Shipping is full of oversize egos and oversize deals – who isn't captivated by the struggle between the Saverys family and John Fredriksen for control of tanker owner Euronav? In offshore, the biggest dealmakers of late have been Quintin Kneen of Tidewater and Robert Eifler of Noble Drilling.
But stand aside, gentlemen. There's a new dealmaker in offshore wind: Mikkel Gleerup, the CEO of Cadeler, the Danish contractor formerly known as Swire Blue Ocean, which owns two existing wind turbine installation vessels (WTIVs) and has four more on order in China.
On Friday, Cadeler announced an all stock takeover of Eneti, a WTIV owner controlled by Monaco's Emanuele Lauro and his family, and listed on the New York Stock Exchange. Eneti is a company that we have widely pilloried in these pages in the past on account of its corporate governance.
Now we have some questions about this deal, as we are having trouble getting some of the claims made by his cheerleaders to stack up.
Eifler and Kneen mastered the art of snapping up bargains at cheap prices just before the exploration and production market snapped back to high levels. Tidewater's perfectly timed purchase of Swire Pacific Offshore and its fleet of 50 offshore support vessels (OSVs) in 2022 has easily netted the company US$400 million in capital gain on a US$190 million outlay, and the acquisition of Solstad's 37 modern platform supply vessels (PSVs) announced earlier this year also looks in the money, as PSVs in the North Sea currently trade at above US$30,000 per day.
Mr Eifler took Noble out of Chapter Eleven restructuring in 2021 and promptly merged the company with Pacific Drilling and its fleet of seven drillships, before also announcing a combination with Maersk Drilling later in the same year, just before deepwater rig rates doubled.
These deals have given Tidewater and Noble access to high-quality assets acquired with low debt, and strong competitive positions synchronised with the market turning in their favour. Neither company is highly leveraged and both look set to be "generating a wall of cash" both this year and next, as Seadrill's CEO Simon Johnson described the offshore drilling sector earlier this month.
The opposite is true for Cadeler and Eneti. These are companies that will shortly take on large debts, and the main benefits from the deal are three years or more away. Some of the claims made about the possible benefits are hard to substantiate.
Nobody doubts that the offshore wind market is going through an unprecedented boom, with 35 per cent compound annual growth in offshore windfarm capacity forecast worldwide from now until 2030 (excluding China). The combination of the two companies will create an industry leader with ten high-capacity WTIVs in total, including four in service and six newbuildings on order. Second-placed DEME has only six units, and Seaway7 and Van Oord only four each, including undelivered newbuilds.
The combined group will be named Cadeler, and be headquartered in Copenhagen, Denmark, with its shares to be listed on the New York Stock Exchange in addition to its current listing on the Oslo Stock Exchange. The current Cadeler CEO and CFO will run the show.
Bringing the two companies together means that the merged company should receive expanded investor attention and enhanced trading liquidity as a result of its greater market capitalisation, Cadeler claims, along with a broader investor base and enhanced research coverage as a result of dual listing. This, in theory, will enable it to command a premium valuation.
The bigger fleet means the combined company should be able to borrow money more cheaply and benefit from a lower cost of capital. Cadeler expects to refinance the combined in-service WTIVs at better rates than it could secure on its own.
So far, so good – in theory. Remember, though, that the key to the success of any deal is the price, and the future cashflows.
Cadeler's deal to buy Eneti is not a bargain, however. Indeed, it is packed with risk for Cadeler. Neither company is generating a wall of cash today, or next year, and the deal requires the merged entity to borrow large amounts to cover its WTIV newbuilding programme.
Eneti's management and shareholders should nonetheless leap at the chance to sell to Cadeler, as this deal is very sweet for them. The combination with Cadeler solves all of Eneti's problems in one fell swoop, and richly rewards both shareholders and management.
Eneti stock was trading less than US$9 per share a month ago, and less than US$6 last July. The Cadeler proposal values each Eneti share at US$15.44. Even based on the Eneti share price the day before the merger, Cadeler is paying a fifty per cent premium for a company that was burning cash in its operations in the first quarter. The Lolli-ghetti family of Chairman Emanuele Lauro holds over 28 per cent of the company's stock. They must be delighted that Mikkel Gleerup approached them with this deal.
The full investor presentation on the Eneti/Cadeler deal is here. The combination agreement has been unanimously approved by the respective boards of directors of Cadeler and Eneti.
