Tidewater has bought Swire Pacific Offshore for US$190 million, as we reported here. The deal will close in a few months, and the Swire fleet was debt-free. The transaction draws a line under five decades of offshore operations by the Swire Group, and throws many of the company's staff into deep uncertainty. It comes after years of bad management, asset write-downs, and chronic underperformance at Swire Pacific Offshore. See our 2019 article asking "what went wrong?" here. Back in December, we were reporting rumours of the sale (here).
The timing of the disposal by Swire seems very strange, as oil prices have surged on the back of the Russian invasion of Ukraine, up 60 per cent, year on year, to close at over US$110 per barrel on Friday. I mean, what kind of fool sells a prime fleet of offshore supply vessels when the oil price is skyrocketing and the world is looking for alternative sources of supply for ten million barrels of Russian crude a day?
It depends on the price, of course, whether such a sale is folly or genius. However, we do indeed find that the numbers on the Tidewater deal to buy Swire Pacific Offshore do not stack up.
How and why?
First, the background. Tidewater is acquiring 29 anchor handling tug supply vessels (AHTS) and 21 platform supply vessels (PSVs) with an average age of about ten years from Swire. This will make the American owner the largest provider of offshore support vessels (OSVs) in the world, operating 174 OSVs in total, well ahead of Bourbon's 149 and Edison Chouest's 143. The fourth biggest international player is Noway's Solstad, with a fleet of just 75 active OSVs.
After the acquisition, Tidewater will be the largest operator of active OSVs in both West Africa and the combined Southeast Asia and the Middle East region. Tidewater says that the deal will make it the OSV owner with the largest market capitalisation and the lowest leverage (debt) across the whole industry. Bourbon and Edison Chouest remain privately held.
On Friday, Tidewater' market capitalisation stood at US$849 million, and its stock price was up over ten per cent since the deal was announced on Wednesday, March 9. Tidewater investors seem to love the purchase.
No other listed player has a market capitalisation above US$200 million: Solstad's was just US$161 million and third placed Seacor Marine's US$145 million. Not bad for a company that filed for bankruptcy under Chapter Eleven in May 2017 and emerged less than three months later, having eliminated about US$1.6 billion in principal of its initial US$2 billion debt load. Tidewater then went on to merge with Gulfmark in November 2018.
Our coverage of Tidewater CEO's interview with Regina Mayor of KPMG, which we dubbed his "Regina Monologue," highlighted Mr Kneen's vision for his company here.
It is important to note that Tidewater is not paying very much in cash for the Swire fleet – just US$42 million, which it already has on hand. In addition, Swire Pacific will receive 8.1 million so-called "Jones Act warrants" that entitle the bearer to buy Tidewater shares, but which are not Tidewater shares, because otherwise the company would risk its status as an American ship owner under the protectionist piece of cabotage legislation known as the Jones Act.
The Jones Act requires 75 per cent of Tidewater's shares to be owned by American citizens for it to be considered an American ship owner in domestic markets like the Gulf of Mexico (see here). The Jones Act warrants issued to Swire Pacific, upon exercise, would represent approximately 15.6 per cent of Tidewater's outstanding share. Crucially, holders of the warrants are not permitted to vote or to receive dividends.
Depending on when Swire sells the warrants, it can benefit from the upside in Tidewater's stock price, even if it has no board representation at Tidewater, and no votes.
In 2013 Tidewater paid US$395 million to purchase Troms Offshore, with a fleet of just five large, modern PSVs, plus one additional PSV under construction at the Vard Aukrayard in Norway. Now, Tidewater is getting three times as many similar PSVs, plus 29 anchor handlers for half the price.
The context suggests how the numbers, even in a depressed market, just do not stack up.
In addition to the announcement of the sale, Swire Pacific, the parent company of Swire Pacific Offshore, announced its 2021 final results here. Swire Pacific Offshore is now considered as "discontinued operations" with its assets "held for sale".
Swire Pacific, its parent, revealed on March 10 for its marine services business that "a remeasurement loss of HK$1,611 million was recognised on assets classified as held for sale from the discontinued operations."
HK$1,611 million equals US$206 million. Swire Pacific is saying that it had previously valued the offshore business at US$396 million, but took the hit of US$206 million when it sold the fleet of fifty vessels to Tidewater for just US$190 million.
