Squeeze Play
Defense titans consolidate
to get a bigger chunk of the Navy pie
by John Snyder
Senior editor
Marine Log
Trying to follow the merger and acquisition news in the U.S.
shipbuilding industry these days is almost like playing the shell
game. You don't know where the little pea is going to wind up.
The latest shipbuilding shuffle involves further consolidation
of the U.S. Navy's shipbuilding industrial base. Litton Industries,
Inc. (NYSE: LIT), Woods Hill, Calif., the parent of Ingalls Shipbuilding,
Pascagoula, Miss., one of the Big Six defense-oriented shipyards,
has made an offer for Avondale Industries, New Orleans, La.,
(NASDAQ: AVDL). Shareholders of Avondale were expected to accept
the cash deal, sweetened to $39.50 per share or about $529 million.
Newport News, which had made an earlier bid to acquire Avondale,
withdrew from the acquisition sweepstakes.
Interestingly, Litton had made a separate offer to acquire Newport
News Shipbuilding (NYSE: NNS), Newport News, Va., in a stock-for-stock
transaction based on a $35.61 price for NNS shares and $64.75
price for LIT shares. The deal would have been worth in the neighborhood
of $1.8 billion. It backed off the deal after Defense Secretary
William Cohen publicly opposed the merger of Litton and NNS,
saying it would dilute competition in the U.S. Navy shipbuilding
market. The Pentagon must approve the merger.
Earlier this year, the Pentagon blocked General Dynamics' bid
for Newport News. GD is already the largest shipbuilding group,
and includes the three other shipyards in the Big Six: Bath Iron
Works, Bath, Maine, Electric Boat, Groton, Conn., and National
Steel & Shipbuilding Co., San Diego.
The Big Six, or the Big Three, or the Big Two plus One--depending
on how you count these things--are united for lobbying  purposes under the ASA (American
Shipbuilding Association) banner. At the moment, Navy ordering
has plateaued (see graph), and employment at ASA yards has been
falling. Nonetheless, Navy work is still where the Big Bucks
are. What we are seeing now is a jockeying to be in the best
position when the next big Navy building round starts early in
the new millenium.
CONSOLIDATION ON
THE COMMERCIAL SIDE, TOO
Of course, the Big Six are not the only shipbuilders that have
been doing the merger tango. Over the last two years, new companies
with old roots and familiar names have emerged in the commercial
shipyard sector. Conrad Industries, First Wave/Newpark Shipbuilding,
Friede Goldman International, and United States Marine Repair
have all either been formed through mergers or grown through
acquisitions.
| Company |
Symbol
Click for Yahoo Finance quote |
Labor force |
FY Rev.
($ million) |
% change |
Backlog ($ million) |
|
| Atlantic
Marine Holding Co., Jacksonville (4 yards) |
Private |
1,800 |
N/A |
N/A |
$200+ |
|
| Avondale
Industries, Inc., New Orleans |
AVDL |
5.500 |
$748.9 |
22% |
$1,800 |
Backlog as of March 31, 1999; |
| Bollinger
Shipyards, Inc., Lockport, LA (9 yards) |
Private |
1,500 |
N/A |
N/A |
$200+ |
|
| Cascade
General, Inc., Portland, Ore |
Private |
840 |
$80 |
(19%) |
$30 |
|
| FirstWave/Newpark, Houston (6 yards) |
Private |
1,100 |
$100* |
137% |
N/A |
*Estimate for fiscal year 1999;
First Wave had $82 million in fiscal year 1998, deriving some
78% of its revenue from repair; |
| Friede
Goldman Int'l, Inc., Jackson, MS (4 yards) |
FGI |
3,000 |
$382.9 |
238.3 |
$407 |
Backlog as of March 31, 1999; |
| General
Dynamics, Falls Church, VA (BIW,
Electric Boat & NASSCO) |
GD |
21,700 |
$2,666 |
15.3% |
$11,728 |
|
| Halter
Marine Group, Inc., Gulfport, MS (22 yards) |
HLX |
7,500 |
$998.1 |
49% |
$656 |
Halter Marine's fiscal year ends
March 31; |
| Litton Industries, Wood
Hills, CA (Ingalls Shipbuilding) |
LIT |
11,300 |
$1.030 |
(7.2%) |
$3,472 |
Litton's fiscal year ends July
31. |
| Newport
News Shipbuilding, Newport News, VA (Newport News & Continental
Maritime) |
NNS |
18,400 |
$1,862 |
9.1% |
3,800 |
Backlog as of March 31, 1999; |
| Todd
Pacific Shipyards, Inc., Seattle |
TOD |
900 |
$109.5 |
(4.2%) |
$53 |
|
| United States Marine
Repair, Inc., Norfolk, VA (Norshipco, Pacific Fabricators, SWM-
Ingleside, San Pedro & San Diego, and SF Drydock) |
Private |
3,000 |
N/A |
N/A |
N/A |
|
| Some
