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Great Offshore: What’s in the deal?

Sep 16, 2005

The board of GE Shipping (GES) has approved the de-merger of the company’s offshore services business into a separate company – Great Offshore. The offshore business consists of drilling services, marine logistics, marine construction and port/terminal services and the de-merger will be effective April 1, 2005. Here are the key details of the de-merger and our view on the same.

About Great Offshore
Great Offshore’s current fleet stands at 31 offshore vessels (17 Offshore Support Vessels, 2 Drilling Rigs, 1 Construction Barge, 11 Harbour Tugs). Further, the company’s new building order book comprises 7 offshore support vessels with an aggregate committed capex of around US$ 70 m to be spent in the next two years (till August 2007). The de-merger would result into creation of the largest Indian offshore company with revenues that were 20% more than the next ranked player in FY05, Aban Loyd Chiles. Great Offshore will also be one of the most profitable plays in this segment with net margins of 27%, next only to those earned by Hindustan Oil Exploration Company.

Great Offshore: Comparative standing
  Revenues Profits NPM
Great Offshore 3,500 960 27.4%
Aban Loyd Chiles 2,884 501 17.4%
Dolphin Offshore 1,386 66 4.8%
Shiv-Vani 1,063 138 13.0%
Jindal Drilling 1,008 89 8.9%
HOEC 855 385 45.0%
Asian Oilfield 78 4 5.1%

Why de-merge?
In our recent interaction, the management had indicated that traditionally, global shipping companies have leveraged up to 1 time their networth (have a debt to equity ratio of 1:1). This is because of the volatile nature of the global shipping industry. However, offshore companies can go for an aggressive leverage due to the stable nature of the business on account of absence of spot markets and longer-term duration of contracts. In fact, the debt to equity ratio in this business can go to as much as 2:1 or 3:1. This de-merger will, thus, enable Great Offshore to borrow more for furthering its expansion plans, which was earlier dependent on the larger shipping business. This, the management has indicated as one of the key rationale for the de-merger.

Also, this de-merger means value unlocking for the offshore business. This is because globally, stocks of offshore companies command price to earnings valuation of over 20 times. Considering the independent nature of this business in case of Great Offshore, shareholders of GES (who have been assigned share on Great Offshore) will stand to benefit going forward. Also, the offshore company will be able to fund its expansion in a more independent manner.

After the de-merger becomes effective, the paid-up share capital and networth of GES will stand reduced to Rs 1,523 m and Rs 17,410 m respectively (book value of Rs 114 per share). On the other hand, the paid-up share capital and networth of Great Offshore will be Rs 381 m and Rs 4,461 m respectively (book value of Rs 117 per share).

The process of de-merger will take about 6-8 months (by March 2006) and the management had earlier indicated that there might be suspension in listing of GES’ stock for a week when the new shares are listed and share capital is reduced.

What’s in it for shareholders?
As per the approval, GES’ shareholders will be issued, at no cost, 1 fully paid share of Rs 10 each in Great Offshore for every 5 shares they hold in GES. Further, consequent to this allocation, the shares held in the GES will stand re-organised to 4 shares of Rs 10 each for every 5 shares that investors currently hold. Also, since all shareholders will be issued shares in Great Offshore on a proportionate basis, there will be no change in the overall shareholding pattern on the date de-merger becomes effective. Post the de-merger, shares of Great Offshore will be listed on the BSE and the NSE.

For GES’ shareholders, this is an opportunity to partake in the strong growth prospects of the offshore business as a separate entity. Also, as indicated earlier, now being a de-merged entity, the offshore business will have the capacity to take on a higher leverage to fund growth plans. And considering the average valuation levels of global and Indian offshore companies, the valuations of Great Offshore are attractive at the current price of Rs 211 (price of GES as on September 15 2005).

However, for shareholding in GES, the segregation of networth has dramatically increased valuations for the shipping business. At the current price of Rs 211, the shipping business is trading at a multiple of 1.8 times FY05 book value, which is high by global shipping valuation standards. This should call for caution.

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