It should be emphasised that Swire is not another K-Line. K-Line liquidated its North Sea fleet in late 2021 to Rem Offshore and Borealis, and took a huge impairment of US$150 million against the book value (here). The Japanese owners appear not to have accurately "marked to market" the declining value of their North Sea fleet in their accounts. The result was an unpalatable surprise for investors when the sale of the fleet and the liquidation were announced.
But Swire has been assiduously marking down its offshore assets all through the long and painful industry downturn. What its revolving door of leaders lacked in strategic vision or industry savvy, they made up for with red ink in the accounts. By end 2018, Swire Pacific had taken cumulative losses of US$1.1 billion on the Swire Pacific Offshore fleet (here). In 2019, it added "impairment charges, a restructuring provision and a loss on disposal of vessels aggregating HK$2,287 million (US$292 million)." In 2020 it took yet another hit of "net non-recurring losses (including impairment charges) at Swire Pacific Offshore of HK$4,221 (US$539 million)."
So, since 2015, the company had written down its assets by close to US$2 billion, but Swire still took another hit of over US$200 million when it finally sold the fifty modern, working ships.
This beggars belief.
So, who's right? Did Tidewater pay fair market value for the fleet, or did it buy the Swire ships for a song?
Tidewater's own press release states that the Swire fleet was purchased for a "compelling valuation… acquired at an attractive valuation compared to fleet appraised value, providing for asset-level value accretion."
"Asset-level value accretion" is a great euphemism that says Swire sold far too cheaply.
Let's conduct a quick tour of Swire Pacific Offshore fleet (courtesy of the company's website https://swirespo.com/Fleet/Fleet) with our valuation hats on, and see what Tidewater got for its money.
The twenty-one PSVs in the Swire fleet consist of the following:
"The 1,000m² clear deck H-Class vessels boast of over 4,600 deadweight cargo carrying capacity to support offshore platforms, DP drillships, semi-submersibles or jackups supply. The vessels can support offshore construction work with a large deck area and accommodation for 44 persons. The H Class vessels are certified by DNV GL for 'Clean Design' and has lower emissions to atmosphere from all machinery including refrigerant gases."
Best guess at valuation: minimum US$10 million apiece. Running total US$40 million.
"The 810m² clear deck G-Class vessels, with their 4,000-tonne deadweight, are powered by a four-engine diesel electric power plant and equipped with highly efficient counter rotating azimuth thrusters ensuring excellent fuel efficiency. These FiFi1, DP2 vessels, are SPS Compliant, Clean Class and built LFL notation ready, to allow for future methanol carriage."
Best guess at valuation: minimum US$9 million apiece. Running total US$130 million.
"The 912m² clear deck, 5200DWT L-Class vessels are designed with fuel-efficient features including efficient propulsion pods, a four-engine diesel electric power plant and large cargo carrying capability that make them well-suited for deep water supply. These vessels are SPS Compliant, Clean Class and prepared for easy upgrade to LFL* and OILREC notation."
Based on recent sales to CBO in Brazil, and the sale of the PX121 design PSVs from Pearl Bidco to Borealis, best guess at valuation: minimum US$15 million apiece. Running total US$190 million.
Oh wait… we have reached the sale price of US$190 million from just eighteen PSVs of the fifty vessels sold. Basically, Tidewater has got three older UT755L design PSVs, and 29 anchor handlers absolutely free.
The same thing happens when I run the numbers on the anchor handling side as well. The Swire anchor handling fleet consists of the following:
"The D-Class vessels are built to Clean Class, SPS 2008 and ice notations. Equipped with 500/400-tonne RRM Brattvagg winches, these vessels are fuel-efficient and are equipped with the latest Dynamic Positioning [DP2] technology and have the power to support the latest generation semi-submersible rigs operating in harsh deepwater environments and have sufficient cargo capacity and clear deck space for a wide range of offshore applications."
Best guess at valuation: minimum US$16 million apiece, based on recent sales from the Siem Offshore and GH Offshore fleets. Running total of AHTS fleet US$128 million.
"The C-Class vessels are fitted with a 400-tonne line pull Brattvagg winch ideal for mooring semi-subs in over 1,000 metres of water. The vessel tanks can handle more than 1,300 m³ of recovered oil, which makes it ideal for oil spill response work. The 'Clean Design' ensures reduction in emissions to the environment."