figures, such as workers and backlog, may be estimated; Sources
include company reports, SEC filings, Marine Log database |
THE BITER BITTEN
One of the most ravenous of this acquisition pack was the Halter
Marine Group, which, after going public in 1997, rapidly gobbled
up chunks of capacity on the U.S. Gulf Coast. By 1998, it had
grown to include 26 small- and medium-sized shipyards and some
9,200 employees, and boasted a record order backlog of close
to $1 billion. Two problems were inherent, however, in this tremendous
growth. One was its reliance on high levels of newbuilding contracts
from the offshore energy sector-some 70% of the revenue of the
record backlog was accounted for by OSV and rig building. Second
was the large influx of unskilled or under-skilled workers that
was absorbed into the group's labor pool.
With the price of oil dipping this past year, high-flying Halter
took a tumble, as the efficiency of the company's production
faltered, OSV newbuilding contracts dried up, and losses piled
up on a series of drilling barges. Losses totaled $1 million
for the quarter ending December 31, 1998.
Halter has since implemented a number of cost-cutting measures,
including slashing its labor force by 1,500 and scaling back
operations at its TDI-Halter unit, consolidating eight facilities
into four.
Meanwhile, though, TDI-Halter has taken a 35% slice in a company
that will operate the Belleli fabrication yard in Taranto, Italy.
That yard specializes in TLP hulls. The move is significant in
that it takes TDI-Halter into the production end of the offshore
market, which is somewhat less volatile than the exploration-related
market.
On announcing net income of $13.3 million, or $0.46 per share
on revenue of $998.1 million for the fiscal year ended March
31,1999, company chairman John Dane III said, "Halter Marine
Group has successfully weathered a very turbulent fiscal year."
He added, "During a period that was marked by great uncertainty
for companies serving the offshore energy markets, Halter took
a number of steps to protect the company's strategic position
in an improving market."
One of those steps is Project ABC, said Dane, which, "continues
to provide operating efficiencies that will make Halter more
competitive. We expect that during fiscal 2000, we will internalize
the processes that this effort has produced and greatly expand
it across our operations," Dane said. Capital spending and
administrative costs were cut drastically.
Halter also entered into an Amended and Restated Secured Credit
Agreement with a group of banks providing for maximum borrowings
of $125 million.
With its ship now righted, Halter confirmed that it was engaged
in discussions with a company involved in the "oilfield
service industry" regarding a possible stock-for-stock business
combination.
That company turned out to be Friede Goldman International, Inc.
FGI's chief executive J.L. Holloway had hinted that the company
was looking to expand through acquisitions.
In an interview with cable news network CNBC, Holloway said the
FGI would continue to "be aggressive in its acquisitions"
and wants to up its market share in the offshore energy vessel
business.
Recent earnings by FGI catapulted it to number one in Business
Week's Hot Growth rankings.
Now the merger is official. After months of rumors and speculation,
the Halter Marine Group, Inc., Gulfport, Miss., and Friede Goldman
International Inc., Jackson, Miss., announced early this month
the signing of a definitive agreement to enter into what they
called a "strategic combination."
The combined company---to be named Friede Goldman Halter, Inc.
and headquartered in Gulfport, Miss.---will have a backlog of
over $1 billion and a workforce of more than 12,000. On a proforma
basis for the 12 months ended March 31, 1999, the combined company
would have generated revenue of nearly $1.5 billion and would
have total assets of over $900 million.
Under the terms of what is described as a "merger of equals''
agreement, each Halter share will be exchanged for 0.4614 of
a share of Friede Goldman. Based on the closing price for Friede
Goldman stock on June 1, the exchange rate values Halter shares
at $7.55, or a 28% premium over the average for the 30 trading
days ended May 25.
