Shaquille O’Neal…Donald Trump…Serena Williams…John Fredriksen?

Jan 17, 2022

Matt McCleery

 

As readers of these pages know, we have been waiting patiently for a celebrity shipowner to leverage their personal brand and deep maritime knowledge by tapping the white-hot SPAC market. The only question was who. Would it be pan-global capital markets dealmaker Andreas Sohmen-Pao? Or how about the multi-talented Vangelis Marinakis, the Greek shipping mogul whose activities extend into owning football clubs and even writing the lyrics to popular Greek songs? In the end, it was shipping’s ultimate celebrity who was first to get into the game.


In early December, Morgan Stanley and DNB Markets brought to market securities offered by “ST Energy Transition Ltd,” a SPAC chaired by John Fredriksen. ST Energy is listed on the New York Stock Exchange, with the ticker symbol “STET.U”, raising to $250 million ($287.5 million if underwriters’ options are exercised). Additionally, a group of private investors will be separately purchasing warrants to the tune of up to $12 million. More on that later.


Before we get into the details, here’s a quick primer.


WHAT IS A SPAC?

SPAC is shorthand for “Special Purpose Acquisition Company.” This once murky backwater of public capital markets went mainstream on Wall Street in recent years and is becoming popular in Europe. According to S & P Global, 2021’s Q3 saw $17 billion of capital raised in 125 IPOs of SPACS (out of $223 billion of overall equity raises). Overall, 2021’s first nine months have seen $121 billion raised for 655 SPAC transactions; much of this activity was concentrated in Q1- which eclipsed full year 2020 activity. Backwater no more.


HOW SPAC’S WORK

Also known as “Blank Check Companies”, SPACs start life by hiring investment bankers to raise money. The main different between a SPAC IPO and a “regular” IPO is that the SPAC doesn’t have a business. The SPAC raises cash, puts that cash into an escrow account and the promoter gets 18- 24 months to find a company to buy with the cash.


If the SPAC promoter finds a target and agrees on a deal, a “de-SPAC-ing” occurs when the target company exchanges some percentage of its business for the cash in the SPAC’s escrow account. If the SPAC promoter can’t find a suitable target during the allotted period (18 months for STET.U), they must give the money back.


WHY SPAC’S WORK

The SPAC structure works by creating supercharged incentives for all the key parties: the outside investors get a common share plus an “out of the money” warrant, in this case $11.50, in an enterprise led by a promoter with a great track record. Investors are attracted to this structure because they can show an immediate gain by ascribing an option value to the warrant and, more importantly, have the embedded leverage associated with the warrant. They also get the right to get their money back if they don’t like the proposed acquisition.


Promoters, such as Mr. Fredriksen, must pay for underwriting and legal fees, but can get rewarded with as much as 20% of the shares in the target company if they are able to use their talents to find the next great acquisition. Plus, investors (including the Sponsor and some of the company directors) who are initially purchasing the warrants on a standalone basis, make up the private, so-called “PIPE,” tranche of the deal. The Class A shares and warrants will be listed on the New York Stock Exchange under the symbols “STET” and “STETWS,” respectively. Finally, for the target company, it’s a quicker way to get liquidity and a public listing than doing a traditional IPO.


USE OF PROCEEDS

According to registration documents, ST Energy Transition intends to focus on acquiring companies involved in “energy transition.” Though no specific targets can be identified before the SPAC is launched, the preliminary prospectus offers strong hints of what type of entities might be targets within the 18-month window for completing an acquisition: “…our primary focus will be on opportunities that contribute in positive ways towards energy transition and clean energy technology, as nations, companies and individuals increasingly demand low-carbon solutions….”


The maritime segment is not named specifically as fodder for a target company, and the management team doesn’t include hard-core Greek and Norwegian shipping veterans, but Mr. Fredriksen’s reputation in the shipping and offshore markets speaks for itself. So does the prospectus, which notes, “Our sponsor is an affiliate of entities that have benefited, and we believe that our sponsor will also benefit, from the leadership and relationships of our chairman, John Fredriksen, who has a long track record of advising in investments into industry leaders across varied sectors…”


There is really no limit to what this could mean, but we all know that Mr. Fredriksen has a front-row seat when it comes to energy transition. Spring 2021 saw a six-vessel VLCC resale purchase by Frontline for ships that would have the potential for subsequent retrofitting to consume fuels including ammonia. So, there is a strong possibility, though no guarantee, that ST Energy will be looking for opportunities “close to home.” Offshore Wind would certainly fit the bill for someone with Mr. Fredriksen’s deep experience in offshore construction.


The real work for the promoter starts once the escrow account gets filled up, because successfully de-SPAC-ing can be challenging. This is especially true in hard asset maritime businesses which, unlike markets such as EV and technology, is known for valuations that are often 20% below NET ASSET VALUE, not the 20% ABOVE NET ASSET that is required to absorb the dilution. But as the maritime industry seeks to reduce its carbon footprint, which is about 3% of the global emissions and the size of Germany, there are likely to be some great opportunities within a massive total addressable market. And if there was ever a shipping man who could find them and get them done, it’s John Fredriksen.



SPACs in SHIPPING

Shipping financiers are likely familiar with SPACs, which have featured in industry capital raises going back to 2004, when International Shipping Enterprises Inc. raised $200 million to buy a shipping company; the next year the SPAC purchased the bulk ore moving arm of U.S. Steel, known as Navios, which re-emerged as Navios Holdings (NYSE: “NM”). The newly reincarnated Navios followed a similar playbook, using SPACs, as it continued its expansion beyond drybulk in the years that followed. Other well-known listed shipping companies also took the SPAC route, including Star Bulk (de-SPAC’ed in 2008, after beginning as Star Maritime Acquisition Corp. in 2005), and Seanergy Maritime (which began, in 2006, as the SPAC Seanergy Maritime Acquisition Corp). In early, 2021, OceanTech Acquisitions I, a SPAC with its eyes on the yachting sector, raised $100 million.



But not all the “maritime” SPACS have stayed the course; Hunter Maritime Acquisition Corp, a 2016 SPAC sponsored by the Saverys family, had expressed an intention, in offering documents, to look for a shipping target. In 2019, after a handful of maritime near misses, it announced a merger with a Chinese fintech company. Like we said, “No guarantees”.