|Shares Out. (in M):||87||P/E||23||NA|
|Market Cap (in $M):||312||P/FCF||NA||NA|
|Net Debt (in $M):||355||EBIT||0||0|
I’m not sure if this idea will meet with more disdain or laughter, but if you can get past the knee-jerk reaction to grab your wallet and run at the mere whisper of the name “Economou,” I think it’s time to buy Dryship (DRYS). George Economou, the owner/CEO of the company has offered to take DRYS private at $4.00/share, and since I think there is no real risk to the deal closing and the process will be relatively rapid, buying here is very compelling. If you assume the deal will take nine months to close (which seems conservative), buying at $3.70 (above where it closed Friday) would be an annualized 12% ROI. Further, I think there is a possibility the deal gets sweetened to make it even more attractive.
For those of you who weren’t around in 2016 and 2017, the WSJ has done some very nice reporting on why George Economou and his company are infamous in investing circles, and hence, why this opportunity exists:
Basically, Economou managed to turn his company into a giant trap for retail investors, and he managed to hugely enrich himself at their expense. I’ll spare you the details, but he ended up with a ‘boatload’ of cash and full control of DRYS. I’ve followed his maneuvers with an appalled fascination ever since.
Throughout 2018 and early 2019, DRYS/Economou worked to reduce the public float and increase his ownership via an on-going and meaningful stock repurchase program. From the 4Q18 earnings report on 2/28/19:
As of February 28, 2019, the Company has repurchased a total of 6,523,854 shares of its common stock for an aggregate amount of $37.3 million, including commissions, pursuant to its previously announced new stock repurchase program under which the Company may repurchase up to $50.0 million of its outstanding common shares until October 29, 2019. Under its old $50.0 million stock repurchase program, which was completed in full on October 5, 2018, the Company had also repurchased a total of 10,864,227 shares of its common stock for an aggregate amount of $50.2 million, including commissions. The Company currently has outstanding 86,886,627 shares of common stock.
As a result of this aggressive share repurchasing, Economou’s percentage ownership of the company increased to 83.35%. After the 1Q19 earnings, DRYS terminated all share repurchases, and in the 2Q earnings release, announced they were going to have to ‘future-proof’ the fleet:
Common Stock Repurchase Program
As of May 15, 2019, the Company has not repurchased any additional shares of its common stock since its last update. Under the previously announced new stock repurchase program, the Company may repurchase up to $12.8 million of its outstanding common shares by October 29, 2019.
Future Proofing of the Company's Fleet
During 2019, the Company has scheduled and started implementing an overall "future proofing plan" for its fleet by performing dry-dockings, installation of scrubbers and installation of ballast water systems. As a result, the Company expects during the period from 2019 to 2020 to incur approximately between 1,100-1,300 off-hire days for a total estimated cost of approximately $80.0 million-$100.0 million.
Due to these factors, the price of DRYS stock declined from over ~$5/share on 2/28/19 to $3.08 on 6/3/19. I’m positive this was more deliberate manipulation by Economou to minimize the cost of acquiring the last bits of DRYS he doesn’t own. Having said that, Economou is a master of legal manipulation. Everything he does is spelled out in filings, and he follows through on what he says he is going to do. He is not a stock promoter that promises the sun and the moon, and then fails to deliver. When he says he is going to buy out the remainder of DRYS, there is every reason to believe him.
As far as the worth of the underlying business goes, I’m no shipping expert, but DRYS is profitable and has a book value of $7.33/share. With $151mn of cash on the balance sheet, Economou could easily use that to pay the ~$58mn it would take to buy out the remaining 14.5mn publicly held shares. If he doesn’t want to use the DRYS cash, he is a billionaire, so funding shouldn’t be an issue. If things get really tight, he can always sell a few of his paintings:
In short, I think that DRYS will soon be a private company again. There are several ways this could play out. Most likely, the deal closes at $4.00. Possible, but less likely, is that the ‘independent special committee of disinterested directors’ will force Economou to offer a token bump to make the deal look more legitimate. Given DRYS history of insider dealing, I’m not holding my breath.
In fact, I think the biggest risk here is that Economou has so little credibility that the share price of DRYS drifts back down in the short-term to where it was prior to the offer. That, and the fact that IB is so conservative with the margin on it, seems like the only flies in the ointment.
My final thought is that if and when DRYS goes private, in a few years from now, when the cycle shifts again and shipping is red hot, Economou will tart it up for an IPO. At that point, grab your wallet and run.
Robber barron has finished fleecing retail with his public company and is now taking it private at a price above where it is currently trading.