Monday, February 16, 2009 5:49:03 AM
excerpt ~~ WHY (primary) I choose to build up a nice stack of DRYS shares! 
"Second, DRYS has announced that it is planning to spin off its Ocean Rig holdings as a new company by issuing shares as a dividend to its shareholders. The regular dividend has been cancelled. However, I have not heard that this dividend has been cancelled. The proposed spin off was supposed to occur in Q1 of 2009. However, I have confirmed with DRYS’ Investor Relations that the spin off has now been delayed until 2H 2009. Its format is best described by the DRYS announcement,
After we file all appropriate documents with the SEC, and once approved, we will spin-off the entity to our shareholders as a dividend. We hope to do so in the fourth quarter of 2008 or in the first quarter of 2009. This is not an IPO, as we will not raise any new equity. Simply, each shareholder in DryShips, as of the record date, will end up owning a share in DryShips and a share in the new spun-off entity, which they can then keep or sell on a U.S stock exchange, and the market will then determine the ultimate value of those shares.
At the time of the spin off announcement, DRYS made the following estimate about the likely value of the new entity’s stock.
Using several methodologies, it was estimated that the total equity value of Primelead would be between $2.55 billion and $2.80 billion, which if correct, and taking into account the 100% owned by DryShips and divided by the 63 million shares should result in a common stock price of $30 to $31 for the spun-off entity. As we showed in our recent presentation, if you assume a daily rate in excess of $675,000 per drillship, you get an EBITDA level which after applying a multiple of 5, which is the current market, you get an Enterprise Value of $900 million per drillship, or $5.4 billion for all six units. Taking out the net debt of this entity you get an equity value of about 2.7 billion. 75% of this value ($30-$31 per share) goes to the 63 million shares owned by DryShips shareholders post closing and post spin off.
DRYS itself will retain a 25% interest in Ocean Rig (according to Investor Relations at DRYS). Note that RIG trades at a 1.15 book multiple. DO trades at a price to book ratio of 2.67. NE trades at a P/B of 1.39. The Ocean Rig entity’s Price/Book ratio is likely to be higher than the average of the lower two values above.
This is a perhaps overly optimistic view of the Ocean Rig entity’s worth in the current market situation. Still, even if you cut that estimate to $10/share, DRYS would still be a great bargain. You would get the DRYS dry bulk business, which seems to be nearly the entire valuation basis for the stock at the moment ($6). Plus, you would get the Ocean Rig business entity ($10+). This is another case where the break up value of the stock is worth more than the company as one entity. The total would give you in excess of $16. Since the stock is now trading at $6, you will have made money. If oil recovers in the second half of 2009, this will make the Ocean Rig spin off entity far more valuable. If dry bulk shipping continues to improve going into the summer, the price of the DRYS dry bulk business will go up dramatically.
At this point I see tremendous upside, with much less downside. DRYS may not have gotten the new capesize ships. They may have paid off to not take them. This will likely eventually hurt growth. However, it has essentially ensured that DRYS will remain profitable in the hard times of the next year or two."
"Second, DRYS has announced that it is planning to spin off its Ocean Rig holdings as a new company by issuing shares as a dividend to its shareholders. The regular dividend has been cancelled. However, I have not heard that this dividend has been cancelled. The proposed spin off was supposed to occur in Q1 of 2009. However, I have confirmed with DRYS’ Investor Relations that the spin off has now been delayed until 2H 2009. Its format is best described by the DRYS announcement,
After we file all appropriate documents with the SEC, and once approved, we will spin-off the entity to our shareholders as a dividend. We hope to do so in the fourth quarter of 2008 or in the first quarter of 2009. This is not an IPO, as we will not raise any new equity. Simply, each shareholder in DryShips, as of the record date, will end up owning a share in DryShips and a share in the new spun-off entity, which they can then keep or sell on a U.S stock exchange, and the market will then determine the ultimate value of those shares.
At the time of the spin off announcement, DRYS made the following estimate about the likely value of the new entity’s stock.
Using several methodologies, it was estimated that the total equity value of Primelead would be between $2.55 billion and $2.80 billion, which if correct, and taking into account the 100% owned by DryShips and divided by the 63 million shares should result in a common stock price of $30 to $31 for the spun-off entity. As we showed in our recent presentation, if you assume a daily rate in excess of $675,000 per drillship, you get an EBITDA level which after applying a multiple of 5, which is the current market, you get an Enterprise Value of $900 million per drillship, or $5.4 billion for all six units. Taking out the net debt of this entity you get an equity value of about 2.7 billion. 75% of this value ($30-$31 per share) goes to the 63 million shares owned by DryShips shareholders post closing and post spin off.
DRYS itself will retain a 25% interest in Ocean Rig (according to Investor Relations at DRYS). Note that RIG trades at a 1.15 book multiple. DO trades at a price to book ratio of 2.67. NE trades at a P/B of 1.39. The Ocean Rig entity’s Price/Book ratio is likely to be higher than the average of the lower two values above.
This is a perhaps overly optimistic view of the Ocean Rig entity’s worth in the current market situation. Still, even if you cut that estimate to $10/share, DRYS would still be a great bargain. You would get the DRYS dry bulk business, which seems to be nearly the entire valuation basis for the stock at the moment ($6). Plus, you would get the Ocean Rig business entity ($10+). This is another case where the break up value of the stock is worth more than the company as one entity. The total would give you in excess of $16. Since the stock is now trading at $6, you will have made money. If oil recovers in the second half of 2009, this will make the Ocean Rig spin off entity far more valuable. If dry bulk shipping continues to improve going into the summer, the price of the DRYS dry bulk business will go up dramatically.
At this point I see tremendous upside, with much less downside. DRYS may not have gotten the new capesize ships. They may have paid off to not take them. This will likely eventually hurt growth. However, it has essentially ensured that DRYS will remain profitable in the hard times of the next year or two."
In the End, we will remember not the words of our enemies, but the silence of our friends.
Martin Luther King, Jr.
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