Frontline Ogles OSG
Ruthie Ackerman, 07.11.08, 3:50 PM ET
For months oil tanker operator Frontline has been eager to acquire rival Overseas Shipholding Group. But now that OSG is trading at a steep discount Frontline’s hunger to gobble it up is taking on a renewed urgency.
On Thursday Frontline reported, in a filing to the U.S. Securities and Exchange Commission, that it entered a forward contract with DnB NOR to buy 1.37 million shares, equal to a 4.4% stake, in OSG on Aug. 29 for $93.1 million.
Frontline, which has a 5.6% stake in Overseas Shipholding Group, said it would contact OSG's management, board or other major shareholders to discuss alternatives to increase shareholder value, including “combining with or acquiring control” of OSG.
On Friday, OSG shares shot up 5.3% to $79.22 in afternoon trading. But even with the jump in share price the stock is still trading at a steep discount to its net asset value of $117, according to Jefferies, which may explain why its an attractive time for Frontline to make a move.
But there’s at least one barrier to Frontline’s acquisition dreams. The Jones Act requires all commercial vessels operating in the U.S. to be built, owned, operated, and manned by U.S. citizens and be registered under the U.S. flag. A foreign investor cannot own more than 20.0% of the shares of a U.S. shipping company.
Yet if Frontline does manage to buy OSG it will gain the second biggest publicly traded oil tanker company with a relatively conservative debt-to-capital ratio of 47.0%. Frontline’s debt-to-cap ratio is 86.0% and Teekay Tankers is 71.0%.
In March, Norwegian billionaire John Fredrksen, Frontline’s chairman and key shareholder, gobbled up a 5.2% stake in OSG, bringing Frontline and Frederiksen’s total holdings to 9.7%. (See “Frederiksen’s Frontline Looks Overseas”)
The same month Frontline Chief Executive Bjoern Sjaastad told Reuters that the company was interested in industry consolidation and speculation pinpointed OSG as its prime target. Although talks between the two companies took place, a merger never transpired.
In May, Fredriksen-controlled firms reduced their OSG holdings which brought the aggregate stake down to 5.2%.
Reuters contributed to this article.
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