of directors now signing off on an agreement to merge with competitor Star Bulk Carriers Corp. or “Star Bulk” in an all-stock transaction (emphasis added by author).
Star Bulk Carriers (…), a global shipping company focusing on the transportation of dry bulk cargoes, and Eagle Bulk Shipping (…), one of the world’s largest owner-operators within the midsize dry bulk vessel segment, today announced 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.
Under the terms of the agreement, which was unanimously approved by the boards of directors of both companies, Eagle shareholders will receive 2.6211 shares of Star Bulk common stock for each share of Eagle common stock owned. This represents a total consideration of approximately $52.60 per share, a 17% premium based on Eagle’s closing share price of $44.85 on December 8, 2023. Upon the close of the transaction, Star Bulk and Eagle shareholders will own approximately 71% and 29% of the combined company on a fully diluted basis, respectively.
The combined company will be the largest U.S. listed dry bulk shipper with a combined fleet of 169 owned vessels on a fully delivered basis, 97% of which are scrubber-fitted.
The transaction is expected to generate at least $50 million in annual cost and revenue synergies within twelve to eighteen months, mostly through commercial operations integration and economies of scale, including reductions in general and administrative expenses.
Effectively, Star Bulk is acquiring Eagle thus greatly enhancing its presence in the mid-sized vessel (Ultramax/Supramax) segments:
Pro forma liquidity (including undrawn revolving credit facilities) for the combined company is stated at almost $420 million, with net leverage of approximately 37%.
The transaction requires approval by a simple majority of Eagle Bulk Shipping’s common shareholders and is expected to close in the first half of next year.
Until then, both companies will maintain their respective dividend policies.
At least in my opinion, there’s nothing wrong with this transaction as Star Bulk is picking up a complementary, scrubber-fitted fleet with plenty of cost savings potential in an all-stock deal.
Consequently, in addition to some immediate stock price appreciation, Eagle Bulk Shipping’s shareholders will be able to participate in the potential upside of the combined company.
However, the reaction of Eagle’s largest shareholders Danaos and Castor Maritime remains yet to be seen.
Particularly, Danaos isn’t likely to be happy about the latest turn of events after Eagle Bulk Shipping precluded Danaos from taking control of the company earlier this year.
Remember that Danaos remains in the early innings of establishing a presence in the dry bulk shipping markets and a potential acquisition of Eagle Bulk Shipping would make for a formidable entry.
In contrast to Danaos, Castor Maritime hasn’t publicly stated its intentions regarding its stake in Eagle Bulk Shipping but the company’s average purchase price per share appears to be just slightly below the implied merger consideration of $52.60 per share.
Consequently, I wouldn’t be surprised to see both Danaos and Castor Maritime complaining about the valuation of Eagle Bulk Shipping in the proposed transaction, particularly after the company agreed to repurchase its own stock from Oaktree at $58 per share in cash earlier this year.
But even if both Danaos and Castor Maritime vote against the transaction, I consider shareholder approval as likely, as Eagle Bulk Shipping shareholders stand to benefit from the combined company’s increased scale and Star Bulk’s generous dividend policy.
However, there’s nothing that would stop deep-pocketed Danaos from launching a competing offer for Eagle Bulk Shipping, with a potential bidding war apparently benefiting Eagle’s shareholders even further.
In a surprise turn of events, leading dry bulk shipper Star Bulk Carriers proposes to acquire smaller competitor Eagle Bulk Shipping in an all-stock transaction valued at an approximately 14% premium to Monday’s closing price.
The combined company would be the largest U.S. listed dry bulk shipping company, with a fleet of 169 owned vessels and a pro forma market capitalization of $2.1 billion.
For my part, I view the proposed transaction as a win-win and would advise Eagle Bulk Shipping shareholders to tender their shares into the upcoming offer.
However, I do not expect Danaos to admit defeat and wouldn’t be surprised by the deep-pocketed containership lessor expressing its dissatisfaction with the transaction or even launching a competing offer in the near future.
Regardless of the outcome, I am reiterating my “Buy” rating on both Star Bulk Carriers and Eagle Bulk Shipping as both companies continue to trade at an approximately 15% (Star Bulk) to 20% (Eagle) discount to estimated net asset value despite strong improvements in the charter rate environment in recent weeks.