Best guess at valuation: minimum US$12 million apiece. Running total of AHTS fleet US$152 million
"The V-Class vessels are ideal for towage jobs for a variety of rigs and deliver great efficiency in supply mode. Designed with a deadweight capacity of over 2,300 tonnes and a fuel-efficient power plant sufficient to give 120-tonne Bollard Pull."
Best guess at valuation: minimum US$4 million apiece. Running total of AHTS fleet… US$188 million
Oh wait… we have reached the sale price of circa US$190 million from just 19 anchor handlers of the 50 vessels sold. In this valuation scenario, Tidewater has gotten ten older, smaller AHTS, and 21 PSVs absolutely free.
Our analysis shows that Swire Pacific should have trusted its own book values for the fleet, which were presumably based on accurate broker valuations given independently in 2021. Swire appears to have given Tidewater US$200 million of value absolutely free. No wonder Tidewater shares are up – which at least salvages some value for the sellers.
This is incredible. And it is not just me that is reaching this conclusion that Swire Pacific has thrown in its hand at an absurdly low valuation. SeekingAlpha's Henrik Alex's analysis of the deal (here), which he rates as highly favourable to Tidewater, cited a VesselsValue valuation of the Swire fleet of around US$441 million.
US$441 million versus US$190 million is not a difference of negotiation, a concession to reach a deal; it is a magnitude of difference in Tidewater's favour.
The firesale price far below fundamental value, coming at a time of rising oil prices and increased offshore activity, has two causes:
Swire lacked a compelling "environmental sustainability" story to appeal to green-minded private equity buyers, having missed out on the drive to battery hybrid operations, presumably due to a shortage of capital and an absence of government subsidies in Singapore. It appears to have botched efforts to create an auction to drive up prices, being more afraid of losing the one potential buyer it identified, than opening the process up again to extract a better price. So, Tidewater was left as the only viable industry buyer, as POSH, Solstad, Hornbeck, Bourbon and Edison Chouest struggle with their own restructurings.
I am surprised that Borealis, flush with its container shipping lucre and a fast growing offshore arm, wasn't a serious contender, or even 3i or Macquarie. But Borealis had snapped up the remains of the NAO/Hermitage fleet from the Scandinavian banks, as well as the K-Line anchor handlers in the last few months, and perhaps wasn't ready for another, even bigger deal in such a short time.
Swire Pacific may need every cent it can muster to recapitalise the airline in future. Additionally, with the China property market showing signs of a sustained downturn due to the collapse of mainland developer Evergrande, Swire's core property market also faces choppy markets in the coming years (here). Cash today always beats promises of better times tomorrow or piecemeal asset sales.
So, to answer our earlier question, "What kind of fool sells a prime fleet of OSVs when the oil price is skyrocketing and the world is looking for alternative sources of supply for ten million barrels of Russian crude a day?"
The answer: one in a hurry to sell into a market where there was only one realistic buyer with the capacity to absorb such a large fleet.
In 2000, P&O took a similar decision to exit dry bulk shipping, with terrible market timing in hindsight, possibly the worst in the history of the shipping industry, selling 22 modern bulk carriers for around US$100 million to Israeli ship owner Idan Ofer, plus some debt. Seven years later, a single bulk carrier was worth over $100 million (here), and Mr Ofer was one of the richest men in Israel. Lord Sterling, P&O's chairman, got a seat in the House of Lords for his destruction and dismemberment of the last serious British shipping company. Services to the nation, indeed.
The Russian invasion of Ukraine has changed everything, in my opinion. The oil and gas services market will no longer be the same. Tidewater has acquired a prime fleet for half the fair market price. Well done to Quintin Kneen.
Kneen now intends to extract a further US$45 million of savings through "synergies" in the next two years. Having bought the vineyard, the pressing of the grapes will begin. We wish all those who have survived so many tough years in Swire Pacific Offshore all the best for the integration.
With its experience in high-horsepower anchor handling and its strong position in West Africa, Swire Pacific Offshore certainly brings much human expertise and technical knowledge to Tidewater, which Mr Kneen would be foolish to squander.
In its 2020 annual report (here), Tidewater declared that its people were its "best assets". Let's hope that the Swire people who will be joining the company are quickly recognised as its best assets, too.
Meanwhile, perhaps the Swire family themselves should talk to the people responsible for leaving US$200 million on the table….
Background reading
Revisit our 2019 article "Swire Pacific Offshore: what went wrong?" here.
Our coverage of the sale of the AHTS GH Endurance to the Icelandic coastguard in October is here.
