Saleh bin Nasser Al Jasser had an exceptionally busy week in June 2014. On June 19, 99% of shareholders attending an extraordinary general meeting (EGM) gave their approval to what Al Jasser described as the biggest corporate merger in Saudi Arabian history between the National Shipping Company of Saudi Arabia (Bahri) and Vela International, a subsidiary of the Saudi Arabian Oil Company (Saudi Aramco).
Al Jasser, the Bahri CEO, valued the deal at $1.3bn and said that it would give the combined company the world’s third-largest supertanker fleet, with 32 very large crude carriers (VLCCs). Just a week later, on June 26, Prince Fahd bin Abdullah, president of the General Authority of Civil Aviation and chairman of the board of directors of Saudia, Saudia Arabia’s national airline, announced Al Jasser had been appointed as the airline’s new director-general. The new role will put Al Jasser at the helm of the airline as the firm moves ahead with plans for privatisation.
MEGA-DEAL: Almost two years to the day before the announcement of Al Jasser’s new role, on June 27, 2012, Abdullah Al Rubaian, Bahri’s chairman, and Khalid G Al Buainain, senior vice-president of technical services at Saudi Aramco and chairman of Vela, signed a non-binding memorandum of understanding that laid the foundation for the deal. At the time, Bahri anticipated the combined fleet of 77 vessels including 32 VLCCs would make it the world’s fourth-largest owner of VLCCs, though by the time the contract was sealed two years later, it ranked third.
The two companies’ vision was to help the Kingdom meet its future transport needs while expanding downstream businesses that serve both of their customers. The transaction made Bahri the exclusive provider of VLCC crude oil shipping services to Saudi Aramco under a long-term agreement that involves it taking responsibility for maintaining reliable crude transportation at all times. Under the terms of the deal Bahri paid Vela $1.3bn, comprising a cash payment of $832.75m in addition to 78.75m new Bahri shares issued to Vela at an agreed price of SR22.25 ($6) per share. This will give Vela a 20% stake in Bahri after the proposed share issuance is carried out on a fully diluted basis. These terms remained in place two years later when they were presented for approval at an EGM attended by 59.78% of Bahri’s shareholders. On June 22, 2014 the firm signed an agreement to obtain a murabaha (a sharia-compliant financing mechanism) bridging agreement with three banks, namely J P Morgan, Samba Financial Group and SABB for SR3.18bn ($847.79m). Bahri said it expected to pay off the murabaha financing within 12 months by issuing a sukuk (Islamic bond) or by obtaining a long-term sharia-compliant facility. Bahri has been operating as a public company since 1979. The government’s Public Investment Fund owns 28% of its shares, while the rest are publicly traded.
COMBINED FLEET: The merger created a combined fleet of 77 vessels, including Vela’s 14 double-hulled VLCCs, one floating storage tanker and five product tankers. According to its 2013 annual report, Bahri owned six general cargo vessels with an average capacity of 26,000 deadweight tonnes (DWT), 24 chemical transport vessels with an average capacity of 46,000 DWT; and 17 VLCCs with an average capacity of 310,000 DWT. Bahri Dry Bulk Company, a subsidiary that is 60% owned by Bahri and 40% owned by Arabian Agricultural Services Company, has been replacing its chartered dry bulk carriers with Kamsarmax ships built at the Oshima shipyard in Japan. The first of the new vessels, Bahri Arasco, was delivered in 2013 and in April 2014, Bahri took delivery of its latest ship, Bahri Trader. Each of these vessels has a capacity of 82,000 DWT. Bahri Dry Bulk signed a SR420m ($111.97m) murabaha with Bank Albilad to partially finance the building of these new vessels.
DIVERSIFIED OPERATION: The latest merger and the composition of the combined fleet reflect several decades of diversification in Bahri’s operations. The company first began as a general cargo shipping outfit in 1979, incorporating a subsidiary in the US in 1991, which serves as its agent for operations in North America. Bahri began shipping petrochemicals in 1985 after acquiring two chemical tankers. In 1990 the company expanded its chemical transportation portfolio by incorporating National Chemical Carriers, a JV 80% owned by Bahri and 20% by Saudi Basic Industries Corporation to purchase, charter and operate chemical tankers. In 1992, it began transporting crude oil and built five VLCCs, which started trading in 1996 and 1997. It continued to expand thereafter and by the end of 2013 its VLCC fleet had reached 17. Through its subsidiary Mideast Ship Management, set up in 1996, the company provided ship management services to vessels owned by Bahri’s subsidiaries. In 2005 Bahri acquired 30.3% of the shares of Petredec, a firm specialising in liquefied petroleum gas transport. Five years later, it formed Bahri Dry Bulk Company, which is 60% owned by Bahri and 40% by ARASCO. In 2013 Bahri created a new line to explore opportunities in offshore support services.
SHIPBUILDING: In 2013 Bahri signed a memorandum of understanding with Sembcorp of Singapore to produce a feasibility study for the construction of a shipbuilding yard in Saudi Arabia. The development of such a facility could open up new markets for the company, but also produce long-term savings in terms of investment in new vessels and repairs to its existing fleet. It came in a year when ship operators were under pressure to curb costs. According to Drewry Maritime Research’s report for the first quarter of 2014, weak freight earnings saw many operators globally reducing repairs and maintenance programmes in 2013, and the report anticipated a catchup period, with maintenance expenditure expected to rise by 2.5-3% per annum over the next two years.
PERFORMANCE: Despite all these diverse activities, the importance of the Vela merger is underscored by a breakdown of Bahri’s earnings by activity. Income from crude oil transportation accounted for 51% of income in 2013; chemical transport brought in 25%; general cargo, 17%; and dry cargo, 7%. There has been a considerable improvement in performance since Al Jasser joined the firm in November 2010. Net income for Bahri in 2010 was SR414m ($110.37m). By 2013 total net income was SR752m ($200.48m), up 81%. The 2013 performance exceeded analysts’ expectations. Albilad Capital had estimated net income of SR528m ($140.76m), when the firm’s actual earnings increased by 48.43% compared to 2012. Fourth-quarter earnings were particularly high; they came in 163% above estimate at SR276.1m ($73.61m).
COMPETITION: Bahri is one of only four companies listed under transport on the Saudi Stock Exchange. The other three are the Saudi Public Transport Company, freight haulage business Saudi Transport and Investment Company, and the local operation of car hire firm Budget, United International Transportation Company. Between them, the four companies offer services in rail, road and sea transport. The exchange has no air transport businesses listed, although this is expected to change soon.
In June 2014, before Al Jasser was appointed to his new role, Prince Fahd announced that the board of Saudia had been given permission to appoint a director-general in the future, something that had traditionally been done by royal decree. Prince Fahd said this new authority would enable the board to speed up privatisation of its business units. According to local media, senior officials at Saudia have suggested the Prince Sultan Aviation Academy, Saudia Private Aviation Company and Saudi Airlines Real Estate Development could all be spun off. The last component to be privatised is likely to be Saudia itself, with the process expected to start in 2015. In addition, local media has reported that the firm’s cargo unit could be prepared for an initial public offering in 2014, with its maintenance unit following in 2015. If these plans are enacted, it seems likely that Saudia’s new director-general will have a pivotal role to play in the biggest transport deals to come in the Kingdom.