Eneti shareholders will receive 3.409 Cadeler shares for each Eneti share they hold. Mr Lauro and his relatives have already given their assent to the deal, as have the Sohman Pao family, which controls 30 per cent of the shares in Cadeler, and Swire Pacific, the former owner, which has been much diluted to 15 per cent.
Following the completion of the deal, Cadeler and Eneti shareholders will own approximately 60 per cent and 40 per cent of the combined company, respectively, on the basis of the share counts for each of Cadeler and Eneti on June 16, and assuming all outstanding Eneti shares are exchanged for Cadeler shares in the exchange offer. This demonstrates the size of the premium Cadeler is paying. The day before the announcement, Cadeler had a market capitalisation of €820 million (US$899 million) and Eneti had a market capitalisation of €415 million (US$455 million), which suggests a ratio of 66:34, not 60:40. Well done, Mr Lauro!
The premium for Eneti comes even though Cadeler had half as many uncontracted offhire and available days for its WTIVs as Eneti from 2024 to 2026. Cadeler has 1,305 days available to find a contracts for its fleet in this period, as opposed to 2,926 available days for Eneti's WTIVs. In fact, Cadeler's contract backlog, including options, is six times larger than Eneti's. Neither one of Eneti's two newbuilding WTIVs is contracted yet, as far as I am aware.
Today, both companies are nearly debt-free. As of March 31, Cadeler had a liquidity position of €49 million (US$53.7 million) (of which €14 million (US$15.35 million) was in cash), and debt of just €115 million (US$126 million). Eneti had cash of €110 million (US$120.6 million) and debt of just €57 million (US$62.5 million) on that same date.
However, with four new vessels on order, Cadeler had a pressing need to raise finances to fund its capital spending requirements. The company says that the remaining capital spend related to its two new X-class WTIVs, the two new F-class foundation installation vessels, and the planned crane upgrades to its existing vessels Wind Orca and Wind Osprey, which are scheduled for next year, amount to €984 million (US$1.07 billion). Eneti, meanwhile, has to spend another €510 million (US$559 million) to pay for its two new WTIVs under construction in Korea.
Together, the new company has capital spending requirements of around €1.5 billion (US$1.64 billion) from now until 2026. That's far more than the company's combined market capitalisation, and it dwarfs any cashflow from the existing operations.
Cadeler says the six-WTIV newbuilding programme will deliver huge cash flows from 2026 onwards, when all the vessels are in service. In a footnote on Slide 14, Cadeler forecasts that the six new ships will achieve 85 per cent annual utilisation, will cost only €35,000 (US$38,375) per day to operate, and will be chartered out at between €240,000 (US$263,150) and €320,000 (US$350,860) per day.
I fear that this is optimistic. Cadeler itself has only achieved above 80 per cent utilisation in just one of the last five years for its existing two high-specification vessels. With traditional offshore construction picking up and more than a dozen new WTIVs scheduled to be delivered to western owners in the next few years, inflation in operating costs is inevitable.
Indeed, looking at Cadeler's operating costs stated in its annual report, these are already above €35,000 per day in 2022. But somehow, Mr Gleerup expects that bigger, more complex vessels will cost less to operate than the company's existing WTIVs of similar but lower specification. Wind is booming, but costs rise – rather than fall – in booming markets.
My calculation for the 2022 opex is at the bottom of this article. As ever, I remain open to corrections if I got the numbers wrong.
One of the key lessons of mergers is that company managements need to be held to account for their forecasts. That 85 per cent utilisation assumption may be right, or it may be wrong. Only time will tell.
Another key justification that Cadeler makes for the deal is that it offers a mind-blowing "estimated annual synergies of €106 million (US$116.2 million)".
This synergy figure of €106 million of annual synergies really caught my eye. In Cadeler's 2022 annual report, the company posted revenue of only (you guessed it) €106 million for the whole of last year, with operating expenses for its two WTIVs of €49.5 million (US$54.2 million) in total, plus office expenses of €15.7 million (US$17.2 million). How on earth can a deal between Cadeler and Eneti achieve synergies equivalent to the 2022 operating cost of four WTIVs when the company will only operate ten such vessels?