Friede Goldman chairman and CEO J.L. Holloway will serve as chairman
and CEO of Friede Goldman Halter. Halter chairman, president
and CEO John Dane III will serve as vice chairman, president
and chief operating officer.
The merger agreement provides for a management succession plan
that is intended to result in Dane succeeding Holloway as chairman
and CEO in two years. The merger agreement, which has been approved
by the boards of directors of both companies, is subject to customary
closing conditions, including shareholder and regulatory approvals,
and is expected to close in the third quarter of 1999. Holloway,
who owns 43% or so of the outstanding shares of FGII, has agreed
to vote his shares in favor of the merger transaction. Shares
of the combined company stock will continue to be listed on the
New York Stock Exchange.
NEW PLAYER EMERGES
Other merger and acquisition news on the commercial side could
involve FirstWave Marine, Inc., Houston.
FirstWave, which consists of a network of six yards in the Houston-Galveston
area that serve the offshore energy and inland new construction
and repair markets, is creating a buzz with some of its recent
actions. It is said to be in negotiations to add another shipyard,
possibly on the East Coast, to its portfolio. It is also said
to be scouring international shipyards for a large floating dry
dock. No comment was available from FirstWave.
It recently added long-time shipyard executive Thomas Godfrey,
formerly of Colonna's Shipyard, Norfolk, Va., to its repair management
staff.
In announcing first quarter 1999 earnings, FirstWave president
Frank Eakin, said, "Our record backlog in barge new construction
has validated our strategy of developing a diversified service
mix. While the energy sector is in a slowdown, new construction
has helped us fully absorb our labor force in Galveston. We believe
our success in avoiding layoffs and retaining skilled people
will serve us well when the anticipated energy services upturn
occurs."
CURRENT TRENDS
Offshore energy, of course, is an important driver of new construction
at U.S. shipyards. Excluding inland barges, equipment for the
offshore energy sector represented the largest percentage of
deliveries by U.S. shipyards in 1998, according to Marine Log's
shipbuilding database. Anchor handlers, offshore supply vessels,
lift boats, and mobile offshore drilling units represented roughly
36% of all the self-propelled vessels delivered in the U.S. Most
of these vessels were built by facilities along the Gulf Coast.
As the price of oil softened and dayrates collapsed, however,
orders for these type vessels slackened at the end of 1998 and
the first quarter of 1999.
Many shipyards are still awaiting the anticipated surge of orders
for OPA 90 compliant tonnage. Currently, only Avondale holds
firm contracts for double hull tankships, following the delivery
of the last of the Double Eagles by NNS, and the handing over
of the second of two 16,000 dwt chemical tankers by Alabama Shipyard,
Inc., Mobile, Ala., to Dannebrog.
There was a ripple of orders for articulated tug barge units
(ATBs) late last year and early this year. Reinauer and Mobil
Oil placed orders for new tonnage, while Bouchard initiated a
major conversion program.
BULLISH ON FERRIES
Passenger vessels, including ferries, excursion and dinner boats,
showed a resurgence last year, accouting for about 15% of all
deliveries of self-propelled vessels. In particular, the ferry
market, buoyed by the renewal of the ferry grant program under
TEA-21, is almost guaranteed to generate strong demand in this
sector over the next five years. Alaska, New Jersey, and Washington
state will also benefit from $100 million in earmarked funds
under TEA-21 to build new ferries and terminals.
A regional effort is also underway in the San Francisco Bay area
that envisions eventually creating a network of 120 high speed
ferries connecting 40 terminals. Marine Log will be covering
this in more depth in our High Speed Annual in July 1999. Bay
Area Council vice president Russell Hancock will also be a featured
speaker at Marine Log's Ferries '99 in Fort Lauderdale, Fla.,
on November 15.
MORE CRUISE SHIPS AHEAD?
All eyes will be focused on Pascagoula, Miss., over the next
year, as Ingalls Shipbuilding begins the construction of the
first of two U.S. flag, 1,900-passenger, 840 ft cruise ships
for American Classic Voyages (AMCV). It will be the first time
an American shipyard has tried its hand at building a cruise
ship in 40 years. The contract, valued at $880 million, contains
an option for a third ship.
American Hawaii will have the opportunity to reflag an existing
foreign-flag cruise ship to |
