How Should You View The Baltic-Genco Merger?

In a report published Thursday, GMP Securities analyst Magnus Fyhr maintained a Buy rating on Baltic Trading Limited BALT, with a price target of $3, following the announcement of the company's merger with Genco Shipping. Genco Shipping is to acquire Baltic Trading in an all-stock deal, with the shareholders receiving 0.216 Genco shares for every share of BALT. In the report GMP Securities noted, "Pro forma, Genco shareholders will control 84.5% of the combined company with the five largest shareholders owning 65% of the shares. The combined company will operate a fleet of 70 ships on a fully delivered basis, including 13 Capesize, eight Panamax, four Ultramax, 21 Supramax, six Handymax, and 18 Handysize vessels." Following the acquisition, Genco will get a modern fleet and its average fleet age would be reduced by a year to 8.8 years. Fyhr believes that the merger makes sense in several ways: 1. The fleet of the combined company will increase to 68 ships, with two of these scheudled to be delivered in 2015. This would rival the recent combinations of Star Bulk Carriers Corp SBLK with 98 ships and Golden Ocean Group Limited GOGL (rated Buy, with a price target of $7) with 77 ships. 2. Genco already provides Baltic with fleet management services, and there are significant overlaps in their shareholder bases. 3. Baltic's liquidity issues will be addressed by Genco's more robust balance sheet. 4. Genco will gain access to Baltic's listing on the NYSE. "Merger will create another powerhouse in the drybulk sector," Fyhr said, while adding, "While we struggle to find any near-term positive catalysts for the drybulk market, BALT shares trade at a 51% discount to our estimated NAV of $2.75. Even with a 10% haircut on asset values, we estimate BALT's NAV at $2.10/share."