In the graph on slide 13, the annual synergies are placed on top of the cash flow generated by the fleet suggesting that these are separate and in addition to achieving 85 per cent utilisation and up to €320,000 per day charter hire for all ten vessels.
Cadeler says that the €106 million comprises "€55 million (US$60.3 million) in cost and operational synergies and €51 million (US$55.9 million) in commercial synergies through improved fleet utilisation." I am very sceptical of these figures. A footnote in Slide 12 of the presentation warns they are "based on management's expectations. Estimates of expected synergies are purely illustrative and are subject to certain risks and uncertainties. Figures are reflected prior to any transaction and integration costs."
Indeed.
The slide says that the breakdown of annual synergies is as follows:
€18 million (US$19.7 million) of corporate and financing synergies, coming from reduced corporate costs, reduced management cost, an optimised hiring plan (whatever that may be) and improved financing terms (big is better, clearly). This is just about credible. The senior management of Eneti will leave after the deal, except for its chairman Emanuele Lauro, who joins the Cadeler board and becomes vice-chair there. The combined company should be able to borrow more cheaply. There will be economies of scale. There were for Noble when it acquired Maersk Drilling, and for Tidewater when it acquired Swire Pacific Offshore. Yes, yes, yes.
I would observe that, firstly, every integration carries cost as well as saving. Shutting down offices and firing people will generate savings, but these will also create costs. Indeed, maintaining a dual listing in New York and Oslo means that a lot of the administrative costs Eneti incurs as an American publicly-listed company will remain.
Additionally, Cadeler has promised to dispose of the three older smaller GustoMSC NG2500X design WTIVs in the Eneti fleet: Seajacks Kraken, Seajacks Leviathan, and Seajacks Hydra, which can only install 4MW turbines and only have 300- or 400-tonne capacity cranes. The older NG2500X WTIVs are now 14 years old and are technically obsolete. Whether they can be sold for their book value is a moot point, but these are units are limited to repair and maintenance operations only and are assumed to be sold.
Tidewater and Noble Drilling were both ruthless at cutting costs in the companies they acquired, and they delivered massive savings by slashing shore overhead. Because most of Eneti's vessels have not yet been delivered, Eneti doesn't have the 100-staff member office of which Cadeler boasts and which might provide some fat to cut.
Cadeler then says it expects to achieve another €37 million (US$40.5 million) of operational synergies, per year. Here my scepticism grows. Cadeler says the €37 million synergy will come from "the cross utilisation of mission equipment, sea fastenings and tooling, procurement efficiency gains, upscaled project execution capabilities and vessel operational cost savings."
How exactly? That €37 million of operational synergies equates to €3.7 million (US$4.06 million) per vessel per year, more than one hundred days of forecast operational cost, or over €10,000 (US$10,964) per day per ship. This makes no sense. Unless I have made an arithmetic mistake and misread slide 12, this figure is somewhat implausible. Or is there something we don't know?
I challenge Mikkel Gleerup and Emanuele Lauro to explain how these €37 million of annual operational synergies are possible in a fleet of just ten vessels.
The balance of €51 million of annual synergies comes from what the company says will be "utilisation and commercial synergies, being reduced mob-demob time, secondary steel scope, optimised fleet utilization and global presence and the ability to work in parallel and accelerate projects."
The entire fleet is scheduled to be utilised at 85 per cent already in the base case forecasts, but apparently, that figure can be improved to the tune of €5 million (US$5.48 million) per vessel, or another 16 days per year, taking the utilisation to 89 per cent for all ten ships, or more at lower day rates.
Maybe the commercial synergies come from charging customers more, but the combined entity has already presented the charter hire numbers at €320,000 (US$350,086) per vessel per day, and assuming the benefits are in higher rates, this would add another €16,000 (US$17,540) per day to the highest assumed day rate.
Given the cost pressure on Cadeler's customers who are struggling with rising turbine costs, rising costs for cablelayers and support vessels, and often wafer-thin margins, there may be significant resistance to excessively high WTIV rates. In oil and gas, higher service costs and drilling costs can be offset by higher oil and gas prices. Wind farms, however, typically sell electricity to the grid at fixed prices, so higher costs simply mean lower returns for the wind farm owners. If the numbers do not meet return thresholds, the projects are delayed or cancelled.
And going above €320,000 per day looks optimistic. As a comparison, in 2022, Cadeler achieved the equivalent of €171,500 (US$188,041) per day per vessel in charter hire equalised at 85 per cent utilisation (€53 million (US$58.1 million) gross per vessel that year). Day rates do double – just ask Tidewater and Noble – but offshore wind in 2022 was not in the same trough of despair that offshore oil and gas was experiencing in 2021.
High day rates will only attract more newbuildings, anyway. Who wouldn't want to spend €300 million (US$328.9 million) on a new WTIV that can be billed to clients at €320,000 per day but only costs €35,000 per day to operate?
The real kicker appears in the footnote on Slide 12, however. This states that "transaction and change of control costs is estimated to be in excess of €60 million (US$65.7 million)."
More than €60 million in transaction fees for investment bankers and merger and acquisition advisers is highly unlikely. Based on the €415 million market capitalisation, you would expect to find fees of maybe three per cent maximum on both sides, so costs of no more than €25 million (US$27.4 million) in total for both companies, absolute tops, not "in excess of €60 million." Where is the other €35 million (US$38.3 million) going, and why?
You will recall that when Eneti purchased Seajacks in 2021 for a consideration of around US$525 million in shares and debt, Eneti's management were suddenly discovered to be eligible for US$30 million in bonuses for simply having bought the company.
Does the "change of control" wording mean that the top management of Eneti are once again going to be paid tens of millions of euros for doing a deal?
Perhaps it does. With the disclosure given so far, we just don't know.
The boards of Cadeler and Eneti should disclose in full how this €60 million plus of "transaction and change of control costs" are being spent, rather than mentioning in a footnote at the bottom of a slide. This figure is far above traditional norms for a deal of this size. The boards should also state to whom these charges are disbursed.
If Mr Lauro and his "top team" are again receiving a large bonus or change of control fee, Eneti and Cadeler should state in public what it is. This is supposed to be a merger of two publicly-listed companies, where the details of €60 million of cash cost is material. It is 15 per cent of the total value of Eneti prior to the deal being announced, and it is more than half the cash held by Eneti at the end of the last quarter.
It was shocking when the Eneti leadership received US$30 million in bonuses for Seajacks in 2021. To receive a similar "change of control" bonus in 2023 for merging the company with Cadeler would be egregious, and it is exactly the sort of corporate governance that we have criticised in the past.
All the claims for €106 million of annual synergies and cost savings are unproven and hypothetical future benefits, but the €60 million of transaction and change of control costs are a cash cost that is incurred now in 2023. This is more than the entire combined cashflow from Cadeler in 2022 and 2021, and more than the entire profit Cadeler appears to have made in its entire history. The boards of Cadeler and Eneti should not be approving a deal that triggers millions of dollars of costs without disclosing what is going on.
Eneti shareholders should say "yes" to this deal that gives them a 50 per cent premium on the undisturbed share price and values their company at 40 per cent of the combined whole. They are getting a great price for a company that has a weak orderbook.
But in my opinion, Cadeler's minority shareholders should say "no" to the deal until this €60 million fee is justified by the boards of both companies, and until the €106 million in annual synergies are properly explained.
What's going on? Why are public companies able to pull off deals like this without full disclosure? Who is getting €60 million, and for what?
Looking at Cadeler's 2022 Annual Report, we see on page 69 a cost of sales for the two WTIVs of €49.5 million, which is explained in footnote four of the accounts on page 77 as including depreciation, which is stated as €22.7 million (US$24.8 million) on page 72.
The shore and general costs are a separate line item, as is financing cost, so the pure cost of operation for the two WTIVs Wind Orca and Wind Osprey was €49.5 million opex, minus €22.7 million of depreciation, which, when divided between the two vessels and over 365 days of the year, gives opex of €36,700 (US$40,239) per day per vessel. This is already above the €35,000 that the company foresees itself incurring in 2026, four years and a bunch of payrises and cost increases later.
And the company cannot claim that this opex cost was due to downtime costs like off-hire fuel and port fees, as during 2022, Wind Orca and Wind Osprey achieved 86.9 per cent utilisation, higher than the 85 per cent utilisation expected for the newbuilds.
The opex cost projections for the newbuilds are likely to be too low, and the utilisation assumption is likely to be too high. And the transaction costs and change of control fees associated with this deal are concerning.
Convince me otherwise, please.
Background Reading
Henrik Alex has a quick analysis of the deal on Seekingalpha.